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Intellectual Capital and HRD
What Is Intellectual Capital?
In this chapter,1 we will define intellectual capital, understand its meaning and how to measure it, identify its components and focus on human capital as an important part of intellectual capital. We will also explore HRD’s role, the tools for building human capital, and ways to enhance intellectual capital and shareholder value. We will draw upon some examples from Indian industry to argue that intellectual capital formation is higher and faster with appropriate HR interventions.
The market value of an organization is the total value of its net tangible assets and the value of its intangible assets. The tangible assets include the book value of all assets, shares, land and buildings, machinery, and all that can be seen and accounted for, while the intangible assets or intellectual capital of the company includes the image of the company and its internal strengths in terms of talent, people, management systems and practices, customers, brands, patents and everything else that comprises its market value.
What constitutes intellectual capital?
- Sound strategy
- Continuing innovation in products and services
- Excellent people
- Loyal and satisfied customers
- Reputation and image in connection with the community that creates the brand
- Synergistic partnerships
Managing talent and knowledge have become the imperatives of the new millennium. Valuing and quantifying intellectual capital effectively is the greatest challenge facing businesses today.
Based on Thomas Stewart’s definition of intellectual capital, I have developed a new model of intellectual capital. Concepts have been borrowed largely from Stewart. However, the manner of value addition in Indian companies is somewhat different. Execution becomes an important part of intellectual capital in Indian organizations. Those corporations that have implemented various change initiatives, stuck to their deadlines, and shown seriousness in delivering the promised output have demonstrated higher intellectual capital than others. In view of this, I have added a new dimension to, and expanded the components of, intellectual capital.
The following are the components of intellectual capital:
- Structural capital—customer capital:
- Customer contracts and relationships
- Loyalty and satisfaction
- Market share, image and reputation
- Service levels
- Brands, distribution networks and channels
- Popularity of revenue-generating activities
- Structural capital—organizational capital:
- Internal operations and efficiency
- Strategies
- Systems
- Methodologies
- Operational processes
- All recorded knowledge
- Patents
- Know-how
- Databases
- Technology
- Human capital:
- Knowledge capital and skill base, including personal knowledge and experience
- Emotional capital
- Motivational capital, including individual capability and commitment
- Relationship capital, including the way people work together, and their relationships inside and outside the organization
- Culture of the organization
- HR practices
- Social capital:
- Trust
- Enthusiasm
- Teamwork and ability to work together
- Seeking and rendering help
- Exchange of ideas (project teams, task forces and communications promote this)
- Emotional capital:
- Passion, obsession, motivation, innovation, enthusiasm, and so on
- Motivational profile of the organization
- Achievement, power, superordinate goals
- Relationship capital:
- Relationship with customers
- Relationship with suppliers
- Relationships within the firm
- Employee relations
- Team work
- Knowledge capital:
- Knowledge from new experiences
- Everyday experiences, problem-solving, experimentation, new projects, markets, mistakes
- Knowledge expressed through new services, revised processes and best practices
- Tacit knowledge, such as the mobilization of collective intelligence
- Execution capital
Market Capitalization of Indian Companies: Percentage of Net Fixed Assets to Market Value
The market valuation is influenced by the flux of events both within and outside the organization. While the organization can only influence external events to some extent, it can do a lot to influence events within the organization that add to its share value. By 2005–2006, some Indian organizations had been able to achieve remarkable market value by doing the right things in the right way. Their HR policies and talent management practices seem to have influenced a large part of their achievements. Several of them figured in the country’s ‘Best Employers’ list.
An analysis of data published in Business Today (October 2005) indicated that most of these companies had a very high market capitalization. The percentage of the tangible assets of some of the companies to the market valuation is given in Table 2.1, which makes a very important point: If the HR manager focuses her/his effort on intangible assets, the scope of the HR job expands enormously. Thus, for IT companies, HR practices can contribute to over 90 per cent of the market value. In hotels and other services, a good HR manager can add as much as 70 per cent of the market value. The question to ask therefore is, ‘What can I, as HR manager, do to influence the shareholder value of my company? Where do I add value? Where should I focus my efforts? Should I concentrate on managing transportation and administration, or talent and branding?’
