Companies with the best people practices generate the best returns for shareholders, according to a recent study of North American companies released in Canada by Watson Wyatt Worldwide.

The study found that a signif icant improvement in 30 key areas of human capital management, or people practices, can be associated with an increase of up to 30% on shareholder value. The 30 practices identified in the study were grouped into five key dimensions: recruiting excellence; clear rewards and accountability; a collegial, flexible workplace; communications integrity; and prudent use of resources.

The year-long study was based on a comprehensive analysis of human resource practices at over 400 publiclytraded companies, about 10% of them Canadian, with at least three years of total returns to shareholders (TRS) and a minimum of $100 million in revenue or market value. The survey data was matched to objective financial measures of a company's value, including its market value, three- and five-year TRS, and its ability to create economic value beyond its physical assets. Based on this analysis, each company was assigned a Human Capital Index score on a scale of one to 100.

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"This is the era of people and people practices," says Teri Brown of Watson Wyatt Worldwide in Toronto. "What have traditionally been perceived as soft issues - corporate culture, training and development, hiring and recruiting methods - can influence hard outcomes.

Until this study, it was difficult to prove the relationship between business success and these practices; our research showed that companies with a high index had high shareholder value and those with a low index had low shareholder value."

The study shows a strong relationship between human capital and shareholder value creation over both the short and long term. Over a five-year period, total returns to shareholders or TRS was nearly twice as much for high-index companies (103%) as for low-index companies (53%). Over a recent six-month period (JanJun 1999), high-index companies reported 28% TRS versus a -6 % return for companies with a low index.

Key dimensions for creating greater shareholder value

Overall, the study showed that significantly improving 30 human capital practices within four of the major categories is associated with a potential 30% increase in shareholder value creation.

Recruiting excellence

Recruiting excellence has the largest potential increase among the five areas. The study's data show that a significant improvement in recruiting excellence could be linked to a 10% increase in market value. Of the six critical recruiting practices with a positive correlation to market value, the two most important are hiring professionals who are well equipped to perform their duties, and specifically designing recruiting efforts to support a company's business plan. The research suggests that each of these practices can be associated with a 2.3 % gain in market value.

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"Attracting and retaining key talent is one of the biggest issues today for CEOs," says David Gore of Watson Wyatt Worldwide in Toronto. "For those companies that do it well, the rewards are great - lower turnover and longer tenures among key employees, and improved ability to generate economic value."

Clear rewards and accountability

The second largest increase in market value (9.2 %) was found among companies that have clearer rewards and accountability. The study identified three practices associated with a 1.8% gain in market value: making employees eligible for stock plans, helping poorly performing employees improve, and terminating employees who perform below acceptable levels. Positive gains in market value were found among-companies that pay above-market wages, link pay to their business strategy, use employee performance appraisals to set pay, and link profit-sharing plans to the company's overall success.

Collegial, flexible workplace

The study showed that a significant improvement in operating a collegial, flexible workplace - the third major area - is linked to an increase in market value of up to 8%. Among the specific workplace practices associated with an increase in market value are offering flexible work arrangements, encouraging teamwork and cooperation, providing equal perquisites, having high employee satisfaction, and using first names between employees and top management.

Communications integrity

The fourth major area that correlates to greater shareholder value is communications integrity - associated with a 4% increase in a company's market value. Of the five specific communication practices identified in this area, the most relevant is accessibility to communication technologies, primarily email, which correlates with a possible 1.8% gain in shareholder value. Other practices associated with increased shareholder value include giving employees the opportunity to offer ideas and suggestions to senior managers, and sharing financial information with employees.

Research by Watson Wyatt Worldwide

New Publication on Shareholder Value Creation

CMA Canada has recently launched a new Strategic Management Series publication called An Executive View of Shareholder Value Creation: Determinants of Success in Publicly Held Canadian Organizations. This publication provides an executive perspective on the shareholder valuecreating and destroying practices of publicly listed organizations. Based on a sample of 32 TSE Listed companies and the responses of over 100 senior executives, this paper provides insight and guidance and complements the publication, Measuring and Managing Shareholder Value. To order this publication, please contact CMA Canada at 1-800-520-4262 or (905) 949-4200; fax (905) 949-0888; or send an e-mail to orderdesk@cma-canada.org.