Can Good HR Boost Share Value?
Now we all know that HR departments has been struggling to get a seat in the boardroom for many years now and some have achieved greater success than others. Yes, a few have made it into the boardroom; others may be in but be granted standing room only, and others may simply have their ear to the door. The general consensus is that in order to excel, modern HR leaders need to speak a more commercial language and package the talent management initiative in a commercial way if HR is to have gravitas and importance in the boardroom. And what better way to do this than to show you can link the tactical and strategic behavior and misbehavior of people to the shareholder value.
For example, let’s look at diversity, the benefits of which tend to be seen as fairness, equity and meritocracy and even pro-legality. While these benefits are valid, it’s a narrow and limiting view of the the value of diversity hiring, which brings so much more to an organization. Of course, we should never take it for granted that diversity hiring brings greater opportunities for all, which is a noble objective in itself, but diversity also brings with it a level of superior team functioning that leads to increased shareholder value. It is these arguments that must also be made with force in the boardroom if HR is to really own it’s seat in the boardroom. Accountants don’t own shareholder value; it’s not all locked up in spreadsheets, assets and book value. A huge, intangible amount of shareholder value is linked to diversity, and therefore, the success of the diversity hiring initiatives.
Take, for example, Ernst & Young that has just revealed that the average return on equity for the world’s leading power companies with high diversity scores is 7.7 percent compared with only 4.5 percent for those with lower diversity scores. In addition, the power and utilities sector has underperformed global equity markets on price by over two-thirds in the past five years. Thomson Reuters found last year that the average stock price of gender diverse corporate boards outperformed those with no women. Further research from the College of Business at Florida Atlantic published late last year has also shown a clear positive link between the development of a racially diverse workforce at multiple levels in the organization with increased shareholder value.
So, while the social equity argument of diversity is a noble one, never to be lost, the most commercially compelling argument for diversity, which should be put forward by HR in order to make a bigger impact in the boardroom, is that diversity is financially enriching and will lead to increased shareholder value. In fact, a well executed diversity hiring policy can boost shareholder value by millions.
A strong leadership team based on a bedrock of well executed succession has also been shown by Deloitte to be more important than earnings forecasts and ratio analysis as a measure of success. This means that analysts will be judging the share value of your business based on your leadership team and bench strength. One analyst quoted in the Deloitte report suggests that strong leadership could add 25-30% to the value of the company.
Thus, it’s clear to me that effective HR manifested in strong leadership performance and pipeline and a diverse work-force can add millions to shareholder value and these commercial arguments should be at the heart of the talent management value proposition.