Market value = Value of net tangible assets + Value of intangible assets
Based on the Business Today data, the values are far lower in 2008 (Table 2.1) as the Sensex touched an unprecedented 20,000 points. However, due to the volatility of this market we have restricted ourselves to the 2005–2006 figures. This is to illustrate that intellectual capital is a very important kind of capital for firms, and HR interventions can only enhance it.
In a competitive environment, it is the quality of people that makes a difference, and gives both nations and organizations a competitive advantage. If any business is to succeed it needs to bring talented people on board. Technology, finances and systems are more easily available today than ever before. Under these circumstances, it is recruiting and retaining talented people that seem to have become a bigger challenge.
Due to the dearth of talent, the compensation package for competent people has shot up about a hundredfold within a single decade in some countries. But talented people are limited, and HR practitioners are constantly being challenged to find innovative ways to retain them and to enhance the competencies of others who are relatively less talented. HR specialists need to recognize the importance of human capital in building business excellence. This chapter focuses on some possible HR interventions to build human capital in the search for talent.
Building talent means building human capital. It is a corporation’s human capital that largely constitutes its intellectual capital, and enhances the shareholder value. Recent research has consistently demonstrated how human capital (competent people, a learning culture, teamwork and enabling attitudes) and HR practices that enhance human capital also add to shareholder value.
TABLE 2.1 Percentage of net tangible assets to the total market value of select Indian firms
Note: Figures based on Business Today data (BT 500, October 2005). The percentage of intellectual capital of each company can be obtained by deducting the percentages from 100.
Role of Human Capital in Organizational Excellence
Capital is a resource base that organizations draw upon. There are many types of capital: financial, technological, and managerial (standardized and predictable systems and practices) and intellectual. The market value of any organization is the sum of its total value of net tangible assets and intangible assets. Bill Gates (1999) observed, ‘Our primary assets, which are our software and software developing skills, do not show up on the balance sheet at all.’ In fact, less than 3 per cent of Microsoft’s value is accounted for by tangible physical and financial assets.
Intellectual capital consists of intellectual material (knowledge, information, intellectual property and experience) that can be put to use to create wealth (Stewart 1994). Human capital is the main component of any firm’s intellectual capital.
Human capital comprises any form of knowledge, skills, motives, attitudes and values (both permanent and semi-permanent) that a person possesses. Self-awareness is also a kind of human capital. So is a sense of power. The latter is the engine that makes human beings apply their power. Knowledge is the best form of human capital. Once acquired, it cannot be depleted. It sharpens a person’s faculties and helps her/him to acquire more. Knowledge is relatively easy to pass on to others. But its acquisition depends on the inherent intelligence and mental capability of the acquirer.
Knowledge capital is found in abundance. New technologies—such as the Internet, distance learning, online learning and other technological innovations—have facilitated its proliferation. Knowledge capital can be used for commercial and other purposes. The possession of knowledge capital allows the acquisition and multiplication of all other forms of capital.
Skill capital is the ability to apply knowledge capital using one’s physical and mental faculties. It grows with practice and experience. Unlike knowledge capital, it follows a parabolic curve where its rate of multiplication declines after some time. With increased experience, it reaches a point of saturation where additional time invested is of limited additional value.
For example, a seasoned surgeon may not be able to add much to her/his skills once she/he has mastered his art. It is like trying to teach Arjuna to improve his skills as an archer. Skill capital is the most powerful form of capital. It can convert itself to, and generate other forms of, capital: financial, technological and material. It can also multiply the skill capital of other human beings. It takes time to acquire, but once acquired it is permanent. Some forms of skill capital may deplete, but only marginally.
Motivational capital includes motives, emotions, attitudes and values. This form of capital involves one’s self-orientation, and also the orientation to the world around oneself. Motives such as the drive to achieve and excel, the need for warmth and affection, the need to influence others, and gain and preserve status and respect in society, the pleasure of helping dependants, and so on are forms of capital that one can possess. Motives provide the fuel required to put one’s knowledge and skills into operation. One’s attitude towards life, technology, innovations, systems, organizational policies and processes, and events in the society and country at large are also important determinants of energy and success. Entrepreneurial attitudes, scientific, aesthetic and economic values, work values and the preference for job challenges influence work and its outcomes. They determine the extent to which a person is likely to use her/his knowledge or skill capital, and convert it into other forms of capital. These traits are acquired through education, mentors and role models. One’s peer group, and the chemistry one shares with it, helps develop these qualities. They may change over time, and according to the situations one faces. They have immense potential to block the use of knowledge or skill capital.
