Justifying HR’s Existence
Here’s my third post live from the Advanced Human Resource Executive Program at the University of Michigan’s Ross School of Business.
How should you respond if your CFO asks:
“Why shouldn’t I cut the HR budget to $0?”
Never fret again when you’re asked that question. Here’s a handy speech for you to memorize, adapted from fabulous materials presented by professor Wayne Brockbank.
Great question. Surely you’re familiar with the study by Baruch Lev on the correspondence between intangibles and stock prices.
In the past, the correspondence between earnings and stock price was about 90%. In recent years, though, it has dropped to 50%, with the other 50% being the company’s intangibles – basically, non-financial criteria investors use to determine how much the company will earn in the future.
Ernst & Young did the most thorough research ever on intangibles, interviewing several hundred analysts to see what factors they use to make their buy or sell decisions.
The #1 Answer: Leadership. More specifically:
- Culture of execution
- Clear vision and strategy
- Succession planning
- Leadership development
The #2 Answer: Corporate Culture. More specifically:
- Intellectual leadership
- Culture of results
- Culture of performance (especially executive compensation)
- Culture of trust
Guess what? HR has responsibility for seven of the top eight intangible factors considered by investors. Therefore, my dear CFO, HR is the very best place to invest if you really want to add value and look good to investors.
Stay tuned for more.
