Tag Archives: human capital

Barclays rated at B- with low margin, poor quality and high risk

London, 11 February 2016: OMS LLP announced today that it has re-rated Barclays to B- ; a low point 7 on the 22-point OMR Human Governance rating scale. This rating is supported by a full analysis and research note issued today. Paul Kearns, Senior Partner OMS LLP, says:

“We seSlide1e Barclays as missing huge value opportunities, equivalent to a minimum 10 percentage points on operating margin, and material revenue loss arising from poor utilization of human capital. The company has quality issues affecting client and customer engagement and we see little strategic coherence or appetite for better performance in human capital management terms. We also see evidence of limited human capital risk mitigation through adopting a combative attitude to regulatory compliance. With this rating material human capital risk remains high. For Barclays’ investors holding a long-term position, and seeking above average returns with this stock, we recommend pursuing an active engagement strategy with Barclays in order to encourage senior management recognition of the material risks and missed opportunities associated with its present approach.“


For more information please contact stuart.woollard@omservices.org or +44 (0) 7940 585661



Management quality and capability has been missing from conventional company research, valuation and investment decision making. Company failures and material value loss occur on a regular basis yet approaches to identify root causes use ineffective and weak diagnostics. Traditional research may identify certain corporate exemplars but not why they are able to generate long-term differentiation and sustained value. OMS fills that gap. OMS LLP researches, rates and advises on effective Human Governance; a brand new discipline that finally makes whole, the way we examine, value and engage with companies to generate true, lasting value for all stakeholders.

How we use “Pinpricks of light” to illuminate Human Governance

Learning financial shoots 2What does the reporting of a seemingly innocuous measure like training hours tell us about a company’s management quality and material value generation from human capital?

Picking up on the theme of the recent post by my colleague, Stuart Woollard, about ‘pricing governance’ into company valuations and the general issue of what companies choose to include in their annual reports, I demonstrate below just how much insight can be gained from these so called “pinpricks of light” and how they affect the underlying value of an organization.

Let’s start with the the most obvious question: why do companies produce any reports for public consumption? We generally assume they do so either because they are required by company law or choose to report on matters that they believe presents the company in a favourable light. The pinpricks tend to be from areas they are least willing to reveal. If these assumptions hold true then anything a company chooses to tell us about its ‘human capital’ is probably something they are happy to publicise. So why is there so little mention of human capital data in the vast majority of annual reports from our OMI listed companies?

One pinprick regularly included is the number of training hours per employee.  In the case of the Nestlé’ in Society Report for 2014 we find that their “Average hours of training per year per employee per category” was 28.8. So what can we deduce or infer from this statistic?

First, it is worth asking how that particular figure was determined because measuring training hours is highly problematic and misleading. Nestlé’s note tells us that it “Covers approximately 85% of all employees through a combination of manual submission from the markets and the training system.” In reality, their training hours figure probably only refers to specific hours recorded for those who attend courses; either in a classroom or in front of a screen.  Also, its reference to a “training system” is likely to refer to a computerised booking system of who went on which courses.  This is where illumination really begins.

If Nestlé employs learning and development professionals, then it should use more precise language to explain what it is spending on ‘training’. For example, “teaching” and “training” are two entirely different processes. Teaching is primarily about imparting knowledge, while training is about giving people skills to do a job. ‘Training hours’ does not reveal anything about how well an employee has been taught, whether it has given them the capability to do their job better or what value it has added. Ironically, Nestlé’s voluntary reporting here turns out to be a negative indicator of human governance when put under an OMR analyst’s microscope.

So what could reassure shareholders’ about Nestlé’s governance and human capital management capability in this respect?

Rather than measuring input (training cost) and activity (hours) Nestlé should be measuring outcomes (what did employees do with what they learned?) and value (how much has Nestlé’s financial performance and market value likely to have increased as a result of its investment in learning?).  More importantly, does Nestlé know what a learning system is and how this drives value?  If they reported that they had recently created one, and it satisfied our standards, then this would immediately improve their OMR (currently BBB-).

One key element in that system would have to be a business appraisal of all investment in employee learning.  For example, OMS advises on how company employees can improve margins. A company can utilise a basic introduction to simple tools, which takes no longer than 2 hours, and has a very specific aim of ensuring every single employee learns how to work together to improve the company’s operating margin by 1% point.  If Nestlé dedicated just 2 hours, out of its average of 28.8, to this objective how much value would it add? Our view is already published in OMS’s a very recent Nestlé Research Note.  Here is just a short extract:

“Nestlé’s current operating margin is 11.80%[i]. Chart 1 below highlights operating margin among other comparator firms. Reckitt Benckiser currently receives our highest rating for this sector and produces the highest margin (Op Margin 25.39%; BBB+). Even companies on the same rating, such as Unilever, currently produce significantly more margin (Op Margin 16.38%; BBB-)[ii]

Nestlé’s big opportunity

From 2013 to 2014 Nestlé’s operating profit margins fell from 14.18% (CHF 13.068 billion) to 11.90% (CHF 10.905 billion). Research conducted by OMS LLP, in conjunction with the Maturity Institute[iii], shows that organizations below a BBB- level of maturity have huge gains awaiting them if the Executive team adopts a strategy to utilise mature HCM practices. In Nestlé’s case, we are confident that an extra 5-10 percentage points on operating margins are achievable within 2 to 3 years. Based on Nestlé’s 2014 figures, a 16.90-21.90% operating margin would equate to an additional operating profit of CHF 4.58 to 9.16 billion.”