Emotional capital is principally the ability to apply one’s human capital in productive ways and get the best out of oneself for oneself or for the organization. It is embedded in one’s sense of power and includes self-awareness, self-esteem and self-worth. It also includes the ability to use emotions in a controlled manner for one’s purposes (individual or organizational). Emotional capital gives direction to the use of human capital. It could be derived from human capital, early childhood experiences, later socialization and workplace experiences, habits and traits, and their position in one’s psychological repertoire. For example, a rape victim may kill herself (low emotional maturity) or use her experience to help reform society. She might become a role model with a renewed sense of power and might even empower others.
Emotional capital may also be expressed in terms of the power bags we carry within us. It is the source of our energy. Certain individuals, groups or situations may cause these repositories of power within us to become more powerful or depleted, functional or dysfunctional. In the presence of people who make us feel weak and incapable, our power bags may disappear altogether. Our emotional capital may deplete or self-multiply in short periods of time. It enables the individual to act with force, but it is elusive and its nature varies from individual to individual. It can sap energy from an individual and render her/him incapable of using her/his human capital. It may become lighter or heavier, a burden or a resource.
In the language of modern management, forms of emotional capital are variously labelled: sense of efficacy, role efficacy, and sense of power, emotional maturity, leadership competence, self-esteem and self-control.
The following are some of the tools for developing emotional capital:
- Yoga and other allied forms of meditation
- Formal training through T-groups, landmark forums, vipasana, laboratory education
- Performance management and coaching
- Role-clarity exercises
- Mentoring
- Formal education and training (degrees, diplomas, skill development courses, apprenticeship programmes, internships, guided practice)
- On-the-job training
- Communication
Some Critical Forms of Human Capital
Higher and more relevant forms of human capital in today’s business environment include:
- Learning orientation (the desire to acquire and apply knowledge)
- Humility: a feeling that as one learns more there is more to learn
- Constant efforts to learn and apply what one has learnt
- Ability to appreciate the humanness in others and willingness to treat all others as possible sources of learning
- Ability to envision the future
- Awareness of the impact one is having on others
- Desire to improve and make a better impact on others and convert human capital into other forms of capital
- Extent to which one is able to multiply and use the human capital of all those who work with one in the organization
- Ability to acquire different aspects of human capital and from all directions
- Ability to fill other’s power bags continuously so that they can use their power and enhance it.
Leadership Talent and HR Practices Make a Difference
Good leadership talent and HR practices have been found to matter a great deal in creating human capital and influencing a corporation’s market value. Most of the modern literature after Peter and Waterman’s In Search of Excellence (1982) indicates that leaders and leadership talent make a lot of difference in promoting excellence (indicated by market value of the corporation). Real-life stories and analysis of Western and Indian business leaders, such as Jack Welsh, Bill Gates, Narayana Murthy, Deepak Parekh, Kiran Mazumdar Shaw and Azim Premji have shown that their primary focus is to create human capital in their own corporations through personal example and promotion of several other values, competencies and qualities through what they say and do.
The success stories of Indian companies have much to teach us about intellectual capital. So does research on global organizations and models evolved by consultants and researchers. We can also simply reflect on our own experiences to derive some valuable lessons.
Indian organizations: Some findings
In earlier books I have presented the stories of 14 Indian organizations, including L&T, Sundram Fasteners and State Bank of India, to show how good HR practices make a difference to sustained growth and profitability (Pareek and Rao 2003).
A company as successful as Infosys is just about 30 years old. N. R. Narayana Murthy, S. Gopalakrishnan, Nandan Nilekeni and N. S. Raghavan, S. D. Shibulal, K. Dinesh and Ashok Arora, the founders, stuck with the company despite all odds. Loyalty in the top leadership team is a significant factor in the formation of intellectual capital and the building of corporations. These leaders promoted a certain work culture and practised what they preached. They cared much less for money than for their customers. The factors behind their success include their work ethic, values, technical competence, systematic approach, awareness and articulation of business alternatives, documentation, understanding of superior software methodologies and processes, execution skills, and the mechanisms they instituted to resolve conflicts and differences. The promoters, for instance, agreed that whenever they had any differences Narayana Murthy would have the final word.
