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Hein Knaapen August 17 2022 14 min read

How HR Adds to Enterprise Value

I have led multiple company-wide “people services” organisations during my many years as a Chief HR Officer.

If you ask me why we should service all employees through their lifecycle, build first-class people solutions, and sustain vital HR knowledge within its walls, I will likely give you the top three reasons that come to mind. Aligning administration, recruitment and learning has its cost efficiencies. Establishing centres of expertise sustains first-class HR knowledge and ensures consistent yet differentiated employee experiences. And more importantly, a centralized organisation essentially frees up HR professionals to focus on the four “people priorities” that, in my view, contribute most to company value: performance management, succession management, leadership development, and capability building.

Why focus on company value?

The founders may have proclaimed a strong purpose for the company, or its purpose may have developed gradually over time. Either way, the organisation acts as an indispensable vehicle for the profitable delivery of a set of products and services. Put simply, it exists to create value for its stakeholders. That value is reflected in its enterprise value.

That is why I think it is important that senior executive leaders when making strategic choices about what their company does or does not do, should look at their organisation through the lens of value creation. They are, after all, the ones responsible for growing the enterprise value. Everything else—from delivering on a compelling purpose to abiding by relevant laws and regulations, employing large numbers of people, and having an engaged workforce—are all means to this end. Deliver the value, and then it’s possible to fulfill that compelling purpose. Deliver the value, and it’s also possible for people to make their living, enhance their capabilities, and live the lives to which they aspire. Don’t deliver the value, and all these possibilities disappear. This leads us back to where the HR function can have the most impact: by enhancing management’s capability to drive value creation.

It is tempting to try to be everything to everyone here. There are no silver bullets. And there is only so much we in HR can do. It is also all too easy to get carried away in heated discussions about our processes and tools and to lose sight of what they should deliver. (I find the heated debate around having or doing away with annual performance reviews a most amusing example of this.) If we want to impact our businesses, it will be by focusing on a few vital priorities and outputs rather than on processes and tools.

Value creation should be the focus. Nothing else. And only four people priorities connect to value: performance management, succession management, leadership development and capability building.

Now you could say these four people priorities actually describe the entire professional domain of HR. That is a fair point, so let me qualify what I am saying. The intention behind distinguishing this particular work is to stop all other activities that are beyond these priorities, other than what the law and probity require us to do or not do. This helps unclutter agendas and doggedly focus everyone on what really matters for value creation.

 

PRIORITY #1: PERFORMANCE MANAGEMENT

For me, this is the ultimate pivot of managing people. While performance management is the vehicle, the individual’s level of ambition is the real thrust. Unfortunately, most performance management practices, in their infinite beauty and complexity, die.

In reality, you need a rigorous practice whereby managers keep their direct reports, as well as each other, on a straight and narrow path of honest and ambitious feedback. HR professionals can have a positive impact here in two ways: first, by building the capability of managers to give and receive such feedback, and second, by ensuring their performance conversations tightly link an individual’s set ambitions to the company strategy.

In practice, good performance management is all about managers regularly initiating conversations with their people, conversations that provide them with frequent, very honest, granular feedback on their performance, as well as practical help on what and how to improve. You might be surprised to learn how very few managers are really good at this. A useful framework for these interactions is to answer these four questions for people:

1. What am I supposed to be doing? Create a clear line of sight for the individual from their work priorities to the company’s strategy.

2. How am I doing? Tell them how well they are currently performing against their set priorities.

3. What should I change? Offer them granular plans for specific adjustments in performance and/or behavior.

4. What are the consequences? Articulate what financial and/or non-financial recognition they can expect.

 

PRIORITY #2: SUCCESSION MANAGEMENT

I am indebted to my former manager and current partner at CEO Works, Sandy Ogg, for informing my thinking in this area. He would say, “All roles are equal, yet some roles are much more equal than others.” By that, he meant that a very limited number of roles in a company—no more than 1%— are critical to value creation. This is not to say you can do without all the other roles. You cannot. But we in HR must understand where those roles critical to value creation are in the company. In each of those critical roles, we need talented people who have already proven their ability to deliver at the level of the ambition, not just at the level of the current performance of the business.

