The HR Department of the Future and How it Will Pay Shareholder Dividends (Book Excerpt)

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Firms of Endearment cover imageThe following is excerpted with permission from Firms of Endearment: How World-Class Companies Profit from Passion and Purpose (second edition) by Raj Sisodia, David Wolfe and Jag Sheth.

Hear more on the topic at our next Senior Executive Roundtable, featuring Raj Sisodia.

The human resources (HR) function is vital to the very existence of Firms of Endearment (FoEs). Above all else, these companies are exemplary recruiters, managers, developers, and motivators of human talent. They know how to build empathetic bridges to people’s minds.

The innovative and humanistic practices that FoEs follow in dealing with employees reflect a deep understanding of what people are looking for in their work lives today. For a long time, relatively few companies saw a connection between employees’ personal needs and their performance at work. Employees were generally seen as resources, akin to capital, technology, and war materials. That is why the traditional personnel department became “human resources” in the last half of the twentieth century. But now, the term “human resources” is increasingly coming under fire. Just as customers have been objectified as resources or assets to be exploited in service of company objectives. That is all now changing, and FoEs are leading the way.

There is no more powerful source of creative energy in the world than a turned-on, empowered human being.

Here is a better way to think about people: a human being is not a resource but a source. A resource is like a lump of coal; once you use it, it’s gone, depleted and worn out. A source is like the sun – virtually inexhaustible and continually generating energy, light, and warmth. There is no more powerful source of creative energy in the world than a turned-on, empowered human being. FoEs consciously create conditions that energize and empower people and engage their best contribution in service of their personal passions and the firm’s noble higher purposes.

Reflecting the new mindset, many companies have started referring to HR as the “People” department. Here is how the People Department at Southwest puts it: “Recognizing that our people are the competitive advantage, we deliver the resources and services to prepare our people to be winners, to support the growth and profitability of the company, while preserving the values and special culture of Southwest Airlines.”

In the past, the HR function was something of a corporate backwater, a primarily administrative function dealing with payroll and staffing. This is fast changing, as companies have outsourced the basic functions of administering benefits plans and payrolls. This frees HR to focus on more strategic issues, such as employee engagement, performance, and retention, which can directly affect the bottom line. Companies are beginning to see that hiring, developing, and retaining the right employees can be a great source of competitive advantage. HR professionals have a key role to play in sustaining the corporate culture and instilling ethical values in employees. CEOs now look for HR leaders who can be trusted advisors to them. More CEOs are now coming from the HR function.

More CEOs are now coming from the HR function.

Pernille Spiers-Lopez, President of IKEA North America, is one such leader. She spent four years as manager of human resources before being named President. She created a culture at IKEA that balances work and family, with the family taking precedence. In 2003, Working Mother magazine awarded Spiers-Lopez its Family Champion Award. IKEA provides full benefits and flexible schedules for employees working more than 20 hours a week. According to Spiers-Lopez, leadership is “about what I stand for and my values.” Managers must strive to be authentic and open, and try to engender two-way trust with employees. People who are trusted deliver way beyond their own expectations.

Essentially, it comes down to treating employs the way customers should be treated: with respect and a deep understanding of their needs. The ultimate goal of the Jordan’s Furniture management team is to create “raving fans” out of its employees by providing internal growth opportunities, offering extensive benefits, and considering them as another form of Jordan’s customers. Costco, SAS Institute and Toyota monitor employee satisfaction through surveys. UPS conducts a survey that assesses employees’ opinions on employee recruitment, retention, and motivation to measure what is called the “Employer of Choice Index.”

Benefits that Flow to Shareholders from Doing it Right

The bottom-line message of this [excerpt] is quite simple: Good people management is great business. Even as more and more activities become automated, the importance of human capital in the performance of an organization continues to grow. Just as companies now track brand equity and customer equity, they should also track their employee equity.

The two main indicators of strong employee equity are low turnover and high productivity. Without exception, every FoE has an employee turnover rate that is far lower than its industry’s norm. FoEs employees are also highly productive. They exceed their non-FoE competitors by large margins in revenue per employee. Jordan’s generates $950 per square foot of sales, compared to $150 for the average furniture store, and turns over its inventory 12 times a year, compared to 1-2 times for the average furniture store. Toyota leads automakers globally in sales per employee. Honda ranks second worldwide in assembly productivity and first in engine productivity.

New Balance has continued to manufacture shoes in the U.S. and UK long after its competitors sent all manufacturing to low-wage nations. The company does this with pride but not out of any sense of charity. In a 2003 interview with Industry Week, New Balance CEO Jim Davis had the following comment:

The philosophy here is we wouldn’t be doing as well as we are if all the people who work here weren’t so committed. It’s because of them we’re able to do so well, it’s because of them we’re able to give back …. It’s providing the right machinery, developing new [manufacturing] techniques and empowering the associates so they continuously improve the process.

Low turnover and high productivity are related to one another because low turnover creates more experienced employees over time, which translates to higher productivity. As a result, companies can have relatively low overall costs and be highly competitive while paying good wages and providing generous benefits to employees. Companies owe it to their shareholders to elevate the working conditions of the men and women on their payrolls, materially, emotionally, and experientially. FoEs show us that the mother lode of wealth runs not through the executive corridors but through the vocational landscape of frontline employees.

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Raj Sisodia, David Wolfe, and Jag Sheth are the authors of Firms of Endearment: How World-Class Companies Profit from Passion and Purpose (second edition).

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