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February 08, 2001
Human Resources Practices Linked with Shareholder Value
    by Mark Thomsen

Research in North America and Europe by global consulting firm finds companies with certain human resources policies can have over 25 percent higher market value.

A global consulting firm, Watson Wyatt Worldwide, has been conducting a multiyear initiative to quantify the relationship between superior human resources management and shareholder returns. The firm measures the effectiveness of a company's human capital through its "Human Capital Index," or HCI. Watson Wyatt has found that companies with a higher HCI tend to have higher market value.

Over the last three years, Watson Wyatt's research has included comprehensive surveys of how major companies implement human resources practices. In a study focused on North America, Watson Wyatt surveyed over 400 companies headquartered in the U.S. and Canada. The companies represented a wide range of industries and their average sales and market values closely mimicked the averages of companies listed on the New York Stock Exchange and NASDAQ exchange.

The survey asked questions about human resources policies such as communications, pay and staff development. After the data was gathered, the researchers analyzed the relationships between survey answers and financial measures such as the company's market value, three- and five-year total returns to shareholders, and Tobin's Q. Tobin's Q is an economist's tool for measuring an organization's capacity to create value beyond its physical assets.

According to the North American survey report, "A significant improvement in 30 HR (human resources) practices is associated with a 30 percent increase in market value." The 30 practices were divided into five categories: recruiting, clear rewards and accountability, workplace environment, communications, and use of resources.

Researchers found that "by showing a significant improvement in recruiting new talent, companies can achieve a 10.1 percent increase in market value." The two recruiting practices having the most significant effect, hiring professionals that have the skills to do the job and implementing a recruiting strategy that supports the business plan, each accounted for a 2.3 percent increase.

Clear rewards for excellent results and accountability for poor performance were found to account for a 9.2 percent rise in market value. Three practices in particular were each linked to a 1.8 percent increase in value: a large percentage of employees participating in stock plan programs, the company being effective at helping poor performers improve, and the company terminating workers who perform unacceptably.

The workplace environment was also identified as being quantifiably linked to shareholder returns. Researchers found that improvement on related policies could yield a 7.8 percent increase in market value. Flexible work arrangements and a culture that fosters teamwork and cooperation accounted for the biggest increases, 1.7 percent and 1.5 percent respectively.

Regarding the quality of communications, the most important practice was found to be giving employees easy access to technologies for communicating. An improvement in this area could lead to a 1.8 percent rise in shareholder returns. Overall, communications was associated with a 4 percent increase in market value.

Analysis of the use of resources led to some surprises for the researchers. Practices such as training for higher positions and employee feedback on peers and managers were associated with a 10 percent decrease in market value. Researchers speculate that rather than these practices being inherently wrong, companies may not implement them to their best advantage.

Watson Wyatt's analysis of a survey conducted more recently in Europe had many parallels to the North Amercian survey. Researchers identified 19 human resources practices that were associated with a 26% increase in market value. The practices were broken into five categories: resource management, integrated leadership practices, remuneration, focus on the employee, and a paternalistic environment. The paternalistic environment was the only category where an increase in emphasis led to a decrease in company market value.

Watson Wyatt acknowledges their research has not established a causal relationship between human resources practices and increased shareholder value. Nevertheless, they believe "it will help more than hurt any organization to implement the practices that high HCI companies use to increase their shareholder value."


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