Conventional thinking in many companies usually underestimates how these roles differ from others in their contribution to value delivery. There will be many key roles elsewhere in the company in which there is not so much at stake, positions in which people can be tested or allowed to gain experience for future career placements. But for these critical roles, you need a ruthless data-driven process to precisely identify the unique talents who are up for the work to be done right from the beginning. Here the HR professional must collect and scrutinize relevant evidence on the readiness of available talent, both inside and outside the company, and guide the selection process.

 

PRIORITY #3: LEADERSHIP DEVELOPMENT

Over the course of my career, I have been privy to many leadership programmes, some as a participant, some as a co-developer. Some were poor; some were great. Quite a few were okay. What they all had in common was that none of them resulted in any discernable change in the quality of leadership.

We don’t start out to develop leaders for the sake of creating leaders. We develop leaders to help drive value growth.

Perhaps the best way forward here is to have the HR team, in collaboration with senior executives, identify the leadership capabilities that will be indispensable for delivery of the corporation’s strategy. This steers everyone clear of the romantic temptation to define what it takes to be a great leader and focuses everyone’s thinking on what the company needs next. With this information in hand, the HR team can design and deliver appropriate programs, using a number of vendors and a variety of learning techniques, to enhance the capabilities of the existing management.

 

PRIORITY #4: CAPABILITY BUILDING

Considering the volatility and pace of change in our current economy, conventional management development practices seem almost obsolete. With many companies reducing management layers, the conventional idea of a career as a progression through a series of promotions to ever more senior jobs is giving way to the concept of a career as a succession of roles that expose individuals to new, enriching challenges. Pay, no longer linked to seniority or tenure, reflects a combination of market value and a role’s contribution to value. Gone are the days of HR applying relatively static career templates and outlining predictable steps up the corporate ladder.

Today, with people priorities driving value, it is in the best interest of the company to focus on developing all the workforce capabilities necessary for value creation rather than on guiding careers. It is for the HR professional to drive a rigorous process that: identifies and translates the organisational capabilities necessary for value creation into people capabilities; selects only the most critical; and develops a plan to build those through some combination of grooming, hiring, and acquiring. Then, if we are truly focused on the real interests of the company, we will offer and support those individuals with any learning they need to realize the entire workforce capability plan.

What about strategy and culture?

People ask me where I think culture and strategy sit in all of this. As Don Barton and Ram Charan state, the CEO, CFO and CHRO together are responsible for deploying the organization’s human capital and financial capital to create enterprise value. In this article, I have assumed the company strategy for value creation is already set and that the choices regarding people priorities are being made in a close collaboration between the CHRO and the rest of the executive leadership team.

Culture, as I see it, is an output rather than a strategic priority or key initiative. As Edgar H. Schein so aptly put it, culture is the taken-for-granted assumptions and behaviours of an organisations members. It shows up in the stories people tell, the symbols and control systems they use, and, mostly, in how they behave toward each other. Understanding whether or not the current culture of the company is relevant to value creation is, therefore, important. By working with the senior leadership of the company on the four people priorities, we in HR can either leverage current behaviours or change them to better align with the company's strategy to create value.

By focusing on these four people priorities—performance management, succession management, leadership development, and capability building—and moving away from conventional activities that don’t have a clear link to value, I believe HR professionals can have a powerful impact. We can strengthen our business credibility by moving away from being the “jack of all trades” and becoming focused contributors to value creation in our own right. From there, the next step will be to have a much deeper involvement in strategy-setting.

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Hein Knaapen

Hein is an internationally recognized expert on HR innovation, talent development, and organizational capability building. As an advisor and mentor, he aims to guide leaders toward maximizing the return on their talent investments.