Chief Executives and managers in other disciplines have always had a nagging suspicion whether advanced HR practices is high ritual that burns resources but actually delivers little. This explains the variations in the HR Department’s budget sympathetically with financial results. If the going is good, all the budgets sought get approved. Otherwise, the familiar chopper is straight away on the HR budgets, particularly relating to training and development. It is for this reason that many line executives look upon HR as high fashion that can be worn well when the feeling is good. Despite the socially desirable statements from one and all that human resources are an asset and HR systems are investible grade programs and projects, the reality is different. The pressures on HR budgets are increasing monotonically with the levels of cost-based competition. Outsourcing of HR is indeed a direct result of the pressures for controlling costs on the HR front.

The main challenge before the HR professional, in this context, is to prove in definitive terms that HR practices indeed contribute to the performance of the company. In this effort, he will have to dwell on and investigate further, four inter related propositions i.e. (a) HR contributes to the long term sustainability of the firm; (b) that HR contributes to shareholder value positively; (c) that the coexistence of performance and HR systems is not an accident but that HR demonstrably leads performance; (d) that there are specific HR practices that contribute more than the others.

PROPOSITION ONE:

Proving this will indeed be a hefty challenge for the HR primarily because of the vicissitudes and mortality of corporations as a whole. Research has given us results to conclude that corporations have a fairly short life. The period of healthy operations for mid-sized companies is even shorter than the mega-corporations. The mega corporations, as revealed by the studies of Standard & Poor, Forbes, Arie De Geus, shed their sheen well within two decades. A sizable number have disappeared while several had to go through asset restructuring, mergers, and acquisitions. Great global brands have disappeared wholesale. The plight of companies, which are smaller than the Fortune 1000, is predictably even worse. Arguably, HR does not contribute to this decline and disappearance directly. It is the inability of these corporations to manage their risk appropriately that causes decline and disaster. Consequently, a large number of failed companies also indicate good HR practices for long number of years as much as the successful companies.

The HR linked defect in the governance and management of these companies might be connected with learning as a culture. Learning culture at the Board and the senior management is a matter of self-belief, personal attributes, personal choices of the shareholders than a HR practice. The HR executive is ill positioned to make Boards and top management learning. He may be able to create such a culture if the company has adopted it as a strategy. He may even be able to influence and make the senior management “learning”. The challenge for the HR discipline is to finely distinguish the absence of the specific elements in HR practice or culture that have led these companies to decline. In terms of the standard HR practice, these companies also probably have maintained the same kind of practices as those, which had survived. One needs to go well under the apparent and discover the differences between those, which had declined, and those, which are performing and surviving.

PROPOSITION TWO:

The Human Capital Index (HCI) created by Watson Wyatt asserts that good HR practices impact shareholder value positively. The 1999 study covered more than 400 US and Canada based companies, which were publicly traded and had a minimum of 100 million dollars in revenue or market value. The survey included a range of questions about how the organizations carried out their HR practices, including pay, people development, communications, and staffing. This study was repeated in 2001 and it revealed that companies with low HCI scores had an average of 21 per cent return over five years. The medium group had an average of 39 per cent while those with high score returned 64 per cent. This study asserts that there is indeed a correlation between good HR practices and higher shareholder value. The unsettling issue is that the low HR score does not actually show a negative shareholder value. Further, the doubt remains whether modern HR practices are used as high fashion consequent to perceived market value addition. A European survey by the same company also revealed that 19 key HR practices were associated with a 26 per cent increase in market value. On the whole, though there is enough indication that good HR practices are associated with positive shareholder value there is far more research required to exclude the multifactor influence and isolate HR practices as an independent variable.

PROPOSITION THREE:

The third challenge has been resolved to an extent by the surveys of the HCI conducted in 1999, 2000, and 2001. The challenge for these surveys was to establish that the HR practices were first adopted and that they indeed provided the traction for performance in the company. In the absence of such proof, the doubt arises whether HR practices were adopted merely as desirable wear while the going has been good any case due to other factors and conditions such as demand pull and associated profit margins. The doubt is amplified when most of us intuitively know that fancy training, annual staff meets, parties, bonuses, recognition awards that include a variety of jingles, hand-made paper, ribbons, trinkets, cuff-links, wrist watches, gold rings, etc. go up when the financial performance is assured. The HCI adopted an interesting approach to face this challenge. It looked at the HCI scores and the financial performance for 1999 and 2001. It aimed at examining the direction of the correlation – if the HCI scores were higher first and financial performance followed, it meant that the HR practices led performance. On the other hand, if the financial performance was higher first, it meant that the HR practices were lagging behind and hence may affirm the fear that they are indeed high fashion wear.

Correlation-A represented the relationship between the 1999 HCI Score and 2001 financial performance. Correlation-B, on the other hand, represented the relationship between 1999 financial performance and 2001 HCI Scores. If Correlation-B were larger, the high fashion conclusion would be inevitable. If Correlation-A is larger, then it is cause for celebration for the HR discipline. Fortunately, the HCI study indicated a statistically higher Correlation-A than Correlation-B. Though the study was understandably happy with this result, there is indeed a cause for concern as well. This arises from the fact that both correlations are positive but fairly small. For instance, Correlation-A at 0.41 is larger than Correlation-B at 0.19. However, should a correlation of 0.41 be a cause for celebration that the HR practices lead financial performance? Would one expect at least 0.8 to be more assertive? Is the interpretation merely self-serving as the researching firm is in HR consulting business? One is also not sure, as to how this relationship will be affected when other influencing variables are neutralized or isolated. While HR executives can indicate the potential of HR practices directly leading financial performance, they need to do far more research to assert this relationship with the managements without embarrassment.

PROPOSITION FOUR:

The fourth proposition is even more challenging for the HR discipline as it will indicate those practices that seem to make a difference to the performance and those that do not. The latest study of the HCI identifies 49 specific HR practices that play the greatest role in creating shareholder value. Amongst these, some practices had a greater impact compared to others. For instance, a company that makes a significant improvement in all the practices under “Total Rewards and Accountability” could see the market value improving by 16.5 per cent. On the other hand, “Recruiting and Retention Excellence” has a potential of 7.9 per cent only while “Prudent Use of Resources” had a negative value of -33.9 per cent.

The survey also noted that the high performance companies had certain programs such as the broad based stock options while the low performers did not have these. Interestingly, it was the low performers that embraced training of employees for future jobs than the high performance companies – this should worry the HRD specialists greatly.

The challenge for the HR function is to identify the specific HR practices that contribute most to the financial performance and the shareholder value. Having done that, the rest of HR practices might be mere maintenance and can either be underplayed, outsourced, or some of them may even be discarded. Intuitively, it appears that a strong performance management system along with a strategic compensation design that is highly flexible would be the core determiner of performance. Several other practices may indeed be either hygiene or ritualistic than contributing to performance. The HR manager needs a deeper understanding based on intense Indian research to be able to convince the Chief Executive and the top management, of those practices that actually contribute to financial performance as well as shareholder value and, that these practices indeed lead both performance and shareholder value on a sustainable basis.