VideoWhat 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.
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