HR in tough times: values and value creation

The new millennium was greeted with widespread optimism (if somewhat prematurely) at midnight on December 31st 1999. The optimism has proved to be short lived. The 21st century has brought with it a whole new series of challenges for organisations and their leaders. These challenges in turn have important implications for the role of the human resources function.

The main issues to be faced include:

- A loss of confidence on the part of investors triggered by a number of factors, including the bursting of the dot. com bubble, the September 11th outrage, the collapse of Marconi and the fraud-related cases of Enron and WorldCom. Savings and pension funds have been seriously eroded by the collapse of stock market values.
- A loss of morale and the erosion of traditional loyalties in the work force, consequent upon a combination of a substantial number of plant closures and redundancies and the closure of final salary pension schemes, in the context of rapidly inflating top management reward packages and 'golden parachute payoffs.
- Growing public concern about the actions and policies of business organisations, particularly large global enterprises, leading to increasingly violent anti- capitalism demonstrations. In the case of companies under attack the consequences both for the morale of existing employees and for the firm's ability to attract fresh talent are evident.

Among the company practices that have added to growing concerns about the way business operates are:

- Pollution of the environment and exploitation of non-renewable resources.
- Exploitation of child labour in the developing countries.
- Engaging in relationships with oppressive regimes.
- The misselling of personal pensions and other investment vehicles.
- The apparent placing of profit before considerations of safety on the railways.
- What are regarded as excessive levels of top management remuneration, including large payoffs or 'golden parachutes for those found wanting.

-Very considerable performance and morale problems in the UK public sector and in the fields of health, education and crime prevention in particular. These problems stem from failures of leadership and organisation design as much as from resource problems.

In facing up to these issues HR people need to think through very carefully the question of what implications they have for the policies and practices for which they hold responsibility. These implications range over such matters as recruitment practices, management and leadership development programmes, benefits policies and administration, organisation design and employee communications. Equally important, however, is the need for them to revisit some fundamental questions to do with the role of HR, its relation to business performance and, not least in importance, the values underlying the profession.

There are particular implications for HR specialists who are also company directors and as such are not only responsible for the formulation and implementation of HR strategy but also share the collective responsibility for the governance of the company, its conformity with the law and its obligations to its investors and other stakeholders.

Personnel, human resources or just plain people?
It has not passed without comment that the professional body for human resources managers in the UK goes by the name the Chartered Institute of Personnel and Development (IPD). The Institute, formerly the Institute of Personnel Management, has resolutely resisted adopting the term Human Resources - a term which came into use from across the Atlantic in the 1970's. Since then most large firms and a sizeable majority of all companies with a personnel function have adopted it.

We are probably saddled with the term 'Human Resources' for the foreseeable future, but it has two major disadvantages. First, and most obvious, the term resources implies that people are a commodity, exploitable and disposable. Secondly the phrase 'human resources management' carries with it mechanistic connotations which bear little relation to the actual processes involved in getting the best out of people.

On the first point, there is abundant evidence that over the past decade or so the tendency to treat people as a commodity has grown considerably, in the public sector as well as in the private. Such things as the increasing scale of redundancies and plant closures and the closing of defined benefit pension schemes provide clear evidence of this.

In the private sector the doctrine of maximisation of shareholder value has fostered an attitude of mind in top management circles such that organisations are seen primarily in terms of financial ratios and market capitalisation or as financial assets to be traded, rather than as collections of human beings working to some common purpose.
In some parts of the public sector, the drive to achieve what are perceived as private sector standards of efficiency has led to people being treated as disposable.

'There is accumulating evidence that corporations fail because the prevailing thinking and language of management are too narrowly based on the prevailing thinking and language of economics. To put it another way, companies die because their managers focus on the economic activity of producing goods and services, and they forget that their organisation's true nature is that of a community of humans. The legal establishment, business educators and the financial community all join them in this mistake.'
Arie de Geus (1997)

Arie de Gues's point is well made, but does not go far enough. In many companies it is not even any longer the case that top management focuses on producing goods and services; they focus instead on financial transactions such as capital restructuring, acquisitions and rights issues. Had their top teams focused on production issues, companies like Marconi might well have avoided disaster.

