Why 'hot air' is worth more than money
By Ben Fletcher
Ben is Professor of Personal & Organizational Development at the University of Hertfordshire
You should not value a company by its 'financials', but by it's staff's perceptions and capacities.
Have you ever wondered why share prices fluctuate so wildly? It obviously has nothing to do with the 'real' worth of the company. In the recent past we have seen many company values plummet - some from being worth billions one day, to being financial liabilities the next day. The dotcom boom also typified the opposite trend. The financial press is constantly reporting cases where the market capitation of companies changes massively from one day to the next. These reports also exacerbate the fluctuations, and some say even cause them. Of course, something is worth what people will pay: no more no less. But it seems that the 'hot air factor' plays a big part in this area. This 'hot air' seems to be worth real money. We all know that it does, but it should not. Would you invest in hot air?
So, what is a company worth? What should you - as a private investor - put your money into? What should you - as a company wanting to increase your value - do to improve investor attractiveness? The answer has little to do with the company financials, except in the very limited sense of them being 'healthy' and fit for purpose. It is something of a paradox, therefore, that financial experts and analysts are so influential. How can it be that the financial analysts make their living from this hot air analysis? Their rarefied models and fancy equations do not seem to be about the stuff that should make share prices change, even if it does seem to make money change hands. How can it be that their analyses exert an influence on the market, and changes market values when they do not measure the important aspects of value? And an even bigger question: if the financials (including share value) do not measure company worth, what does?
The answer is simple. It is also problematic. The answer is simple because it is 'people'. And that is also why it is problematic: because organizations are not good at making the most of them, or of developing them very much to suit their needs.
When they have been asked, the vast majority of chief executives and company directors will tell you that it is the employees that give them competitive advantage. Yet, in the same group only about 1 in 10 are prepared to give HR budget spends a greater priority than other issues such as finance and marketing? I call this the People-Power Paradox. It is the failure of organizations to harness their people-power despite realizing the importance of so doing. This is promoting the Hot Airers when better measures should exist.
It is true that people factors make business. My own estimates suggest that these soft aspects account for about 40% of the bottom-line value of well-established organizations with solid product/customer bases, but as much as 80% of 'Cusp Businesses' (i.e. those at key transition phases).
This People-Power Paradox comes as no surprise to me for two reasons. The first is that Human Resource professionals have failed to deliver on the person-potential-power front. They spend hard earned corporate budgets, but do not add to the bottom line. I have argued in the past that this is because they fail to have the professional confidence to develop staff using an individual - rather than an organizational - perspective. In short, they deploy fashionable initiatives that can never work in their context. The benefits of these, if present, are not sustained, are marginal, or the bottom-line effects are unconvincing. HR has marginally beneficial effects in companies and that is why they remain marginalized in the real corporate decision engines.
The second reason for the paradox is that 'people' are hard to measure in a way that has economic or financial implications. And they are the real Hot Air. And that is why companies should not have their financial people analyzing this important asset. They may be able to produce predictive models that base future forecasts on digging through the entrails of the financial past, but this says nothing of the people potential at all. It also says nothing about staff perceptions and knowledge of what is really going on in the company, nor does it begin to measure people power as the engine that drives the business.
There is now available something that does both of these things - it is called the FIT-IQ (see www.fitcorporation.com). It is a management tool that has value to managers within existing businesses, and as a 'remote management' tool for venture capitalists and other investors. The core of the FIT-IQ is that it provides - perhaps for the first time - a rigorous evaluation of the value and utilization of the human capital in an organization (in a broad sense) as well as a set of methods to improve it. A FIT-IQ score for an organization is derived from employee perceptions of themselves, the organization of work, the culture of innovation, and the organization's reputation. A complex statistical modeling algorithm generates a management intelligence - or investor quotient - 'IQ' rating that can be used as a measure of the quality of management and as an indirect measure of shareholder value.
One major advantage of this FIT-IQ - besides actually measuring the people dimension that the financials do not - is that it measures future potentials, rather than past performance. However good the financial models, I would maintain that the analysis of the past never provides a business model for the future: the past is the place of problems, not solutions. The process of business is continually changing and tomorrow needs the application of a different kind of criteria.
(c) Professor Ben (C) Fletcher, 2002.
This is a series on 'The HOW, WHAT & WHY of Business and Management?' written by Professor Ben (C) Fletcher.
Ben is Professor of Personal & Organizational Development at the University of Hertfordshire. He is the founder of FIT Science which has taken over 20 years to develop. He is an Oxford doctorate, a Chartered Occupational Psychologist, a Chartered Health Psychologist, and was previously Dean (Director) of one of the larger UK University Business Schools for 6 years. He is on the Board of several companies, including being a founder director of The FIT Corporation Ltd. - the commercial arm of FIT Science. He is a member of the IOD. He has published extensively and lectured worldwide.
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