{"id":684,"date":"2015-12-16T10:38:59","date_gmt":"2015-12-16T10:38:59","guid":{"rendered":"http:\/\/www.omservices.org\/?p=684"},"modified":"2015-12-27T08:32:59","modified_gmt":"2015-12-27T08:32:59","slug":"how-we-illuminate-pinpricks-of-light-to-analyse-human-governance","status":"publish","type":"post","link":"https:\/\/www.omservices.org\/?p=684","title":{"rendered":"How we use \u201cPinpricks of light\u201d to illuminate Human Governance"},"content":{"rendered":"

\"Learning<\/a>What does the reporting of a seemingly innocuous measure like training hours<\/em> tell us about a company\u2019s management quality and material value generation from human capital?<\/p>\n

Picking up on the theme of the recent post by my colleague, Stuart Woollard, about \u2018pricing governance<\/a>\u2019 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 \u201cpinpricks of light<\/em>\u201d and how they affect the underlying value of an organization.<\/p>\n

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<\/em> 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 \u2018human capital\u2019 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<\/a>?<\/p>\n

One pinprick regularly included is the number of training hours per employee.\u00a0 In the case of the \u201cNestl\u00e9\u2019 in Society Report<\/em>\u201d<\/a> for 2014 we find that their \u201cAverage hours of training per year per employee per category\u201d <\/em>was 28.8. So what can we deduce or infer from this statistic?<\/p>\n

First, it is worth asking how that particular figure was determined because measuring training hours is highly problematic and misleading. Nestl\u00e9\u2019s note tells us that it \u201cCovers approximately 85% of all employees through a combination of manual submission from the markets and the training system.<\/em>\u201d 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.\u00a0 Also, its reference to a \u201ctraining system\u201d is likely to refer to a computerised booking system of who went on which courses.\u00a0 This is where illumination<\/em> really begins.<\/p>\n

If Nestl\u00e9 employs learning and development professionals<\/a>, then it should use more precise language to explain what it is spending on \u2018training\u2019. For example, \u201cteaching\u201d and \u201ctraining\u201d are two entirely different processes. Teaching is primarily about imparting knowledge, while training is about giving people skills to do a job. \u2018Training hours\u2019 does not reveal anything about how well an employee has been taught<\/em>, whether it has given them the capability<\/em> to do their job better or what value it has added. Ironically, Nestl\u00e9\u2019s voluntary reporting here turns out to be a negative indicator of human governance<\/a> when put under an OMR analyst\u2019s microscope.<\/p>\n

So what could reassure shareholders\u2019 about Nestl\u00e9\u2019s governance and human capital management capability in this respect?<\/p>\n

Rather than measuring input (training cost) and activity (hours) Nestl\u00e9 should be measuring outcomes (what did employees do with what they learned?) and value (how much has Nestl\u00e9\u2019s financial performance and market value likely to have increased as a result of its investment in learning?).\u00a0 More importantly, does Nestl\u00e9 know what a learning system<\/em> is and how this drives value? \u00a0If they reported that they had recently created one, and it satisfied our standards, then this would immediately improve their OMR (currently BBB-).<\/p>\n

One key element in that system would have to be a business appraisal of all investment in employee learning.\u00a0 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\u2019s operating margin by 1% point.\u00a0 If Nestl\u00e9 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\u2019s a very recent Nestl\u00e9 Research Note. \u00a0Here is just a short extract:<\/p>\n

\u201cNestl\u00e9\u2019s current operating margin is 11.80%[i]<\/sup><\/strong><\/sup><\/a>. <\/strong>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]<\/sup><\/strong><\/sup><\/a>.\u00a0<\/em><\/p>\n

Nestl\u00e9\u2019s big opportunity<\/em><\/strong><\/p>\n

From 2013 to 2014 Nestl\u00e9\u2019s 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]<\/sup><\/strong><\/sup><\/a>, 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 Nestl\u00e9\u2019s case, we are confident that an extra 5-10 percentage points on operating margins are achievable within 2 to 3 years. Based on Nestl\u00e9\u2019s 2014 figures, a 16.90-21.90% operating margin would equate to an additional operating profit of CHF 4.58 to 9.16 billion.\u201d<\/em><\/p>\n

It should be of great concern to all investment researchers and analysts, that the default rating for companies on OMS\u2019s scale is a \u2018B\u2019; 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 Nestl\u00e9 (or indeed for most other companies) might want to raise this point.<\/p>\n

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

References:<\/p>\n

[i]<\/a> http:\/\/markets.ft.com\/research\/Markets\/Tearsheets\/Financials?s=NESN:VTX<\/a><\/p>\n

[ii]<\/a> Yahoo Finance at 3 November 2015<\/p>\n

[iii]<\/a> http:\/\/www.hrmaturity.com\/the-evidence-is-plain-human-governance-is-material-to-corporate-performance\/<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

What does the reporting of a seemingly innocuous measure like training hours tell us about a company\u2019s management quality and material value generation from human capital? Picking up on the theme of the recent post by my colleague, Stuart Woollard, about \u2018pricing governance\u2019 into company valuations and the general issue of what companies choose to … Continue reading How we use \u201cPinpricks of light\u201d to illuminate Human Governance<\/span> →<\/span><\/a><\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[1],"tags":[17,14,10,16],"class_list":["post-684","post","type-post","status-publish","format-standard","hentry","category-uncategorised","tag-company-reports","tag-human-capital","tag-nestle","tag-training-days"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p5zQHw-b2","_links":{"self":[{"href":"https:\/\/www.omservices.org\/index.php?rest_route=\/wp\/v2\/posts\/684","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.omservices.org\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.omservices.org\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.omservices.org\/index.php?rest_route=\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.omservices.org\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=684"}],"version-history":[{"count":9,"href":"https:\/\/www.omservices.org\/index.php?rest_route=\/wp\/v2\/posts\/684\/revisions"}],"predecessor-version":[{"id":716,"href":"https:\/\/www.omservices.org\/index.php?rest_route=\/wp\/v2\/posts\/684\/revisions\/716"}],"wp:attachment":[{"href":"https:\/\/www.omservices.org\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=684"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.omservices.org\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=684"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.omservices.org\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=684"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}