Big picture thinking is needed
As an academic studying business for two decades I was only too aware that the theatre we call capitalism would lay on a blockbuster or two. It hasn’t disappointed. VW - the movie is now showing at a business school cinema somewhere near you. It is set to run and run.
What makes this unfolding story so fascinating is that it encapsulates the overarching theme I hope to adopt in future editions of this monthly column: namely, if HR leaders are to be effective in their roles they have to be clear in their understanding of how people and HR are tightly integrated with the rest of the business in the same way as any other executive leading another function has to understand the same about his or function.
Although intuitively obvious, most executives do not think about the whole business, at least certainly not until they reach senior executive positions like the function’s lead, the MEC or board. The simple fact is that there is no incentive to do otherwise. Most executives are interested only in winning the war for resources for their function. They think less about the differential impact of those resources were they to be placed elsewhere, and much more about what it would look like for their career if they were not successful in ‘winning’ the war for resources.
Building future leaders
We academics in our leading business schools also have to take some responsibility for this. We coach aspiring executives on how to be great leaders, maximize their performance, and via success, drive their careers. Crucially, we have split business up into different silos from accounting and finance, through marketing, strategy to HR, without ever really attempting to integrate each with the other. Academics from these different disciplines rarely talk to each other. The same is true of executives in our leading businesses. The risks of this, as VW shareholders will testify, are material - €16 billion and counting.
‘But I did strategic HR during my MBA,’ I hear you say. I’m sure you did. But my guess is that you never did any finance with that part of your module. Would I be right? Given the language of the boardroom is strategy, and that strategists converse in finance, you might well be faced with the proposition of finding yourself in a meeting with senior executives talking a different language to you. Which is why we stick to the comfort of our functional silos.
Which brings me neatly to the plot of VW - the movie. It all turns on the existence of a cadre known as the “golden triangle”. You may have heard of it. Ram Charan has recently written about it in the Harvard Business Review, and it represents the special integrative dynamics between the CEO, CFO and CHRO. It’s good to see Ram has finally caught up with this concept, which I’ve been writing about for the last ten years, and something Strategic HR expert Jon Ingham, too, has been blogging on recently. So what is it?
Money and people
There are really only two things in business: people and money, hence the term human capital. There, I’ve got this off my chest at last. This is not we nasty economists turning people into economic assets; it’s simply recognizing the power of business lies in the productive combination of investment and talent. This was the main thrust of the Valuing your Talent initiative I led for the accounting, management and HR chartered professions in 2014, itself a golden triangle of the professions themselves.
Combining the power of people (your senior HR executive) with finance (your CFO) brings about a different kind of conversation with huge potential. In the case of the FTSE 100, you are bringing to bear a quarter of a trillion quid’s worth of investment in people alone. Little wonder, then, the CEO and his or her strategic agenda want to talk about how best to deploy the power of the asset represented by people. The CFO translates just how powerful, with the right investments, this asset might be. But, here again, the language and tools for this conversation are hazy.
Nor is it not simply about joining resourceful humans and capital. There are other capitals in the business, too, all of which require a people element to unlock their potential. The HR executive, then, becomes a very powerful value broker in terms of understanding how the capability of a company, what is done to it, how it is deployed and developed over time, releases greater economic as opposed to the accounting profit others purport to understand. And this is why you need to have done some finance with your strategy and HR.
I am not aware of the institutions at which the VW executive team completed their studies. But powerful triangles abound, or at least they used to before VW destroyed them a decade ago. Labour representatives hold three of the five seats on the powerful executive committee at VW. It is clearly a voice to be reckoned with. It has to be. In German corporate law there is the concept of co-determination, or Mitbestimmung. Some see it as representing progressive capitalism. Many will now see it as a recipe for disaster. This would be short sighted for at least three reasons.
First, things started to go wrong at VW over a decade ago when the former CEO, Bernd Pischetsrieder, and Wolfgang Bernhard, former head of the VW brand, engaged in a power struggle in an attempt to wrestle power away from VW’s personnel director, who was forced to resign amidst allegations of bribery and other unsavory happenings with the company’s all-powerful workers’ council. In short, the priceless golden triangle was broken, and with it the precious channel for communication between people, strategy and finance.
Second, even Pischetsrieder and Bernhard recognized the dangers of this fracture, and tried to forge closer ties between management and the workers’ council. But the company’s then chairman, Ferdinand Piëch, teamed up with personnel chiefs to first weaken and then oust Pischetsrieder from the board. Enter Martin Winkertorn as CEO. The rest, as they say, is history. So, beware golden triangles and their crumbling can have catastrophic consequences for the executives involved. They are too precious to be left to serendipity. Company boards should monitor these relations and preserve them accordingly. There may even be scope for them to be written more formally into corporate governance.
Third, at this time, VW was deliberating over how best to develop its small car diesel engines to realise its aim of being the world’s number one carmaker. With the golden triangle in tatters, and consequently no communication between what people were doing to achieve the strategy and financial targets in place, managers began making decisions that, with effective executive relations and governance in place would have been discussed and managed out as too risky, by even the most perfunctory of risk board committees. This is arguable yet another classic case of naïve governance which many of my fellow academics are guilty of encouraging.
Until next time...
By showing displays of leadership, middle-managers achieved what was best for their short-term individual careers as opposed to safeguarding the future value of the business. The cost to VW’s shareholders is currently €16 billion and counting. You ignore the fostering and preservation of golden triangles at your cost. It’s time to brush off that copy of Corporate Finance for Dummies.