The Current State
Most organizations, regardless of what they do or how they’re structured, have figured out that they are supposed to say how important their people are. More often than not, however, those organizations have mastered the platitudes, but struggle with the delivery. This is not because leadership wishes ill will on its employees; it’s just that most senior leaders have never had genuine care for and investment in human capital modeled for them, nor are they typically rewarded for such behavior. This reality is actually quite ironic because it is objectively clear that human capital is the greatest asset an organization can have. If only for self-interest, the most rational thing businesses and other types of institutions could do is make people their number one focus. Because most organizations favor and reward short term gains over long term sustainability (again, despite claims to the contrary), and businesses are generally more driven to meet the demands of shareholders than the needs of employees, when faced with difficult situations, they usually make decisions based on near term financial performance rather than on professed values. This is why profitable entities lay people off or eliminate training programs or decrease benefits at the first hint of revenue or margin challenges—despite the claim that “people are our greatest asset!”
The fact is we can always improve a process or a tool or a technology. We can tweak automation and cost. But when all is said and done, people (human capital) make or break organizations. In fact, according to the Gallup organization, tangible assets have dropped in S&P market value from 68% in 1985 to an average of 13% today. Why is this? The short answer is that what used to be material competitive advantages such as fiscal capital or technology or real estate have become commodities that can easily be adopted and replicated, or that simply no longer matter. An organization’s human capital, on the other hand, can either be an unassailable competitive advantage or an Achille’s heal that mitigates against other potential advantages. One thing the COVID pandemic has demonstrated is that in the midst of an existential crisis, the organizations that are surviving and even thriving are those who have walked the walk with their people.
So, if human capital is so critical to success, why is it rarely a core focus and area of investment? Several structural and operational reasons are shared below.
Failure to Understand What Human Capital Is
In many cases, C-Suite executives have been taught to see the people in their organizations as expensive “productivity tools,” or as interchangeable objects, like technology or physical plant, that can be moved around like pieces on a game board—and whose skills, engagement, use of other tools, etc., either add value to the production of products and delivery of services, or are a drag on the P&L. The relationship itself is often seen as purely transactional.
People are undoubtedly expensive (and complicated), but the words human capital represent a very powerful concept. First, is the notion of humanness or humanity, which goes far, far beyond labor. Our humanity is the source of everything from creativity to empathy to grace, as well as the sublime in human behavior and achievement. It is also the source of fragility, angst, conflict, and a host of other very problematic realities. It’s a package deal, but when people in healthy organizations are primed to excel, the impossible becomes achievable.
As for “capital,” using an analogy from physics, capital is stored energy or potential. As with fiscal capital, it is a resource, that when fully realized, can foundationally change what’s possible. Human capital, therefore, can be an organization’s greatest asset by far because it is nearly boundless. If the leadership in companies and other entities fully understood this, human capital development would naturally be one of their highest priorities and areas of investment. Ironically, even though the ROI on human capital is potentially magnitudes greater than on other investments such as marketing or technology, most P&Ls reflect people purely as cost, which makes investment in developing human capital structurally difficult. This causes further, downstream problems because it is human capital that drives things such as innovation, transformation, sustainability, and continuous improvement—the core of competitive advantage and growth—which cannot be commoditized.
Disintegrated View of Human Capital Support Systems
Related to the transactional view of HR discussed below, few companies or institutions are structured to support human capital in a way that recognizes what should be an interconnected system of activities and related initiatives. For example, most organizations approach things like hiring, training, employee wellbeing, equity, diversity & inclusion, and compensation & benefits as separate, siloed activities (if they happen at all). Again, there are people, often in HR, who understand the value of a more integrated approach and, given the opportunity, would operate that way, but few organizations make that possible. This is truly unfortunate, because in order for any company or institution to maximize the value of their human capital, the people in the organization have to get close to achieving optimal knowledge, skills, abilities, attitudes, productivity, mental and physical health, engagement, resilience, teamwork, shared values and a host of other things, which can’t be achieved in environments that take a fragmented and siloed approach to developing the people that comprise the humanity in their company or institution.
HR as a Transactional Cost-Center
When most people think of anything connected to employees, they think of Human Resources. Moreover, in most companies and other types of organizations, HR is viewed as a cost center that is primarily transactional in nature, even if the folks in HR themselves would prefer a different tact! In other words, HR processes payroll, benefits, hiring, termination, promotions, complaints, etc. They aren’t often seen as business or strategic partners. As a result, things connected to HR are seen as expenses to be minimized, rather than investments to be leveraged. And since no one else formally owns human capital development, it rarely happens in any systematic way. In short, although there are exceptions, HR doesn’t typically operate in ways that bring added value and the departments they serve don’t often see human capital development as their responsibility—all while the “bean counters” are trying to figure out how to “do” human resources more cheaply. Moreover, such an environment typically has no clear accountability, let alone shared accountability, for growing people in ways that help them individually and empower them within the organization. As an example, the vast majority of organizations are much better at checking the boxes on generic “performance evaluation” forms, usually at the last minute before the annual deadline, than they are in designing and implementing true development systems. Why? Checking boxes is a relatively quick transaction, while developing someone often requires a long term, team-effort between functional area managers, HR, and other stakeholders, as well as the person being supported.