'Chickenless heads'
Where top managers focus their attention primarily on financial transactions and relations with the city institutions they inevitably lose touch with the grass roots of the organisations they control. The result is the opposite of the term 'headless chickens'; instead we have 'chickenless heads'. The term headless chickens implies that, without clear leadership from the top, organisations lose direction and decline and die. The concept of the chickenless head tells a story that is more common today. The organisation's rank and file employees may carry on doing a reasonably good job of pleasing its customers and producing quality goods and services, unhampered by the remoteness of top management, until, because of mismanagement of its financial affairs it becomes bankrupt or is taken over. Marconi did not destroy shareholder value because its employees at all levels below the very top were not doing their jobs. This type of situation is all the more tragic, of course, when the employees concerned are also shareholders in the company. When the same chickenless heads who have brought about the company's collapse walk away with payoffs that represent huge sums in the eyes of the average worker any remaining vestige of morale or loyalty is finally destroyed.

The pursuit of shareholder value

In businesses that focus exclusively on shareholder value the process of human resource management is confined to the mechanistic carrying out of the basic administrative functions that are necessary - recruiting and inducting employees, remuneration, compliance with employment law etc. There is a complete absence of understanding of the role that progressive HR policies can play in building employee commitment and establishing a sustainable competitive advantage. This reflects a remarkable lack of knowledge on the part of top management of the impressive array of research findings that show how critical is the gaining of the commitment and loyalty of the workforce in achieving competitive success.

The point is often made that if a company declares the creation of shareholder value as its purpose then this is hardly likely to be inspiring and motivational for the shop floor or graduate entrants. Even a statement of purpose that is about meeting the needs of all the stakeholders is unlikely to call forth exceptional commitment and effort. For this to happen the purpose needs to be inspiring or challenging, seen as worthwhile, as serving society in some higher way than the material interests of the stakeholders. It also needs to be capable of being clearly articulated in very few words and sufficiently tangible and quantifiable that the extent of its achievement is capable of verification by measurement.
A Company that, from a modest start in a garage rose to be one of the world's most rapidly growing and successful business of all time - Hewlett Packard - was guided from the beginning by Dave Packard's thinking on purpose.

'I want to discuss why a company exists in the first place…I think many people assume, wrongly, that a company exists simply to make money. While this is an important result of a company's existence, we have to go deeper and find the real reasons for our being…We inevitably come to the conclusion that a group of people get together and exist as an institution that we call a company so that they are able to accomplish something collectively that they could not accomplish separately - they make a contribution to society.'

Now that the influence of both Hewlett and Packard has gone and the Company has looked outside for its chief executive, it appears to be being managed for shareholder value. The acquisition of Compaq has gone through with a narrow shareholder majority despite strong opposition from the Hewlett and Packard families. It will be interesting to see how it fares in the future.

An alternative -the inclusive approach

In the early 1990's Charles Handy gave a lecture at the Royal Society of Arts, called 'What is a company for?' There was such interest in what Handy said that in 1993 the RSA decided to challenge senior business leaders to give their vision of the company of the future.
Twenty-five of the foremost business leaders of the time responded to the challenge and agreed to support and participate in the ensuing Inquiry. A wide ranging consultation exercise led by Sir Anthony Cleaver, then Chairman of IBM UK, involved more than 8,000 business leaders and opinion formers. The business leaders who participated in the preparation of the Report were aware that massive changes were taking place in the business world. On the one hand, globalisation and revolutionary developments in the technologies of communication and information were transforming the competitive environment. On the other hand important changes were taking place of a social nature, including growing public concern about the impact of business success on the environment.

Such concerns were reflected in the growth in number, size and influence of various pressure groups. Following the collapse of the Soviet bloc and the end of the cold war it had seemed for a time that democracy and Western style capitalism were now unchallenged as the bases for a prosperous and just society. Yet challenges were now being mounted from many sides, and not only from those concerned for social justice or environmental conservation. There were also critics who argued that some aspects of the way the markets worked favoured short term thinking and thus acted against the process of sustainable wealth creation. The realisation was growing that whereas profit and the creation of long-term value for investors remain crucial, in the New Economy we needed to find new ways to generate these returns in a sustainable manner that would be supported by society in general.
The findings of the Inquiry were published in 1995 in the RSA report 'Tomorrow's Company: the role of business in a changing world'. Considerable public interest resulted in the report selling over 4,000 copies. The report looked at the changing world, and, making reference both to its own research and other recent evidence, set out the vision of the 'inclusive approach'.

