27 Apr Lack of strategic HR destroying market capitalisation
FROM a business standpoint, strategic Human Resources (HR) is how a business makes integrated and coordinated choices about talent, leadership and organisational culture to deliver unique value to customers and other key external constituencies such as investors and regulators.
Column by Brett Chulu – theindependent.co.zw
Recent research shows that investors base at least 28% of their investment decisions on a company’s strategic HR. For businesses trading on a stock exchange, the presence or absence of strategic HR practices impacts on share price performance relative to competitors within the same industry.
By extension, share price performance directly impacts on the listed business’s market capitalisation (current share price multiplied by outstanding shares).
Investors versus strategic HR
The Results Based Leadership Institute, the world’s highly respected strategic HR thought leaders, in 2012 conducted a study on the key factors influencing investment decisions at the business level.
A total of 430 members from the investment community with at least 15 years of investment experience were interviewed. These were private equity investors, hedge fund managers, venture capitalists, mutual fund investors and portfolio managers.
The study identified three broad domains of factors influencing investment decision, namely; industry attractiveness, company performance (history of financial and non-financial performance) and quality of leadership.
The most influential investment-decision domain was company performance; with a total vote of 38,5%, followed by industry attractiveness with a score of 33,1%. Quality of leadership ranked third with a score of 28,4%.
From this ranking, strategic HR directly features in two of the domains.
On the one hand, a whole domain—quality of leadership, is a strategic HR focal area. Clearly, we cannot escape the conclusion that the presence or absence of strategic HR in a business has a bearing on which potential investment target gets dropped or which company is favoured with a higher valuation.
On the other hand, within the company performance investment-decision province, strategic HR directly but partially contributes to non-financial performance or intangibles through building organisational culture.
Intangibles that are related to operations such as speed, accountability, shared mindset, for instance, are aspects of organisational culture that are within strategic HR’s sphere of expertise.
Organisational culture refers to the repeated patterns of behaviour and operational delivery that customers and other key stakeholders value. Thus investors place a higher value on businesses that repeatedly out-perform rivals in aspects that customers may value such as customer service.
Here is an inescapable conclusion; based on solid research, a business listed on the stock exchange should pay as much attention to its strategic HR delivery as the rest of its operations. Not doing so is a recipe for suppressing market capitalisation.
Strategic HR unlocks share value
I have every reason to believe that the findings of the Results Based Leadership Institute are applicable to Zimbabwe.
Some recent pointers lend weight to this supposition. For instance, how do you explain that when it was announced Joe Mutizwa, ex-Delta CEO, would be joining StarAfrica as its board chairman, the latter company’s market capitalisation rose by over 100%, that feat being accomplished in a largely subdued stock market.
Joe had not even started working there! Evidently, investors placed immense confidence in Joe’s leadership skills to turn around the performance of the then underperforming company. Quality of leadership matters to investors in Zimbabwe.
Here is a puzzle that many business leaders in Zimbabwe are struggling to solve. Why are some companies with good earnings performance being ‘underpriced’ by investors?
What business leaders of Zimbabwe Stock Exchange-listed companies may need to do is to analyse their businesses across the domains of company performance and quality of leadership, two of the three domains that inform investors’ decision to invest in a company. The reason for excluding the domain of industry attractiveness in this analysis is that industry attractiveness does not differentiate firms within the same industry. The other two domains are within the direct influence of business leaders.
We suggest a two-step process for assessing why a firm could be ‘undervalued’.
In the first step, business leaders should compare their firm’s price-earnings ratio against firms within their industry for a period of at least five years.
As numbers do not lie (unless cooked), by comparing a graph of your price-earnings ratio with those of firms within your industry, you may uncover uncomfortable truths. In simple terms, a price-earnings ratio of, say, 11 in our local context means that for every US$100 of profit (after tax) a Zimbabwean listed company makes, investors are placing a value of US$1 100. Let’s assume your company is listed on the Zimbabwe Stock Exchange (ZSE) and there are two other firms within your industry also listed on the ZSE.
In the second step, examine the possible internal reasons for your price-earnings ratio trend.
If your company’s graph of price-earnings ratio series over five years is consistently below the other two, it means either of two things:
First, your company’s financial performance in terms of metrics such as earnings per share, return on assets, for instance, is consistently below your rivals’. It may well reflect that you are being outsmarted by your rivals in terms of strategy.
Simply put, investors think that your rivals are better strategists, given that you are operating within the same industry environment. If you disagree then consider the second possibility: Investors may be of the perception that your rivals have better leadership capabilities than your company’s.
In particular, investors may be of the opinion you are relatively poor strategy executors; that your organisation has less able talent; that you do not have a strong pool of future leaders and talent; and that leaders in your organisation have poor self-development (low emotional intelligence, weak social networks, etc).
Lastly, it could be that your leaders do not have a cultural identity connecting to customers, investors, regulators, etc. Pretty harsh prognosis! What’s disturbing is that in the majority of cases I have encountered in Zimbabwe, business leaders blame the external environment for poor share price performance.
Very few, so far have been brave enough to admit that internal weaknesses may be the reason why investors are underpricing their assets. In the same breath, when companies miss forecast earnings, business leaders are quick to apportion blame on external circumstances.
That’s a strong signal of poor leadership.
What’s encouraging is that investors admit that measuring quality of leadership is tougher than measuring factors in other investment-decision domains. Thus businesses must communicate as much as possible on a company’s leadership practices and counsel its leaders to demonstrate leadership competencies both internally and externally.
For instance, business leaders who are in the habit of speaking arrogantly in public send wrong signals to investors about the company’s overall leadership quality.
Reflect on it
It’s not enough to publish the profiles of your leaders as a way of communicating leadership quality to investors.
Chulu is a strategic HR consultant who is pioneering innovative strategic HR practices in both listed and unlisted companies. — firstname.lastname@example.org