People Decisions Based on Short Term Financial or Performance Issues Rather than Organizational Values
It is very common for organizations to profess certain values such as integrity or teamwork or loyalty, but behave in ways that suggest other things are actually more important. Culture and Values represent a much bigger topic than can be addressed in this article, but suffice it to say that when a company claims to value integrity, for example, but then rewards a sales leader who has ethical lapses, or when a university claims to value teaching excellence, but will not promote or tenure faculty based on teaching, then you end up with a collective dissonance that compromises the value that human capital brings to the organization. When employees see that “hidden” values trump an organization’s claimed values, or worse, are fearful that a temporary dip in revenue will result in layoffs or pay cuts, rather than trimming other costs that do not directly harm people, they become less engaged, taker fewer risks, and simply become less productive. They tend to be less inclined to support teams, and instead, rationally, “look out for number one.”
A Better Way
At Idea Pathway & The Transformation Collaborative, we’ve come to understand that turning human capital into a most valuable asset requires a comprehensive, coherent, and integrated approach—an approach that we have frankly never seen fully implemented in any organizational context. The most important element of a successful plan is that it address a broad range of interrelated items that collectively support the growth and development of people in organizations. These same efforts also happen to drive organizational health, so it is a “twofer.” We’ve also noticed that much of human capital development typically benefits from thoughtful outsourcing because so few companies and other entities have the scale to develop core competencies across so many areas.
In addition to the high impact items in the Human Capital Development figure, there are additional areas of potential focus such as “saving” struggling employees and supporting remote and hybrid work environments.
Other Elements of a Good Plan
Beyond the interrelated areas of focus discussed above, it is important that organizations understand what it looks like to actually value employees as much as they typically claim they do, employ a more rational distribution of “HR” responsibilities across the organization, and have a genuine belief that human capital is the ultimate competitive advantage. In fact, in the absence of such a belief and/or a values-based approach to how we treat people, it is impossible to turn human capital into a company’s or institution’s greatest asset.
Employing a More Rational Distribution of “HR” Responsibilities Across the Organization
Of all the things organizations can do to better support human capital, employing a more rational distribution of perceived HR responsibilities is one of the easier challenges—not because the effort is easy—but because it is the kind of change with which most organizations already have some facility. As noted previously, Human Resources departments are usually primarily transactional while functional area managers rarely see human capital development as their responsibility. That is a bad combination! To the extent that companies and other institutions move HR itself into a more strategic and business support role, while shifting accountability for human capital development to functional areas and business units, the more rational human capital development activities will be.
A Values-Based Approach to How We Treat People
We believe there are two primary sources that drive what is ultimately irrational behavior. The first is that most executive teams endure extreme pressure to produce financial results for owners, investors, shareholders, etc.—quickly and consistently. Relatedly, the average tenure of executive leaders across all industries, for-profit and nonprofit, is decreasing dramatically. As a result, the only thing most leaders can focus on is short term results! And because people stick out as a big, if not the biggest, cost in most any P&L, that is the first place most executive teams go to limit or cut cost in pursuit of higher (short term) profits. Secondly, and maybe more importantly, actual corporate values often bely their stated values. For example, most organizations proudly publish values such as integrity, professionalism, collaboration/teamwork, accountability, etc., and some even go so far as to enumerate things like compassion, people first, and other admirable claims. As noted in a previous example, however, most organizations find it almost impossible to subordinate financial performance to integrity or to put teamwork and compassion on the same level as sales quotas relative to incentive compensation. As a result, it becomes almost impossible for companies and other institutions to commit to a system that fully supports human capital development because in most cases neither P&L priorities nor values actually support that commitment.
Interestingly, the COVID pandemic provided an opportunity to almost all existing organizations to test their commitment to values. Some have passed the test admirably, sacrificing profits and/or growth to support employees and other stakeholders during crisis or paying bonuses regardless of achieving targets, or shifting fiscal resources to payroll and benefits, including direct support for employees experiencing personal crisis. And others have failed miserably, which may have long tern deleterious effects even for those entities that survive the pandemic. As Mark Cuban noted just a few months into the crisis, “The way companies treat their employees in times like these will be their defining feature in the coming months and years.” It will become a legacy that either buoys or compromises organizations going forward.
How to fully support human capital in an affordable way
The fact is that even well-meaning companies and other entities often don’t have the scale to support internal core competencies in all the areas related to building human capital. Some activities are episodic and infrequent and others require a level of specialization that may not be feasible on a regular basis. That does not mean, however, that leadership teams can free themselves of responsibility for fully supporting the human capital (humanity) in their organizations. Careful prioritization and outsourcing when appropriate are necessary. As life both outside and inside of organizations becomes more complicated and the needs of employees more complex and varied, supporting human capital requires a more comprehensive, coherent and purposeful commitment—and a reassessment of long held and counterproductive assumptions. Although organizations are unlikely to have core competencies in every support area, they do have to fully understand what human capital is and believe that the humanity in their company or institution is deserving of care and development. At Idea Pathway and the Transformation Collaborative, we make it possible for organizations to invest in human capital—and reap the rewards— without incurring the overhead and long-term costs of building internal competencies across every support area. If you’d like to discuss your situation, click here or send an email to firstname.lastname@example.org or call 719-344-8195. We’ll be in touch promptly.
 Another significant problem in many organizations is the traditional, damaging way that “professionalism” is defined such that people are expected to leave their personal lives, their vulnerabilities, and their very humanity at the office door as if they were automatons of some sort, rather than people.