There should be an award for imaginative book titles. Bill Catlette and Richard Hadden would win it for Contented cows give better milk: the plain truth about employee relations and your bottom line. Here’s the idea: companies that not only treat people right but make that an integral part of corporate strategy always make more money. The book compares ‘contented cow’ companies like Hewlett Packard, Federal Express and Wal-Mart with ‘common cows’ like Texas Instruments, General Motors and Xerox. Over a period of ten years the former outperformed the latter in terms of higher growth in sales and net income.
GE is one of the outstanding contented cows. Its market cap has been the world’s highest over a long period, and for five years in succession it was number one on the Fortune list of America’s most admired companies. So how does GE report on human resources?
The answer is remarkably well in terms of a general narrative, far less so as an equity story. GE argues that a learning culture, a relentless focus on excellence, constant reviewing, ‘work-out’ meetings and, of course, six sigma (a measure of quality that strives for near perfection) have molded its success. Seldom have soft facts been presented in such tough language. Initiatives are launched with ‘passionate intensity’ and personnel reviews ensure that ‘role models – heroes – have emerged in all the businesses.’ Rigorous HR reviews are used to sift out new leaders. The entire letter to shareholders in the 1999 annual report focused on HR as did the next year’s report – Jack Welch’s last as chairman and CEO.
GE’s meritocracy mantra is symbolic of an exceptional openness that expresses itself in other ways. The company openly admits that its famous six sigma was derived from programs run by Allied Signal and Motorola. Similarly, its asset management, market intelligence and digitization strategies were copied from other companies.
On the other hand, the GE reports are short on metrics. No information is provided on employee turnover, productivity or absenteeism, though the 2001 report with Jeff Immelt as CEO certainly seems less gung-ho than during the Welch years and it mentions the 1,200 patents gained by the company’s employees.
The GE story illustrates a gap between ethics and effectiveness. Welch’s authoritarianism and self-aggrandizement have faced criticism of late but none of the critics provide a viable alternative. Ron Collard, PricewaterhouseCoopers’ HR operations partner, points out that while many companies boast in their annual reports that ‘people are our most important asset,’ the underlying message is that as long as we ignore them, they don’t cost much and go away when necessary. This kind of hypocrisy characterizes most HR reporting.
So reporting weakness could well reflect a deeper malaise. The Conference Board recently asked a panel of experts, ‘Are we any better at managing people?’ Most responded with a clear no, including Cows author Bill Catlette, who calls for more ‘disciplined, determined, capable leaders’ – people, in other words, far more like Jack Welch.
On the other hand, ethical pressure to take HR seriously is mounting. The influential Global Reporting Initiative demands a breakdown of wages, pensions, benefits and redundancy payments; structures of employment; labor union representation; and so on. It’s well-meaning, and aims to persuade corporate sinners to mend and then to report on their ways. But what about productivity, performance indicators and incentives? And why aren’t ethics linked to effectiveness?
The same deficiencies apply to the Dow Jones Sustainability and FTSE4Good indices. Dow Jones classifies human capital in its social category, ignoring it in the list of economic criteria. The FTSE framework is a ragbag of all and sundry, reducing employees to liabilities to be provided for rather than assets to be exploited. So while many companies on both sides of the Atlantic have professionalized the way they report on environmental and corporate citizenship issues and made great strides on issues like stakeholder dialogues, HR reporting has drifted around in the corporate backwaters.
Stephen Gates, author of a Conference Board study on how human capital is measured and reported, has found more companies relying on sophisticated software. But the study, published in 2002, also says most HR professionals do not collaborate with colleagues from finance or strategy when they design human capital measures.
This could be a signal for canny IROs to extend a helping hand. Well-chosen HR indicators on revenues, compensation, absenteeism, and so on, judiciously grafted onto standard financial metrics could give the equity story a breath of fresh air.
Just as long as it’s not hot air.
