Economic Value Added (EVA) and Customer Value Added (CVA) are frameworks that firms can use to understand expectations of investors and customers respectively. Using these frameworks firms can develop and implement strategic and operative plans intended to meet these expectations. But what about the employees, who are also key stakeholders in the firm?
There have been attempts to establish frameworks related to employees along the lines of EVA and CVA. Human Capital Value Added (HCVA) is the profit per employee, where profit is defined as revenue minus expenses excluding employee costs. This measure has come under criticism because it assumes that all the value is added by human capital and none by financial capital. A rather complicated metric Human Capital Development Contribution (HCDC) has been proposed as more representative of the ‘true’ contribution of employees. You are welcome to explore these metrics and how they are calculated, but there appears to be a fundamental problem with these approaches. They look at value added by employees. If from an investor perspective we think of value added to the stakeholder, should we not in the same way find a way to establish the value added to employees?
This is a difficult question and to understand why, we need to unpack the relationship between the firm and its stakeholders. We usually think of the relationship with stakeholders as one-sided. But the relationship is actually bi-directional in the sense that just as the stakeholder has expectations of the firm, the converse is true as well; the firm has expectations of its stakeholders too. The importance of these expectations is not necessarily the same for the three stakeholders. Classical management theory, as exemplified by Agency Theory, holds that employees act as ‘agents’ for the investor. This is typically taken to mean that the investor is the owner and the employees (managers, actually) act as their agents. This places the investor in a position of greater power relative to the firm. Customers, by paying for the goods and services they buy, have a more equal relationship with the firm. It is worth considering what ‘life time value’ means in respect of the customer. More often than not, it’s the opposite of CVA, in that it refers to the life time value of the customer to the firm not the other way around. The relationship between the employee(s) and the firm is even less clear.
In today’s mainstream thinking the employee is often seen as a resource, rather than a stakeholder. Take the classic balanced scorecard. Employees enable process performance, which helps meet customer expectations, which results in the desired financial performance. All of the causal arrows point towards financial performance, which places the employee at the bottom of the list of stakeholders. This causal chain, of course has been extensively researched. But companies like Southwest Airlines, Men’s Wearhouse, Zappos and Virgin say they place employees first, customers second and investors third in their priorities.
In terms of cause and effect, the two positions, one that views employees as a resource and the other that places the employee first, appear to be equivalent. This is not surprising, because one can see most situations from more than one perspective. From the instrumental perspective, which privileges practical outcomes, working towards employees becoming more engaged is the means to an end – higher profitability. From the normative perspective, which focuses on ethical priorities, it is the right thing to do for firms to ensure that their employees are highly engaged, regardless of the effect of this on profitability.
Richard Branson points out that the overwhelming majority of employees worldwide are not fully engaged at work. If employees were fully engaged, customers would feel they are valued and profitability would grow. This raises an interesting question. If firms are stating publicly that they place employees first, does it matter that this comes from a deep-seated belief rather than an unarticulated desire for profitability? Probably not.
Which then brings us to one possible measure of the value the firm adds to employees: the level of engagement amongst the employees. There are several consulting firms that conduct surveys to measure engagement level. A series of surveys taken over a few years can reveal trends and areas where improvement is needed.
This approach does come with some risks. First, discussions about employee engagement have a tendency to gravitate towards the relationship between engagement and profitability. This makes it hard to tell whether a firm is committed to higher employee engagement for normative or instrumental reasons. Second, several organisations, on the basis that money talks, incentivise managers to improve employee engagement. This can result in sometimes thinly veiled, unseemly, enthusiasm on the part of managers to do something to improve engagement. In a reflective moment, one manager told me that he felt we were throwing lollies at employees in return for higher engagement scores and worse, that employees were getting addicted to these sweeteners. In short, managers need to walk a thin line between noble intent and pecuniary interest.
We’ve now explored frameworks for all three key stakeholders and the means to establish strategic goals that align with their expectations. How would we change the logic of the balanced scorecard to reflect this truly balance stakeholder perspective? Let’s take a look next week.
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