HR must be on the top rung of the corporate ladder to boost profits

The figures below show that firms with HR board members are well ahead of
the rest of the terms of share value. 
The profession asks, what more proof do CEOs need of its value?  By Mike Broad

HR is a bit-part player at best if it does not have a seat in the boardroom,
claimed one executive director of a FTSE 100 company.

It only becomes part of the big picture when the HR director sits alongside
the financial director as an equal, he added.

HR directors believe the function needs to sit squarely in the foreground of
this big picture – with a confident smile on its face – following the release
today of groundbreaking research by Andersen Human Capital UK, released
exclusively to Personnel Today.

It reveals that the average increase in earnings per share (EPS) of FTSE 100
companies with HR directors on the board between 1996 and 2000 is nearly double
that of those without them at that level.

EPS increased by 88 per cent for those companies with boardroom HR, based on
31 August 2001 figures.

This compares favourably with the 44 per cent increase in EPS for all FTSE
100 companies during that four-year period.

Board-level HR directors interviewed by Personnel Today expressed relief
that there was proof that when HR becomes involved in strategic decision making
– which usually occurs at board level – there are quantifiable profitability
gains.

For some the need for board level HR is obvious. David Bell, director for
people at publishers Pearson, and one of three executive directors on the
board, explained, "Companies like ours are brain driven and creative. It
is all about ideas and turning that into productivity, and to succeed we need
people and money.

"Our aim is to find, keep, and inspire the best people in our sector.
It is as simple as that."

Cadbury Schweppes is a good example of a FTSE 100 company that has driven
forward productivity with the help of a board level HR director. It launched a
managing value programme in 1997 aimed at increasing EPS by at least 10 per
cent per year, generating more than £150m of free cashflow and doubling
shareholder value every four years.

HR played an integral role in its £1.3bn acquisition activity in 1999 and
2000 aimed at growing its core business, and the restructuring of its senior
management.

Strategic development has been separated from operational performance and
the new strategy team was given a wider remit, ranging from M&A planning to
developing e-commerce and knowledge management.

Bob Stack, chief HR officer and board member at Cadbury Schweppes,
explained, "The HR role was extremely significant. Our chief executive
John Sunderland believes that creating shareowner value is 80 per cent about
people and only 20 per cent analysis.

"In many of the key elements of building capability, such as
leadership, change management and management culture, HR played a lead
role."

The company surpassed its first two aims and achieved 84 per cent growth in
shareowner return in four years. The managing value programme has been extended
to 2004.

"Our company values mean that it would be inconceivable not to have HR
on the board. Almost all strategic proposals that come in front of it have a
people capability aspect to them," he added.

The need for HRto sit on the board, and its ability to affect the bottom
line, is clearly far greater in people-oriented businesses.

Board-level HR has also played a central role in Scottish & Newcastle’s
drive to grow its core business and become a large multinational brewer. The
group employs more than 40,000 staff following the 1999 acquisition of the
largest French brewer Brasseries Kronenbourg, and Alken Maes, the second
largest Belgian brewer, the following year.

Henry Fairweather, group HR director of Scottish & Newcastle and board
member, explained that boardroom HR has helped develop the appropriate
organisational cultures for these acquisitions and nurture a senior management
team capable of running a multicultural business successfully. This has been
vital to the strategy’s success, he said.

It is not just in an acquisition phase that board-level HR can contribute to
strategy. Supermarket giant J Sainsbury employs 140,000 staff and is attempting
to recover lost market share.

Its HR and IT director John Adshead, one of four executive directors on the
board, said, "In a strategy that is about transformation and recovery of
lost ground, and trying to become the best if not the biggest supermarket,
individual and team capability has to be of the highest level. HR is playing a
critical role here."

While a few companies realised the importance of HR many years ago – Cadbury
Schweppes, CMG and J Sainsbury have all had an HR director on the board for
more than 20 years – many have failed to promote it to board level.

