What kind of a return do you get on your investment in human capital?
Don’t know? Don’t despair. Neither do most of your peers.
It seems companies spend about 36 percent of their revenues on pay, benefits, training, and other expenses related to their workforces. But only 16 percent of the financial executives who participated in a recent study say they truly understand the return they are getting on this huge investment.
The new study, “Human Capital Management: The CFO’s Perspective,” was conducted by CFO Research Services in collaboration with Mercer Human Resource Consulting to examine the changing role of the finance function in managing human resources. It is based on a survey of 180 senior financial executives at large U.S. and multinational corporations, as well as on select in-depth interviews.
“CFOs are in a difficult situation,” said Rick Guzzo, a human-capital strategy consultant with Mercer. “Most see the importance of human capital to business success, yet they are unable to apply ordinary financial discipline to managing what is often their company’s largest investment. Their predicament is getting tougher. Financial executives are feeling increasing pressure from boards, investors, and analysts to show how human capital is being managed in their companies.”
In fact, about half (49 percent) of the financial executives said investors are beginning to ask, at least to a moderate extent, about human-capital issues.
In addition, 23 percent said their boards currently are involved in human-capital issues to a considerable or great extent, and 36 percent predicted that their boards will be involved at this level in two years.
The survey also found that the changing role of the CFO in managing human capital demands a corresponding change in the relationship between the corporate finance and human-resource functions.
“Historically, there’s been little love lost between finance and HR in most companies,” noted Guzzo. “However, the changing business landscape makes it necessary for these two areas to come together in new, more-collaborative ways. The financial executives surveyed acknowledge both a need and a willingness to work in partnership with HR to better manage the human capital of their enterprises.”
Other findings in the study:
- Finance executives want to be more involved in human-capital decisions, not just in setting and allocating HR budgets, which has been their traditional role. Of those surveyed, 62 percent said they should have an “important” or “leadership” role in human-capital decisions, but only 38 percent said they currently play such a role.
- A large majority (92 percent) of finance executives said human capital has a great effect on the company’s ability to achieve customer satisfaction. Eighty-two percent believe human capital has an impact on profitability.
- Finance executives believe both finance and HR should report directly to the CEO and work together collaboratively.
“The relationship between HR and finance has changed because managing human capital is no longer just the province of the HR function,” said Guzzo. “It is a responsibility increasingly shared by senior leadership across the organization.”
More Huge Goodwill Charges Expected
Look for another huge round of goodwill write-offs this year, especially if the stock market doesn’t come roaring back.
After writing down an astounding $750 billion in acquisition-related intangible assets in 2002 (under the new FAS 142 rule), U.S. companies are poised to take another $200 billion in charges this year, according to estimates by Bloomberg.
Market watchers speculate that a number of companies may have delayed this day of reckoning, gambling that valuations would recover somewhat with a rebounding stock market.
“If the market deteriorates this year, they will have to take big write-offs, and analysts will be asking why they didn’t do it last year in the first place,” said Alfred King, vice chairman of Valuation Research Inc., a consultancy that helps companies value their assets, in the Bloomberg story.
Keep in mind that management at Qwest Communications International Inc. warned back in October that it would write down as much as $30 billion, while WorldCom Inc. has indicated it may take a charge for as much as $50 billion to reduce goodwill.
“There are some companies that didn’t want to admit they’d made mistakes, so they avoided or minimized write-offs,” King told Bloomberg. “Companies that took an aggressive posture in writing downs assets last year are going to be glad they did.”
Adds Robert Willens, accounting analyst at Lehman Brothers: “This just confirms what people already knew: that the acquisitions that created the goodwill didn’t work.”
Last year AOL wrote off a record $99.5 billion to reflect the deterioration in the value of its goodwill.
Clorox Dumps D&T
On Tuesday Clorox said it would dismiss Deloitte & Touche LLP as its independent auditor after 46 years.
The packaged-goods company stressed in a regulatory filing that its financials for the fiscal years ended June 30, 2002 and 2001 did not contain an adverse opinion or disclaimer of opinion and “[were] not qualified or modified as to uncertainty, audit scope or accounting principles.”