It should be of great concern to all investment researchers and analysts, that the default rating for companies on OMS’s scale is a ‘B’; a lowly point 8 on a 22-point scale that mirrors standard credit ratings. When it comes to training practices, over 95% of companies adopt the same methods and still choose to measure training hours rather than anything meaningful in terms of company valuation. Any investment managers with holdings in Nestlé (or indeed for most other companies) might want to raise this point.

Of course, training hours is just one among a myriad of pinpricks that we analyse in this way. If you would like to know more then please contact us.


[i] http://markets.ft.com/research/Markets/Tearsheets/Financials?s=NESN:VTX

[ii] Yahoo Finance at 3 November 2015

[iii] http://www.hrmaturity.com/the-evidence-is-plain-human-governance-is-material-to-corporate-performance/

How can you price-in ‘good’ governance?


“[we are] trying to join the pinpricks of light coming out of the boardroom” Paul Lee, Aberdeen Asset Management, PLSA December, 2015

In one short comment came the admission. Corporate governance teams at investment firms are struggling to make sense of company boards, how they function, and how they drive value creation and manage business risk. In short, conventional governance analysis is not able to give investors the complete picture and the reassurance they need. Moreover, finding ways to help direct companies in a more value-focused direction is often simplistic and sometimes extreme, e.g. pushing for heads to roll when things are going badly.

Why is this so? The room full of governance professionals at a recent PLSA event mentioned a number of factors. Poor information, little transparency, board dysfunction and a lack of senior level ‘quality’ were some of the insights. Ineffective board structures (auditors not gauging risk effectively, for example), weak industry expertise and inappropriate or excessive incentives (executive pay) were others. All contributors made valid points, to varying extents, but all painted a depressing picture of weak boards and blunt tools for investors with which to examine, diagnose and offer coherent advice.

Is this a failure of governance both within organizations and by the people trying to bring higher standards? Can the present approach to governance be fixed? There appear to be two inherent problems:

  1. There is no coherent framework that defines and measures “good” governance – as was admitted by the UK IOD earlier this year. When you look for factors at board level that drive value and risk, to what extent are each actually material? Is the existence of effective NED’s as important as the nature of executive pay? Is board level industry expertise a sign of good or inferior management quality? Does each factor work together to make analysis meaningful on a comparative basis? If we do not know what ‘good’ looks like and how this drives value, how can it be improved?
  1. Corporate governance is one part of a much bigger, whole human management system that must be considered – traditional governance analysis concentrates efforts on the nature and activities of the board. But what about the rest of the organization? Is the board a good proxy for how the organization manages itself? For example, if the board is good at acquiring and sharing critical knowledge, does this mean that the rest of the company is too?

Our approach looks at the governance problem in a different way – something we have called Human Governance analysis. The question we seek to answer is to what extent is a company maximizing value and effectively managing risk arising from its entire human capital management system? This acknowledges and includes important board and C-suite factors but, critically, evaluates how this plays out and connects to the entire human capital management system; including for example, the management of supply chains.

When we analyze Human Governance, we look at all the key facets of value that arise from human capital. Our starting point is to identify underlying organizational purpose, how this relates to business strategy, and then to the performance of all a company’s human capital. We are interested in how value and values are intertwined and permeate and inform both senior leader actions and people outcomes across the entire human system. We are, of course, interested in key aspects of a traditional governance focus that materially impact value, such as executive reward and decision-making. This is an analytical whole system methodology that specifically assesses corporate Human Governance and the extent to which an organization is aiming to achieve maximum value from its human capital.

At the same time, we also analyze company capability to consciously and explicitly manage and mitigate human capital risk. Human capital risk arises out of unclear, distorted or non-committal organizational purpose and seeps through all company systems: from decision-making, resourcing, reward, learning and performance management to quality assurance. We view people risk arising from 12 core dimensions and only by understanding risk in this interrelated context can we understand and predict the likelihood of corporate problems or failure.

So back to the original question – how can you price-in governance? Through our ratings, we carry out comparative analysis across firms and sectors. We are able to identify not just the nature of value and risk areas but also the potential value and risk quantum for particular organizations. We believe you can price the nature of this whole system Human Governance, either through a value or risk factor built into an investment algorithm, or perhaps through more qualitative stock picking processes. Investment professionals can also use the analysis to ask better questions of the board and demand better information: companies are wasting too much time measuring and reporting on meaningless metrics such as training hours rather than learning impact. It is something which investors and investment professionals are now beginning to understand.