Infosys did not take off until the IT boom. When the boom occurred, the company cashed in on its intellectual capital. The technical competencies, leadership, values and culture of the early Infosys years are now powerfully reflected in the company’s towering public image, internal pride and work culture. Infosys has excellent HR practices, internal processes and management systems. It has institutionalized 360° feedback, started a leadership institute, and undertaken various leadership and development activities (in fact, a part of its HR is called L&D), instituted assessment centres and numerous other initiatives.
Another set of HR success stories comes from Indian pharmaceutical companies, such as Ranbaxy, Wokhardt and Dr. Reddy’s Laboratories, which have boomed in the last ten years. They each also have a relatively short 20-year history. For example, in 1999–2000 the combined turnover of Dr. Reddy’s Laboratories was less than 650 crore. By 2000–2001 the turnover was 
1,001 crore and profit 144 crore; in 2001–2002 the turnover touched 1,651 crore with profits of 459 crore. By 2007–2008, Dr. Reddy’s had a turnover exceeding 5,000 crore. The reasons for this success include globalization, intellectual property management skills, leadership innovativeness, vision, entrepreneurship and talent management (a number of the top 50 managers are non-Indian). The HR initiatives at Dr. Reddy’s include leadership development, restructuring and professionalization. They use 360° feedback to develop top talent and provide coaching and mentoring services. They have used assessment and development centres to identify fast-track managers and build them up. They have reviewed their performance management system and come up with more innovative schemes, including changing their recruitment polices and strategies.
When we look at other pharmaceutical companies we find that the following factors sustain the pharmaceutical business:
- Products and networks
- Markets and customer build-up
- Leadership
- Customer loyalty
- Entrepreneurship; investments in R&D
- Professionalism
- Globalization
When we consider engineering giant like L&T, we find that the following factors lie behind its continuous success:
- Competent managers
- Professionalism
- Innovativeness and openness to new management processes and technologies (L&T was the first company in the world to start an HRD department)
- Continuous restructuring and role negotiation exercises
- Succession planning
- Building internal leadership
- Loyalty of managers (managers preferred to remain at L&T with low salaries because of the superior work culture)
What sustains India’s most successful business houses—the Tata Group, the Birla Group, the Murugappa Group, the TVS Group, Bajaj, Hero Honda and Reliance? The answer seems to lie in:
- Carefully selected and nurtured talent
- Culture and values
- Progressive HR practices (all of them keep reviewing and changing their systems of performance management and career planning)
- Innovative HR practices (most of them use upward appraisals, assessment and development centres, and conduct climate surveys)
- Consistent performance
- Ability to withstand a turbulent environment
- Excellent industrial relations
- Concern for the environment and surroundings
- Investments in the vicinity of its operations/social responsibility
- Expansion and product leadership (quantitative and qualitative)
- Loyal employees, customers and stakeholders
- People management practices
- Not very high salaries
- Retention capability
- Professionalism and a desire to change
- Leadership at all levels
- Reliability of products and services
- Consistency and trustworthiness
- Work culture
The examples of building intellectual capital through HR practices are not limited to the new-generation industries or the private sector. The Indian public sector also presents similar success stories. Certain public sector companies have focused intensively on building intellectual capital and have reaped the benefits. One must note that most of these industries, begun in a socialistic economy, started with many disadvantages, such as being forced to locate themselves at places that were promoted by the government’s sense of social responsibility rather than any real strategic advantage. Also, people were often employed for reasons of social responsibility rather than commercial expediency. In spite of these odds, several of them have been hugely successful. These organizations include SAIL (after its turnaround in the mid-1980s and its second turnaround in the decade 2000-2010), BHEL, HMT (in the 1970s and 1980s), NTPC, BPCL, ONGC, IOC, SBI, Corporation Bank, BOB and LIC.
What lay behind their success?