At the heart of the inclusive approach is the belief that understanding stakeholder needs, (the needs of customers, employees, suppliers, shareholders and society and the environment), and incorporating them into business strategy, is central to the achievement of sustainable competitiveness.
Inclusive companies have vision in the sense of a shared view of an envisaged future and a clear, inspiring purpose and set of shared values. Inclusive companies have mutually beneficial business relationships. Operating from their purpose and values, they build relationships with stakeholders that are best suited to fulfilling their envisioned future and that also allow the stakeholders to fulfil theirs.

Inclusive companies have a success model. A system for measuring the activities of key importance to achieving their envisioned future within the context of their purpose, values and key relationships. Applying an inclusive approach requires clear leadership and continual measurement of the progress of key relationships. There is no set formula. Each company has to find its own way forward.
MacMillan and Downing (1999) point out that the inclusive approach has some support from some of the recent thinking in the field of strategic management and marketing, and in particular from the school of thought associated with Hamel and Prahalad, Ghoshal and Kay. 'In a world where products look increasingly similar and where outsourcing, joint ventures and alliances make it sometimes difficult to discern where one business ends and another begins, where do the sources of competitive advantage lie? The answer is in a company's ways of doing things that are difficult to copy. Apart from its intellectual capital, which may be patented, other invisible assets may be found in the 'core competencies' of key employees and in the business networks of relationships - its social architecture' or 'social capital'. Long-term collaborative relationships with key customers and suppliers and (often implicit) ways of working among key staff are thought to produce distinctive competitive advantage.

It is also increasingly well understood that employee commitment is an essential ingredient of a strategy for building sustainable competitive advantage.
Shared values and trust are the basis of effective relationships. Shared values are derived from commitment to a common purpose and the existence of common objectives. Trust is earned when the organization's actions are in line with its espoused values. Organizations, whether in the business, public or voluntary sector are complex networks of mutually interdependent relationships.

These relationships exist between people within the organization in their roles as employers and employees and members of work teams. They exist also across the organization's boundaries as between the firm's directors and its investors, the firm's front line personnel and its customers and suppliers, and between members of the organization and the community.

In recent years a very substantial body of research evidence has been built up that demonstrates clearly the relationship between organisational performance and employee commitment, which in turn is largely a function of the organisation's HR policies and practices. Unfortunately a very large proportion of top managers either remain relatively ignorant of these findings or, due to inbuilt attitudes, are highly sceptical of their validity. In a survey conducted towards the end of the last century by IBM in association with Towers Perrin UK HR executives were asked to list the capabilities HR specialists would require in the 21st century. Top of the list, scoring 90% was the ability to educate and influence the line. They were also asked to state whether they believed they possessed that ability. 8 per cent replied in the affirmative. A vitally important role at the strategic level for HR is precisely this ability to convince the top team (and the finance director in particular) that the human factor is critical to success and to present the research findings forcefully and with conviction.

A good example to take would be the work of Frederick Reichheld who, in his book The Loyalty Effect (1996) has shown the strength of the relationship between business success and the ability to build customer loyalty, and how this, in turn, is a function of employee loyalty.

Another is the research carried out by Pfeffer (1998) which demonstrates that the combination of a number of powerful tools and policies of human resource management, acting as a total system, produce the highest levels of employee commitment and sustained company business success. He extracted from various studies, related literature, and personal observation and experience, a set of seven dimensions that characterise most if not all of the human resources practices of companies producing profits through people.

These are:
- Security of employment. Pfeffer quotes Lincoln Electric, General Motors innovative Saturn and Fremont plants and the highly successful Southwest Airlines as examples of companies that offered guaranteed employment and avoided layoffs during recessions.
- Selective hiring. This first requires a large applicant pool from which to select. The second requirement is a sophisticated selection process, which relates the skills and qualities, needed in the job to the qualities of the individual. The third is to use this process for all jobs at all levels.
- Self-managed teams. Pfeffer asserts that 'organising people into self-managed teams is a critical component of virtually all high performance management systems'.
High compensation contingent upon organisational performance. 'The level of salaries sends a message to the firm's workforce - they are truly valued or they are not.' It is important, however, that a significant element of compensation should relate to the organization's performance.
- Training. 'Training is an essential component of high performance work systems because these systems rely on front line employee skill and initiative to identify and resolve problems, to initiate changes in work methods and to take responsibility for quality'.
- Reduction in status differences. 'In order to help make all organization members feel important and committed to enhancing organisational operations. This can be accomplished in two ways - symbolically by means of language, job titles, dress, allocation of physical space, car parking privileges and the like and substantively (and much more rarely) through reducing inequality in compensation across the different levels of the company.
- Sharing information. Sharing information, particularly financial information shows people that they are trusted. Also, if people are to contribute meaningfully to enhancing performance they need to have performance data and to be trained in how to interpret it.

