Learning professionals already know employee development initiatives benefit employers and customers as well as employees. It helps make employees and organizations more adaptable and more able to respond to change. It also serves as the foundation for organizational innovation, as it’s never possible to innovate without learning something new. Further, a firm’s investment in training and development is an important predictor of its future stock price.
Despite the growing importance of human capital to companies’ survival and success, as of the mid-1990s, few standards existed to guide its measurement. The American Society for Training and Development’s (ASTD) benchmarking initiatives were launched to correct this situation by establishing a common definition for training and development investments with a general document for all parties to use. Early analysis of ASTD’s benchmarking data revealed a statistically significant relationship between a firm’s investment in employee development and its subsequent stock performance.
In late 2001, Bassi Investments turned the ASTD research into a live investment strategy and started investing in firms that make unusually large investments in employee development. At the same time, research by the company and two academic researchers, Paul Harrison and Jens Ludwig, concluded that the return on firms’ investment in human capital — as measured by their spending on employee education and training — generates super-normal returns. Even after establishing controls for a host of other potentially confounding factors — including a firm’s past performance — training expenditures still made a significant impact on subsequent stock price.
The finding is not the result of reverse causality — firms that have performed well in the past tend to invest most heavily in learning and development. It is likely that at least part of the reason for this super-normal return is that investments in human capital — specifically employee learning and development — are a non-reported investment buried in selling, general and administrative expenses. Hence, all but the most diligent investors are unable to ferret out which of these costs are investments that might generate future profitability. This may cause high-investment firms to be under-valued in the short-run.
Early in 2009, Bassi Investments analyzed the performance of U.S.-based banks in the aftermath of the financial meltdown and concluded again that training investments — and changes in those investments — remained a powerful predictor of subsequent stock prices, even during the market turbulence of 2008.
While the analysis could not determine why this relationship exists, it suggested three possible factors:
• Training investments have their intended impact. Firms that make greater investments in this area subsequently perform better as a result.
• Training investments may serve as a proxy for the degree to which a firm is willing and able to take a long-term perspective rather than a short-term focus on quarterly earnings.
• Expenditures on learning and development — and in particular, changes in those expenditures — may serve as a window into an organization’s future financial health and well-being, or lack thereof.
Bassi Investments’ 2009 analysis concluded that a company’s spending on learning and development is critical information for its stakeholders to know. Investors and employees often will demand this information. If it is not forthcoming, or if it suggests the firm is headed in the wrong direction, they may head out the door.
For example, investors would have been well-served to have avoided the bank in the lower-left corner of Figure 2 — Wachovia Bank. Mired in losses related to bad mortgages, Wachovia lost 85 percent of its market value during 2008 and was sold under pressure from federal regulators. This market activity occurred after a dramatic decline in its learning investments.
Bassi Investments has found portfolios that focus on firms that spend more to educate, develop and train their employees have out-performed the market for 10 years. The right hand column of Figure 3 shows the annualized comparison of these portfolios relative to the S&P 500 — the standard benchmark for the category.
Portfolio A is the longest running of these portfolios. More recent portfolios — C to F — are each based on somewhat broader — and more difficult to quantify — concepts of human capital management than the original portfolios. As published in Good Company: Business Success in the Worthiness Era, each uses a somewhat different process to identify firms with superior capabilities for managing and developing employees. For example, one portfolio is heavily weighted to firms that do an exceptionally good job of employee performance management — a specific aspect of being a good employer. Another is weighted to firms that use rigorous quantitative analysis to help them invest wisely in employee development.
The performance of these portfolios does not prove investing in employees causes better subsequent stock performance. But it suggests executives and investors should pay attention to this facet of being a good employer.
Implications for Learning Professionals
These findings are important for all learning and development professionals, not just those who work for publicly traded firms. They confirm that learning is central to an organization’s long-term viability, and money invested in it does matter, so learning leaders should share them liberally.
The findings also point to the importance of making progress on methods to measure and evaluate learning. Linking learning to the human factors that drive an organization’s business results helps build a strong and defensible case for investing in it. But this requires doing the necessary homework to identify the unique drivers for an organization’s business results.
“We have discovered that there is a huge appetite for analytics at Applied Materials,” said Angela Sheffield, head of global workforce planning at Applied Materials. “HR analytics enables us to develop rigorous, fact-based insights that help our executives run their businesses better and smarter. And that’s a good thing for us in HR.”
More recently, several learning leaders have banded together to create standardized methods to measure and report on learning and development investments. In the past year, Kent Barnett, founder, chairman and CEO of KnowledgeAdvisors, a learning and talent management analytics provider, and David Vance, former president of Caterpillar University, alongside a group of chief learning officers from organizations such as BP, Sprint, Qualcomm and Verizon Wireless, have developed standard training and development reporting principles for the human capital function. The standard definitions and measures created from these principles will provide consistency to common learning and development definitions and calculations. In the future, measures will be extracted or calculated from various data sources within an organization and housed in a data set or warehouse. From there, three reporting statements will be adopted to organize standard measures, much like three common financial statements — income statement, balance sheet and cash flow statement — that organize financial data.
According to KnowledgeAdvisors, “The hope is that this standard framework will be broadly adopted with common terminology and measures, which in turn will contribute to a greater understanding of successful practices and meaningful comparisons across organizations. Our inspiration is the set of Generally Accepted Accounting Principles (GAAP), which have been used by the accounting profession in the United States since 1973 to provide consistency, clarity and uniformity in the analysis of the financial well-being of organizations. The data produced using these principles can then provide a solid foundation for analysis, just as the data produced by accountants according to GAAP provides the foundation for financial analysis.”
When standard measurements are created for the people side of business, customary metrics and measurement will elevate learning — as well as the broader human resource function — and create new accountability.
“Setting professional standards for talent-related metrics that are relevant to our stakeholders, including chief executives and individual investors, is part of the natural progression of our discipline,” said Jeremy Shapiro, executive chairman of the Society for Human Resource Management’s Metrics and Measures Taskforce. “If we execute well, we will have more objective tools to tie talent programs with business outcomes.”
Laurie Bassi is CEO of McBassi & Co. and chairman of Bassi Investments. Dan McMurrer is the chief analyst at McBassi & Co. and chief research officer at Bassi Investments. They can be reached at editor@CLOmedia.com.