- Competent managers who joined these corporations
- Emphasis on HRD (SBI has many firsts to its credit because of its emphasis on training)
- Making a mark whenever they had an opportunity to change
- Investing heavily and continuously in people and HRD (all of them run staff colleges or training centres of excellence, for example, MTI Ranchi for SAIL, HRD Institute for BHEL, two staff colleges and several training centres for SBI and Petroleum Institute for IOC
- Undertaking continuous performance management, coaching and other such exercises
- Using assessment and development centres and exploring the use of 360° feedback.
Ghoshal and Bartlett’s (1997) lessons for the role of the top management indicate that while it is true that risks can be reduced by introducing strategy, structures and systems, the diversity of human skills and unpredictability of the human spirit make initiative, creativity and entrepreneurship eminently possible. The basic role of the top management, they argue, is to recapture valuable human qualities by individualizing the corporation. To individualize the corporation and to obtain organizational effectiveness, the top should adopt a philosophy based on purpose, processes and people.
There have been many studies highlighting the qualities and characteristics of Indian leaders (Chary 2002; Pandit 2001; Pareek 2001, Piramal 1996; Singh and Bhandarkar 1990; Sinha 1995; Srivastava 2003). Some of the results will now be highlighted to show their relevance to other Asian cultures like Sri Lanka.
Srinivas Pandit studied 22 Indian leaders from various fields (Pandit 2001). The common traits he found among them included:
- Commitment (drive, dedication, passion, obsession and zeal)
- Persistence (dogged determination, hard work, insistence and tenacity)
- Difference (distinctness, differentiation, innovativeness and talent)
- Curiosity (creativity, clarity of thought and intelligence)
- Persuasiveness (negotiation, influencing and presentation skills)
- Risk-taking or entrepreneurship
- Focus (concentration, goal orientation and centring)
- Values (honesty, integrity, honouring of commitments, truthfulness)
- High energy (spiritedness and stamina)
- Learning orientation
- Humility (modesty and unpretentiousness)
- Firmness (but not obstinacy)
Chary (2002) studied seven Indian business leaders: Kiran Mazumdar Shaw, Azim Premji, Narayana Murthy, Venu Srinivasan, Deepak Parekh, V. Kurien and Mukesh Ambani. The following findings emerged from his study:
- Passionate commitment to goals
- Great vision; thinking much ahead of their time; ability to re-write management principles
- Missionary zeal
- Exalted goals and social concerns
- Necessary core competence
- Firm foundation of values (integrity, humility, compassion, honesty, customer service)
- Simplicity and humility
- Love for people
- Ability to think out of the box
Leadership has been defined in many ways by different authors and experts. Tichy and Cohen, the authors of The Leadership Engine (1997: 8), point out that ‘The scarcest resource in the world today is the leadership talent capable of continuously transforming organizations to win in tomorrow’s world. The individuals and organizations that build Leadership Engines and invest in leaders developing other leaders have a sustainable competitive advantage.’
According to Tichy and Cohen:
- Winning leaders with a proven record take direct responsibility for developing other leaders.
- Winning leaders can articulate and teach others how to make the organization successful. They tell stories about their past and explain their learning experiences and beliefs.
- They have well-developed methodologies for teaching others.
- Leadership talent can be nurtured and it is never too late or early to develop one’s own leadership abilities and others’ talent.
- Leaders are normally viewed as those people who motivate others to do a specific thing.
Warren Bennis says that the basis of leadership is the capacity to change the mindset or framework of the other person (Tichy and Cohen 1997).
After reviewing a number of studies on leadership, Briane Lee (1997: 265) of Franklin Covey states that leadership is:
… an intensely human enterprise, and does not fit neatly into definitions and boxes. Leaders have all the spontaneity, unpredictability, frailty, vulnerability and potential that is possible in the human race. If we are to lead with honor, we must start with the premise that flexibility, adaptability, and wisdom are possible, that we have seeds of greatness in us, and if we care deeply about the lives of others, we can work together to accomplish worthwhile things.’
Quoting Warren Bennis, Tom Peters (1997) points out that the one thing most leaders have in common is that they all make mistakes but bounce back. They use failures as building blocks.
