It is hard to find a recently published book or article about management that doesn’t refer to the importance of people. Authors speak of the war for talent and the relationship of human capital to the market value of a company. CEOs declare in annual reports that people are their company’s most important asset. Surveys of executives confirm that many believe that finding and developing the right talent should be one of their top priorities.
It is a positive sign to see so many executives and management writers stress the importance of human capital, and one would expect the companies they work for and consult with to behave accordingly. But few organizations seem to walk their executives’ talk when it comes to the management of talent. Most companies are operated in ways that downplay the importance of people. They have bureaucratic structures that optimize the value of financial capital, machinery, equipment, and natural resources, at the expense of talent development and the opportunity for people to use their skills. Work processes are designed with simplified, standardized jobs, and individuals are controlled through well-defined hierarchical reporting relationships, highly monitored budgets, and close supervision.
The contrast between what executives say about the importance of people and how they manage their organizations is unfortunate at best. At worst, it is a major contributor to poor organizational performance.
To be sure, there are some companies — for example, some high-volume commodity producers — for which the quality of human capital doesn’t matter very much. When all is said and done, natural resources, cash, other tangible corporate assets, and even government regulations are more important to the success of these enterprises.
But for the vast majority of companies today, people do matter. The market value of most companies depends in large part on intangible assets, the most important being human capital. Particularly in developed countries, businesses need workers to perform complex work at a high level. Outstanding talent is scarce, and it can be a critical source of competitive advantage.
When executives say people are important but the organization’s practices and structures do not reflect this view, the unspoken message is the one that gets heard: People are not a source of competitive advantage after all. Employees are, in effect, told that the company is managing them incompetently and that their bosses know that this suboptimal approach is wrong. As a result, executives come across both as hypocritical and as poor managers and strategists, which in turn undermines their ability to lead.
Closing the gap between rhetoric and reality is not easy, but it can be done. Three features of any corporate structure clearly show whether management truly believes in the importance of human capital or is merely paying lip service to it. They are the corporate board, the human resources management function, and the information systems. If you are interested in building an organization in which people are treated as a valuable asset, then you must focus on these three critical areas.
Boards of Ignorance
When a corporation values human capital, the board of directors should have access to both the expertise and the information needed to understand talent issues at all levels of the organization. Consider the issue of expertise. A good deal of research-based knowledge exists about the retention, motivation, and development of human capital. Acquiring this knowledge and putting it to use requires in-depth expertise. Thus, a board should have at least one member who has a sophisticated understanding of the research related to human resources management, organizational effectiveness, succession planning, and learning and development. These are the anchors of effective human capital management.