Pfeffer goes on to argue that 'the real sources of competitive leverage' are the culture and capabilities of the organization that are derived from the way people are managed. This, he asserts, is a much more important source of sustained success than things like having a large market share or a distinctive brand ' because it is much more difficult to understand capability and systems of management practice than it is to copy strategy, technology or even global presence'.

Pfeffer's seven practices form a useful template against which to assess one's own company's policies and practices.
Ian Wilson (Wilson 2000) has identified eight elements in what he calls the 'new social contract' between employees and the corporation:
" A vision and sense of shared purpose, beyond profit and shareholder value.
" Inspiring leadership. (He quotes Herb Keller of Southwest Airlines.)
" Empowerment of the workforce.
" The customisation of work - tailoring job content, hours and compensation packages to meet individuals' needs.
" A climate of equity, respect and due process.
" Reduced volatility in employment patterns.
" Increasing employability.
" First rate on-site amenities and services.
Sadly many companies appear never to have signed up to such a new social contract or have torn it up at the first sign of a downturn.

The leadership vacuum

Today there are two reasons to be concerned about the quality of leadership in large organisations, both private and public. On the one hand there are concerns about competence in the sense of the ability to create a clear vision and to articulate it in such a way as to inspire and motivate. On the other hand, following recent cases of fraud and suspect share dealings there are severe doubts about the integrity of leadership. All too often the top managers held up as role models for our young leaders of the future turn out to either fallible or corrupt or both.

'If Only CEO Meant Chief Ethical Officer' was the lament in a recent edition
of Business Week. It was suggested that the type of people who have climbed to
the position of CEO are ill-equipped to lead business out of its current
confidence crisis. 'This year's corporate scandals could even end up changing what
companies look for in a CEO as they attempt to restore investor confidence'.
The magazine cited Michael Hoffman, executive director of the Bentley
College Center for Business Ethics as suggesting that a new type of 'servant
leader' will be required - one who looks out more for employees, customers,
and the company rather than for him or herself. 'I think boards of directors
and search firms need to begin looking for people with a tremendous amount
of integrity,' Hoffman said. 'If you can't trust a business and you can't
trust a person running it, you're probably not going to invest in it.'
Nevins and Stumpf (1999) have expressed these ideas and ideals very clearly:
'Demonstrating flexibility and empathy, while remaining true to the core values of the organization and finding ways to circumvent unpredictable impediments, will be characteristic of tomorrow's leaders. These will be people who are inspirational; technologically savvy but not prone to getting lost in details; entrepreneurial; devoted
to service, and inclusive rather than independent or autocratic. Additional key leadership competencies will include: the ability to develop and articulate a value proposition - maintaining it in a dynamic market and energising others to buy into it; investing in a business model that guides employee decision-making at all levels; committing to a culture that values mentorship and learning while aligning individual and corporate goals, and recognising what it means to develop and manage truly transformational knowledge systems. The common characteristics of these new leaders are all related to issues that are more focused on the intangible aspects of an organization. Over time, those would-be leaders who are unwilling or unable to demonstrate these leadership behaviours will find themselves with few followers.'

Where will these new leaders come from?
If these characteristics of leaders are to be developed we shall need a complete change of emphasis in our internal leadership development programmes, away from concentration on the acquisition of skills and towards a stronger focus on values and self-knowledge.

Few business schools encourage MBA students to be explicit about their
values and seek to make a meaningful difference to the world through their
working life. A recent survey from the Aspen Institute looked at MBA students' attitudes to business and society, at three different stages: before they started
their programme, halfway through and, finally, on graduation. The results
showed that students' sense of social responsibility decreases as they go
through their MBA programme. For example, as they begin their degree, more
than 40 per cent say that one of the primary responsibilities of a company
is to produce useful, high-quality goods and services; but by the end of the
programme just over 30 per cent think this is valuable.
However, some European business schools are waking up to the
apparent ethical vacuum at the heart of most MBA curricula. Recently
the European Academy on Business in Society was launched with the aim
of helping deans and professors at business schools and universities
place greater emphasis on ethical issues in business education.

