Will human capital ever sit on the balance sheet?
Siân: You talk a lot about the fact that there's less rigour when it comes to human capital management versus financial. Are you actually seeing any increased focus on the value of human capital from investors?
Eric: Probably one of the best places to look for evidence of that is with private equity clients. I have seen over the last several years a real increased emphasis on making sure that, when they're doing their diligence on an asset, they not only understand the capabilities of the senior leadership team but they more fundamentally understand how the organisation operates.
So in their diligence, they're trying to make sure that they're buying companies that have healthy organisations that maximise the value of their human capital in terms of getting the most out of the time, talent, energy of their workforce. In large part, this is because the holding periods for these companies have increased significantly and they know that they're going to have to have dynamic organisations that can adapt over time.
If you were just to buy a company and flip it quickly, you would worry less about long term organisational health, but given the changes in the way private equity firms create value, they put a lot more emphasis on a deeper understanding of that. I think that's a leading indicator of how very progressive investors are thinking about human capital.
Siân: What measures are they looking at? Can you ever see human capital sitting on the balance sheet?
Eric: No, I think it will always be a little bit difficult to measure it as concretely as you would financial flows. But they're looking at things like the level of engagement and inspiration in the workforce. They're trying to understand how the leadership team itself creates an environment that's productive inside the company. So, instead of just diligence in individual leaders and looking at their resumés, they're also trying to understand how that team works together in a more collaborative way to manage the enterprise.
I think they're looking deeper at longer-term factors that are associated with organisational health. Things like organisational drag. I do think there are metrics we can use to improve the understanding of that, like the use of tools in workforce analytics that allow you to measure where time goes in an organisation.
When it comes to talent, I think one of the most telling measures which we haven't seen companies put into place yet, but I think they over time could, is looking at how effective leaders are at what I call the ‘talent trade balance’. So, how much talent do they import into their group and how much talent do they export from their group? You want to reward managers who have a positive trade balance.
Lastly, I have seen a number of companies put in measures around inspirational leadership. There's some interesting work at companies like Google and Kronos and Netflix, where they are specifically measuring upward feedback levels of inspiration in their leadership a couple of times a year. They reward people for that because they can see the outside impact leaders have on the organisational energy. I think we will over time add more sophisticated measures to how we manage human capital.