Investors must demand human capital nurture, not bonfires of talent

Learning the lessons of the past on the cult of the CEO, and focusing on real personnel development will lead to a better future

Some years ago I attracted controversy when, in an article for the UK’s Independent newspaper, I attacked “a management philosophy that focussed on profit at all costs”. 

I dared to question Jack Welch, the then all-powerful CEO of GE, and his peculiar version of the ‘Six Sigma’ business practice which he called “focussing on people.” Once a year, the supposed corporate wizard would don his ‘sorting hat’ and spend a weekend with his management team where they would go through all their direct reports…and fire ten percent of them.

This proceeded down GE’s management structure to the entire company, and happened every year. Year after year.

To me the pseudo-scientific nature of this exercise was brought home by the fact that they started by looking at their photographs. Jack said ‘even at this stage, you just knew’ who were the ones to chop. I’m still haunted by the fixed, frozen smiles of GE employees in their corporate photographs.

‘Hopefully, worthy initiatives by investment houses need to develop into a broader assessment of social capital as a whole’

This terrible business philosophy could only exist thanks to the dangerous cult of the buccaneering Chief Executive then holding sway in Anglo Saxon markets, which rightly seemed strange to many Europeans at the time. It all ended in tears with major corporate scandals such as Enron and WorldCom. I called for a softer approach, “cardigans not cowboy boots.”

Well, CEOs are back. Responsible investors are now again being told to focus on them. The distinguished management consultant, Rajen Makhijani, does so in his essay – “Leadership by Results for Impact Investors and Investees.” He focuses on how important leadership is to the success of businesses, citing a Harvard study that suggested 14% of a company’s performance can be attributed to the CEO alone. Another study suggested that 50% of a company’s reputation is linked to the CEO’s reputation.

All I can say is – responsible investors beware. Remember your history.

The activities of Jack, et al, drove what I called “a bonfire of talent,” aided and abetted by management consultants. Too often, employees became cost centres to be squeezed dry or thrown away.

Fortunately, current thinking amongst thought leaders is taking us in a very different direction now. Investors are being called upon to re-assess the importance of ‘human capital’.

The concept is not exactly new. The 18th century Scottish economist Adam Smith believed that economic activity was fuelled by “the acquired and useful abilities of all the inhabitants or members of the society”. He saw an individual’s talents and abilities as being “a capital fixed and realised, as it were, in his (her) person”. Likewise, John Maynard Keynes wrote about the importance of what he called “animal spirits” in animating markets and enterprise.

But it is a concept that now has its day. This is certainly true in the world of development bankers. In 2018, the World Bank launched The Human Capital Index (HCI), an international metric that benchmarks the key components of human capital across economies. They are leading a global effort for people to achieve their full potential, arguing in their 2020 Human Capital Index that sadly “even before the effects of the pandemic, a child born in a typical country could expect to achieve just 56 percent of their potential human capital.”

Fortunately, such thinking is finding favour amongst responsible investors more generally. Paul Herman, an investment manager and founder of HIP (Human Impact + Profit) recently argued: “For investors seeking impact, the value of people is critical, as no products can be invented and no customer served without human resources.”

Herman, together with Kirstin Dougall, a Stanford University researcher into sustainability, does a lot to tell us “Why impact investors should care about human capital valuation” in their essay of that title. As they state: “while it is common for impact investors to seek investments with appealing environmental and sustainability characteristics, the value of people and the workforce as a whole – the human capital – is often overlooked.” Investors should remember: “Employees invent products, serve customers, and operate teams, and thus directly contribute to top-line revenue.”

For a while now in the States, the UAW Retiree Medical Benefits Trust has been leading a coalition of 25 diverse global institutional investors representing $2.6 trillion called The Human Capital Management Coalition (HCM Coalition). This was “formed to increase disclosure on human capital management…an important indicator for long-term investors of a company’s value”. The HCM Coalition engages companies with “the aim of understanding and improving how human capital management contributes to the creation of long-term shareholder value.”

European investors have tended to be more focussed on environmental issues. But this week Sundeep Vyas, a partner at DWS, the German asset management group, told me “human capital is an increasing focus for businesses and for investors as we all recognise the importance of managing this vital asset.”  Similarly, BNP Asset Management puts a strong emphasis on what they call “inclusive growth and equality.” This includes gender diversity. They state they “will vote against the entire board of directors in companies which do not have at least one woman on the board”.

A lot of the work undertaken by William Mercer and McKinsey has indeed emphasized the financial benefits of a broader and more diverse workforce. In Diversity matters McKinsey shows that “companies in the top quartile for gender diversity on executive teams were 25 percent more likely to have above-average profitability than companies in the fourth quartile.” And further, the report says: “In the case of ethnic and cultural diversity, our business-case findings are equally compelling: in 2019, top-quartile companies outperformed those in the fourth one by 36 percent in profitability.”

Hopefully, worthy initiatives by investment houses need to develop into a broader assessment of social capital as a whole. I’m thinking of the way the major Australian investor CBUS (the Construction and Building Unions Superannuation fund) uses “GRI Social Standards to screen companies to meet their responsible investor principles.”

Fortunately, a lot of this is being driven by changed attitudes amongst the employees of investment companies themselves. Mathieu Chabran, who founded Tikehau Capital, the alternatives asset manager, with Antoine Flameron, told me that the mentality and outlook the pair had working in banking in their twenties was very different to what he finds now amongst his own employees: “Their values are different. Money is cheap now. Easily available.” A reference to the impact of global quantitative easing. “For our young people it is what you do with it that is important." And "It's important to listen to your people. They are our main asset. To succeed as a business we must get our people to buy into what we are doing."

Maybe a brighter future will come from combining veterans’ experience of past mistakes with this new understanding of why people matter.


Christopher Walker is a writer on business and politics. He sat for several years on the asset allocation committee of a major asset manager.