The ability to spend more time framing contexts (more through coaching and supporting rather than directing and controlling) and less time defining the content becomes the model for middle managers (Ghoshal and Bartlett 1997).
Hessebbein and Cohen (1998) of the Drucker Foundation say that leaders exist at all levels of the organization. They identified the following traits in leaders:
- They excel at seeing things with fresh eyes and they challenge the status quo.
- They are energetic and seem to be able to wade through obstacles.
- They are deeply interested in a cause or discipline related to their profession.
- They can tap the convictions of others and connect them to the organizational sphere.
- They help others see what their everyday work means in the larger context.
- They have a tremendous appetite for learning.
- They are open to ideas.
- They are driven by goals or ideals that are larger than what an individual can accomplish.
- They are willing to push themselves out of their comfort zones even after they have achieved success.
In his book Top Grading, Smart (1998) lists 50 critical competencies for top graders. Some of these include: intelligence, analytical skills, judgement and decision making, conceptual ability; creativity; strategic skills; pragmatism; risk-taking; integrity; initiative, excellence, self-awareness, adaptability, listening, teamwork, assertiveness, effective communication; political suaveness; the ability to conduct meetings; vision; change management, conflict management, energy, ambition, enthusiasm, tenacity, and a work–life balance.
Daniel Goleman (1998) considers emotional intelligence as central to leadership talent. In his chapter on the competencies of stars, Goleman identifies personal and social competencies as constituting emotional competency. The following characteristics have been included in his framework:
- Personal competencies that determine how we manage ourselves include:
- Self-awareness: Knowing one’s internal states, resources, and intuitions. These include emotional awareness, accurate self-assessment and self-confidence.
- Self-regulation: The management one’s internal states, impulses and resources. These include self-control, trustworthiness, conscientiousness, adaptability and innovation
- Motivation: The tendencies that guide us towards our goals and allow us to reach them. These include achievement drive, commitment, initiative and optimism.
- Social competencies that determine how we handle relationships include:
- Empathy or awareness of others’ feelings, needs and concerns: These include understanding others, developing others, a service orientation, the leveraging of diversity and political awareness
- Social skills dealing with adeptness at inducing desirable response: These include the ability to influence, communicate well, manage conflicts, lead, catalyse change, build bonds, collaborate, cooperate and build team capabilities.
Goleman (1998: 32) observes:
Emotional intelligence is central to leadership, a role whose essence is getting others to do their jobs more effectively. Interpersonal ineptitude in leaders lowers everyone’s performance: it wastes time, creates acrimony, corrodes motivation and commitment, and builds hostility and apathy. A leader’s strengths or weaknesses in emotional competence can be measured in the gain or loss to the organization of the fullest talents of those they manage.
Goleman indicates that the traits of outstanding leaders transcend cultural and national boundaries. The most effective CEOs have been found to have three main clusters of competencies. The first two fall under emotional intelligence. They include personal competencies like achievement, self-confidence and commitment. The second consists of social competence like influence, political awareness and empathy. The third cluster of competence is cognitive: they think strategically, seeking out a broad range of data, and apply strong conceptual thinking. They blend all these into an inspired vision and influence the thinking of others.
Jeffery Pfeffer (1998) observes three characteristics of the most successful transformations:
- Building of trust
- Encouragement of change
- Measurement of the right things and the alignment of the incentive system to new practices
Pfeffer argues that a people-centred approach can increase profits and offer a competitive advantage.
Trying to Win the War for Talent
The various studies and perspectives of researches reviewed so far indicate that:
- Leadership talent is critical for business development or any form of development.
- Leadership talent is no longer limited to a few.
- Everyone’s leadership competencies can be developed.
- Leadership competencies need to be developed and multiplied for growth and survival.
- It is imperative for managers to explore their talent and develop their leadership competencies for their own good and the good of the organization.
- Self-awareness is a critical first step in developing leadership talent
- Organizational programmes and plans are required to develop leadership talent. Such programmes are helpful.
Given the critical importance of leadership talent, it is important for corporations to nurture it carefully. Indeed, corporations need as many leaders as possible.