Despite the strong correlation with profitability, only 16 of the 60
companies which have been in the FTSE 100 since 1996 have an HR director at the
top table.

This could change however, albeit slowly. George Battersby, group HR
director and board member of biotechnology company Amersham, believes that HR
directors are increasingly being considered for board-level positions.

He said, "It will probably continue, but it is dependent on the HR role
being seen to add value at that level. These days, enlightened chief executives
are looking for HR directors to be strategic business partners, not just
service providers."

A key way that HR can add value in the boardroom is in assessing whether the
company will be able to execute an ambitious business plan.

Cadbury Schweppes’ Stack explained, "It is less about functional input
as being able to assess the capability of the company to implement strategy,
based on the number of people, skill levels, and employee relations."

Boards are also better able to foster staff commitment if HR is represented
and this can have a direct impact on productivity. Most of the HR directors
interviewed by Personnel Today won board support for encouraging staff to
become stakeholders in the business.

"In our 21st-century company, we want all our employees to work with
the company, not for it. We have evolved the master-servant relationship, and
many staff passionately believe that the firm is theirs – 96 per cent own
shares," explained Bell.

Communication of staff issues is also important. "If the whole board
speaks with one voice and in the same language, it is likely to come across as
sincere to the staff," said Ian Taylor, HR and organisation director of
consultancy giant CMG.

But Neil Roden, HR director of Royal Bank of Scotland, questions the
importance of board level representation. He is not a board member.

He said, "Our board only meets a couple of times a year and I think
there are more important factors for HR. The head of HR has to report to the
chief executive. We have two board subcommittees where 99 per cent of the big
decisions are taken.

"Furthermore, it doesn’t matter what position the HR director holds if
they don’t have the ability to influence the organisation."

Amersham’s Battersby agrees that HR’s ability to influence profitability
depends on respect, not warming a seat on the board.

He said, "It isn’t essential to be on the board, but HR does have to be
seen as a top player in the senior management team. The HR role cannot be
performed effectively unless you are at the heart of the business agenda."

But there are concerns that HR professionals don’t have the skills to get to
the heart of the business agenda and make a contribution. Stack, who has an HR
background, is concerned about the trend for senior personnel roles to be
filled by directors from other disciplines.

He said, "While companies are starting to recognise the importance of
people as part of the business, they don’t have the confidence to use HR.

"Wider business skills need to be identified and nurtured early in an
HR career so they can progress to senior roles and influence performance."

www.andersen.com

Feedbackfrom the board

What are the board level skills
needed by HR to improve company profitability?

John Adshead, HR and IT director
of J Sainsbury

"A combination of commercial understanding, technical
skill and ability to influence others is needed to succeed at board level. It
is vital that HR develops its commercial understanding so that it knows where
income and profits flow from."

David Bell, director for people of
Pearson

"It makes a big difference if you come in from outside HR
because you have experience of being a line manager and understand the issues
involved in managing a large number of people."

George Battersby, HR director of
Amersham

"Firstly you need commercial ability, and secondly
specialist professional skills. There is no point in pursuing an HR agenda that
is leading edge if it is not connected to the business agenda."

Henry Fairweather, HR director of
Scottish & Newcastle

"While you don’t have to be a whiz kid economist or
accountant, you do need to understand the strategic vision of the business.
It’s also important to be a diplomat. All organisations have tensions between
different divisions and personalities, and HR is well placed to get people to
see both sides of an argument. HR can be the oil in the wheels of the senior
management team."

Ian Taylor, HR and organisation director of CMG

"Leadership, business acumen and strong people skills are
required. You’ve got to be a leader and say, ‘the answer is this, this is what
we need to do, this is the direction we’re going, and this is our people
strategy’. The HR director needs to have a clear vision and carry the board
along."

Bob Stack, chief human resources
officer of Cadbury Schweppes

"You need to be a business person first. It’s important to
make the linkages between the needs between the needs of the business and the
appropriate HR solution."

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