It added that the decision to change accountants was made by the audit committee of the company’s board of directors.
“During the company’s two most recent fiscal years and the subsequent period through February 15, 2003, there have been no disagreements between the company and D&T on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure,” stated Clorox.
In January Clorox said it would dismiss the accounting firm because it did not completely separate its audit and consulting businesses in time, according to reports.
In June Deloitte Consulting said it would separate from the parent company by going private, rather than going public.
A Clorox spokeswoman told Reuters the company decided it would seek a new auditor if that split was not completed by December 31.
Deloitte Names New U.S. Team
Meanwhile, Deloitte & Touche announced a new management team for its U.S. operation, effective June 1.
James H. Quigley will become U.S. chief executive officer, Sharon L. Allen will be chairman of the U.S. board of directors, and Barry Salzberg will become managing partner.
Last week, Deloitte announced that William G. Parrett, the firm’s current U.S. president and managing partner, would become global CEO, effective June 1.
These changes are part of a succession process that follows the decision last September by James E. Copeland Jr., the current CEO, to retire June 1, the Big Four accounting firm noted. Doug McCracken, the accountancy’s current chairman, will complete his four-year term at that time.
Quigley, 50, is currently co-regional managing partner in New York, New Jersey, and Connecticut. He is credited by the company for his skill in serving large clients with complex needs.
Allen, 51, a current board member, is the firm’s regional managing partner for the Pacific southwest, including Southern California, Arizona, and Nevada. In her new position, Allen will lead the firm’s governance processes, serve as the U.S. representative on the organization’s global governance committee, and oversee the firm’s relationships with a number of major multinational clients.
Salzberg, 49, is currently a U.S. deputy managing partner, head of Deloitte’s tax-services practice, and a member of the executive committee.
Central Parking CFO Resigns
Hiram A. Cox resigned as senior vice president and CFO of Central Parking Corp. after just 18 months on the job.
William J. Vareschi Jr. was named acting CFO.
The company also announced that in the first quarter of 2003 it would record a $1.5 million increase in accounts payable to correct an error in the process for recording vendor invoices, which had an impact on net earnings per diluted share. Central Parking indicated the error was in large part attributed to the company’s decentralized payables process.
“A rigorous process has been established to capture and record vendor invoices on a more timely basis and to estimate the liabilities for vendor invoices not yet received,” noted Central Parking’s management in a statement. “The company believes that this improved process has resulted in a more accurate accounts payable balance and does not anticipate further adjustments.”
Central Parking also announced it would no longer report pro forma results, in accordance with new rules required under the Sarbanes-Oxley legislation.
In other CFO news:
- Chief financial officer Marinus Henry was promoted to vice chairman of Universal Music Group, the world’s largest recording company. He will retain the CFO position. Henry joined Universal Music in April 2000 as executive vice president and CFO. He previously served as executive vice president and CFO of Sony Corp. of America, the U.S. parent company of Sony Electronics, Sony Music, and Sony Pictures.
- Robert R. Jenks was named CFO of Internap Network Services Corp., which provides IP-network services. Jenks has 30 years of experience at equity-investment and capital-management companies, including GE Capital. While at GE, Jenks was responsible for the company’s global private-equity-investment activity in the communications industry, managing a technology portfolio across 35 companies in the United States, South America, and Europe.
- Pierre Alary was named interim senior vice president and CFO of Montreal-based Bombardier Inc.
- Internet search company Overture Services Inc. announced it will buy Web portal AltaVista from CMGI Inc. for $140 million. The purchase price probably won’t have them doing cartwheels at CMGI: in 1999 CMGI paid Compaq Computer Corp. $2.3 billion for an 83 percent stake in AltaVista.
- Boeing Co. CFO Mike Sears canceled a trip to Israel this week due to security warnings from the U.S. State Department, according to Reuters.
- Cisco Systems has kicked off a $150 million global advertising campaign to increase awareness of its corporate network services.