HR practices that build human capital and help to win the war
Apart from—or in the absence of—leadership talent, good HR practices can enhance a company’s market value by dispersing the leadership widely across many employees, and serving customers better. Tools for developing the higher forms of human capital include:
- Induction programmes
- Performance planning
- Performance analysis
- Feedback and performance coaching
- 360° feedback
- Assessment and development centres
- SAFI services (self-assessment through feedback on instruments)
- E-groups
- Small group activities
- Job rotation
- Task forces
- Lecturing and acting as facilitators
- Leadership circles
- Tools for human capital formation
- Leadership talent development programmes
- Networking and networks
- Professional bodies and forums
- Mentors
- Post-training follow-up programmes
Huselid’s (1995) study of 968 firms in 1995 has indicated that HR practices are related to productivity, financial results and profits. One standard deviation in a work practices index accounted for a 16 per cent increase in productivity. Lynda Gratton’s (2000) study of seven better-performing companies pointed to the important role of communication, change management and high employee involvement.
Watson and Wyatt have developed a human capital index, which is a consolidation of 30 key HR practices. They studied 400 US and Canadian firms and found that the market value of those featuring high on the index had risen 103 per cent, compared to those low on the index whose market value had risen 53 per cent in five years. They also found that increases in shareholder value across a five-year period was associated with recruitment excellence (10 per cent), clear rewards and accountability (10 per cent), a congenial workplace (4 per cent), communications integrity (5 per cent), and prudent use of resources (10 per cent).
In The Human Equation, Jeffrey Pfeffer (1998) lists the seven practices that lead to business success:
- Employment security
- Selective hiring
- Self-managed teams and decentralized decision-making
- Extensive training
- Compensation linked to performance
- Minimal status difference
- Openness in sharing financial information
In a 1992–1996 survey of 1,500 firms, Coopers & Lybrand found that each standard deviation of increase in the index of good HR practices resulted in an increased market value of $40,000 and sales of $27,000 per employee. They felt that the following eight practices made a significant difference:
- Top grading through talent acquisition
- Induction, integration and assimilation
- Performance management
- Training
- 360° feedback and appraisals
- Succession planning and career development through assessment development centres
- Enhanced software services (ESS); climate surveys
- HRD audits for self-renewal and business alignment
This review makes it clear that human capital formation can be influenced by having the right HR practices. This in turn provides a roadmap to win the war for talent.
Our experiences in developing human capital show that:
- The 360° feedback is a potentially valuable tool, as major changes are reported as a result of such feedback programmes.
- Self-administered tests are very effective (for example, Myers-Briggs Type Indicator).
- Assessment centres are very useful.
- New technologies like simulated incidents are useful training tools.
- Leadership talent plays a critical role.
- The desire to learn is even more critical.
People pay little attention to human capital because they have a hard time distinguishing between the cost of paying people and the value of investing in them.
If the primary purpose of building human capital is to enhance innovation, then a corporation actively needs to generate more activities that can result in innovation.
Human capital grows in two ways: when an organization uses more of what people know, and when more people know more things that are useful to the organization. But human capital is also easily dissipated. Hence, human capital needs to be amassed and concentrated.
The Canadian Imperial Bank of Commerce (CIBC) has abolished training and developed a new leadership centre. It has developed competency models that customers expect the employees to have: knowledge of accounting and selling, and expertise in credit analysis. There are about four dozen competencies in all. Competency models have been turned into competency maps that display skills that people need to have to progress along their career paths. Employees are made responsible for learning what they don’t already know. They have access to books and software in the learning room of each branch. Managers are instructed to learn from colleagues. The initiative is purely theirs. CIBC records the core competencies of the company and shows individuals how they can grow the knowledge base that the bank needs.
In Human Capital Edge, Bruce N. Fau and Ira T. Kay (2001) present 21 key management practices that companies must implement in order to maximize shareholder value:
- Recruiting and retaining excellence:
- Achieving recruitment and retention mission are critical.
- Hire people who will hit the ground running.
- It is not enough to be a great place to work—you have to be known as a great place to work.
- Involve employees in the hiring process.
- Focus on the basics—people are more alike than different.
- Creating total reward and accountability orientation:
- Link pay to performance.
- Demand that CEOs hold a significant stake in the company.
- Offer significant stock-based incentives across the board.