The challenge for HR

In today's uncertain and depressed business climate one vital role that HR can play in the short term is to persuade top management to abstain from knee jerk reactions which can only damage the organisation's long term prospects of success. Such reactions include large scale redundancy programmes that result in loss of talent and experience as well as the erosion of morale, the closure of final salary pension schemes, the reduction of employers' contributions to pension schemes, slashing training budgets, suspending graduate recruitment and other cost cutting measures.
Actions such as downsizing cannot fix deep-seated problems of product acceptability, quality, service, process design or management style. The damage is compounded when the wrong people start leaving, and too much experience and expertise is lost (corporate Alzheimer's) or when the cut is too deep and those who remain suffer stress due to heavy work loads, (corporate anorexia).

In such cases a downward performance cycle can be triggered. Performance problems lead to downsizing, which in turn leads to employees reducing their efforts, spinning work out to make it last or leaving to find more secure employment. This in turn lowers performance further, leading to yet more redundancies and so the cycle continues.
Another current example of the knee jerk reaction is the marked trend for companies to close their defined benefit pension schemes. Many employers have told new staff they must join a money purchase scheme. These, of course, lack guarantees and are dependent on the performance of investments. But some firms, including Tesco, Nationwide and Safeway, have avoided the knee jerk response, have studied a range of options and have adopted a hybrid occupational scheme that retains guarantees and in some cases enhances benefits. All three have adopted pensions based on average salaries rather than final salaries. The career average scheme as it is known provides a pension entitlement based on salary in each year. Employer and employee commit to paying an agreed percentage of salary into the scheme. Each year, pension rights accrue based on the employee's current salary. The sum is then index-linked to inflation. The sum of all the years plus inflation is added up at retirement to achieve an average salary pension.

Equally important is the influence that HR people can exercise on the culture of the organisation and the consequent beneficial impact upon employee commitment and performance levels. Among the initiatives that can be taken by a proactive, strategic HR team are the following:
" Encouraging bottom-up exploration of the organisation's values
" Working with sympathetic senior line managers to introduce working practices designed to improve employee commitment and performance. Successful projects of this kind in parts of a company can then serve as models for other parts to emulate.
" Organising regular seminars for senior line managers that expose them to the research findings on the links between employee commitment and organisational success.
" Promoting the cause of transparency in the firm's financial affairs.
" Conducting regular attitude surveys that measure the impact of top management decisions on employee morale.

HR specialists as company directors

As company directors or members of boards of trustees, HR specialists share fully in the fiduciary and other responsibilities of such bodies. This means in practice that they share responsibility for all aspects of the organisation's performance. In my experience HR directors often lack the necessary financial knowledge to enable them to discharge these responsibilities effectively. It is worth bearing in mind that the HR director of a company found to have engaged in fraudulent accounting practices would be held equally culpable alongside the CEO and the finance director. The implications are clear:
HR directors must ensure that they are adequately educated in financial knowledge such that they fully understand the finer points of the company's accounts, including all the footnotes. They must persist in asking for clarification of any matters that are not clearly understood.

They must be fully aware of the environmental issues associated with the company's operations and the company's track record in dealing with these. This is particularly important with regard to any environmental issues that carry health and safety risks for employees or members of local communities.
They must also be fully aware of the moral and legal aspects of the company's relationships with its customers or clients. For example, in past cases of misselling of pensions and other investment, to what extent were senior HR people aware of the practices being employed by their companies?
In relation to any issue that causes doubts to be raised as to the legality or morality of the company's operations, the HR director must be prepared to challenge those responsible and, in the last analysis, be prepared to act as whistleblower.
HR - human resources or human relationships?
Perhaps it is time to challenge the concept of people as resources, to give them back their humanity and dignity. HR could, in the future stand for human relationships, for, after all, what are organisations other than complex networks of human relationships?

References

De Geus, Arie (1997) The Living Company, Nicholas Brealey London
MacMillan, Keith and Downing, Steve (1999) Governance and Performance: Goodwill Hunting, Journal of General Management, Vol. 24 No. 3 Spring pp 11-21
Nevins, Mark and Stumpf, Stephen, (1999) 21st Century Leadership, Journal of Strategy and Business, 3rd quarter
Pfeffer, J. (1998) The Human Equation, Harvard Business School, Cambridge, MA
Reichheld Frederick F. and Teal Thomas (1996) The Loyalty Effect, Harvard Business School, Cambridge, MA
Wilson, Ian (2000) The New Rules of Corporate Conduct, Quorum Books, Westport, Connecticut

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