- Synchronize pay.
- Don’t treat benefits as fringe.
- Establishing congenial and flexible workplace:
- Understand that employee satisfaction is critical to any goal.
- Minimize status distinctions.
- Make work arrangements flexible.
- Don’t underestimate the crucial importance of senior leadership.
- Learn how to manage change.
- Don’t assume that workers no longer care about security
- Be cautious about developmental training.
- Opening up communication between management and employees:
- Make communication open and candid.
- Enable employees to share knowledge by capitalizing on technology.
- Link 360° feedback implementation to job and competency
- Periodically review and renew HR practices and policies.
Where Do We Go From Here?
A survey that I undertook of top-level HR managers in Sri Lanka in 2010 has indicated that they lack competency in some of the HR systems and practices that are essential for building human capital. For example, of the 55 top-level managers who volunteered a self-assessment, the percentage figures lacking competency in the following areas are as follows:
- Competency mapping (49 per cent)
- 360° feedback (47 per cent)
- Assessment centres (57 per cent)
- Organizational development (OD) interventions (51 per cent)
- Career development (47 per cent)
A similar study of 28 Indian HR managers showed that they lacked competency in a number of areas that make a difference to human capital building:
- Competency mapping (52 per cent)
- 360° feedback (64 per cent)
- Assessment centres (50 per cent)
- OD (53 per cent)
- Feedback and coaching (46 per cent)
- Organizational structuring (39 per cent)
Most of the Indian managers possessed insufficient competency in those functions that did not enhance human capital, such as transportation, administration and industrial relations.
According to Deepak Parekh, ‘Excellence requires one to constantly challenge self-defined standards and perceptions about performance and behaviour. It is the pursuit of exclusivity in perpetual competition with the self’ (Pandit 2001).
Excellence in performance implies that certain existing standards or global benchmarks have been surpassed. In a dynamic world, achieving excellence is a continuous process. You cannot sit back once you reach a state of excellence, as a new goal always emerges in the distance. Performance excellence is multidimensional (involving quality, cost, speed, coverage and technology). It can be applied to individuals, teams and other entities. ISO systems, People Capability Maturity Model (PCMM) certifications, and so on assure both insiders and outsiders that a particular level of excellence has been achieved and will hitherto be expected from others as well. Assessment centres and 360° feedback ensure the building of competencies accordingly.
It is, ultimately, people who build excellence and are affected by it. At the individual level it is fostered through various HR interventions like 360° feedback, assessment centres, performance management, performance coaching and mentoring systems. Excellence at the organizational level can be created through organizational climate surveys and employee satisfaction surveys.
Post-intervention studies of 360° feedback indicate that receptivity to feedback, internal customer service and resilience in dealing with problems increase as a result of 360° feedback. The formation of human capital through such intervention yields lasting benefits. Assessment and development centres have also ensured competency improvements in several cases and have generally enhanced employee satisfaction (see Chawla 2004; Rao and Rao 2004).
Organizational climate surveys in the public and private sectors and service organizations have also enhanced organizational capability and led to excellence in employee performance. Gaps still exist in the effective utilization of HR tools such as integration and assimilation enhancement systems (IAES) and team excellence enhancement mechanisms. The experiences involving IAES of Indian corporations—for example, ONGC, which is experimenting with assessment and development centres as well as 360° feedback; BPCL, KRL and IOC, which have tried out and used organizational climate surveys effectively for diagnosis and improvements; NTPC, which is heavily involved in building competencies through competency mapping, assessment centres and 360° feedback—have shown how HR interventions can be used to build human capital slowly and steadily.
A systematic evaluation of HRD audit will help in creating HR enablers in an organization.
Exercise
Using Table 2.2, assess your organization in terms of the various components of intellectual capital. Share this in your group and discuss what you need to focus on in the future. Use a five-point scale for the extent to which the component is present in your organization (5 = present to the highest degree; 4 = present to a high degree; 3 = present to some degree; 2 = present only to a small degree; 1 = not present), and a three-point scale for the extent of institutionalization of this component (3 = highly institutionalized; 2 = somewhat institutionalized; and 1 = in the early stages of institutionalization).
TABLE 2.2 Assessment of the intellectual capital in your organization
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