How You Can Avoid Bad Business Practice

Article By

Bay Jordan
Bay Jordan
Bay Jordan describes himself as a different sort of accountant. After qualifying as a Chartered Accountant in Zimbabwe and South Africa he spent 8 years in public practice before moving into financial management and consultancy, working in blue chip organizations in South Africa, North America and the UK. Recently relocated to Scotland, he is a published author and motivational speaker and enabler.

How often have you heard it? Possibly you have even said it. “Our people are our greatest asset.” The statement is so common it has become a cliché. Clichés often start life however as a new insight, and just lose value through overuse—so we should not ignore this phrase just because it is platitudinous .

The rationale

It has been said that people constitute 70-80% of the value of a business. Jack Welch, the former CEO of GE famously said “We know where most of the creativity, the innovation, the stuff that drives productivity lies – in the minds of those closest to the work.” At its most elemental, business is just human activity: people providing things for other people. Ultimately, running a business is about co-ordinating the activities of people, and this demands people skills and leadership. It is therefore only logical to acknowledge that people are assets that comprise the core value of any business.  

How can we ever expect to have engaged, enthusiastic employees when, even if we keep telling them they are valued assets, every action subtly reinforces the message that they are actually no more than a cost?

We are therefore entirely justified in claiming that employees are our greatest asset. The problem is we don’t account for, manage or treat them as such. If we did, surely we would include them on the balance sheet with all our other assets? And yet we don’t. But it’s not really our fault. Generally Accepted Accounting Practice (GAAP) insists upon accounting treatment that ultimately treats people exclusively as costs. This has serious consequences.

The consequences

In the land where profit is king and employees are one of our biggest expenditures, we will always look to our people to reduce costs. We justify almost any new investment by the number of people we save. Learning and Development (L&D) is often a battleground between HR and Finance—to the detriment of the employee. And when times get tough, it is more likely than not we will consider redundancy as a solution.

This is almost a reflex, knee-jerk reaction—despite the fact redundancy payments actually entail additional costs—at least initially. And unfortunately, the same mindset prevails in non-profit institutions too.

How can we ever expect to have engaged, enthusiastic employees when, even if we keep telling them they are valued assets, every action subtly reinforces the message that they are actually no more than a cost? And sometimes not so subtly!

The action recently taken by P&O Ferries, the major UK shipping company, highlights an extreme example of this kind of activity. In March this year P&O Ferries dramatically made 800 of their 3000 UK-based employees redundant with immediate effect. This decision and the brutal way it was initiated— by a recorded video message—provoked outrage from all corners: employees, unions, politicians and commentators and, the outrage only increased as more was learned.

Notwithstanding his admission that the underhand action was likely illegal and taken to replace those employees with foreign workers whom they wished to pay less than the legal UK minimum wage rate, the CEO, Peter Hebblethwaite, admitted to parliament he would repeat it if he had to. Something he justified on the grounds that the company was not viable without the intended savings.

The leadership gaffe

P&O Ferries’ treatment of employees was more than the “slap in the face” described by the press. It was also commercially short-sighted, showing a complete disregard for employees’ shared history and past contribution, but also their rights, dignity, thoughts and feelings. What is also abundantly clear is that there was no recognition of employees as assets. On the contrary, the whole tactic took no account of their value or the accumulated expertise they offered: things like the teamwork, safety needs, where things are stored, etc. Add in the costs of redundancy, the loss of goodwill—of both customers and employees—and the legal costs which arose from the nature and volume of the outrage and it all became a massive PR disaster. As a result, the short-term costs will have been considerably more than expected while the longer-term costs are also likely to be greater, even ignoring the experience lost which would be needed to restore effective operations. Thus, it is dubious whether they achieved any of the benefits hoped for and perhaps calls into question whether they have only increased the likelihood of the very consequences they were taken to avoid.

P&O Ferries’ treatment of employees was more than the “slap in the face” described by the press.

Yet the P&O Ferries case is perhaps only an extreme example of the need for—and failure of—managers to also be leaders. Open a newspaper or listen to a news report on almost any day and you will find other examples. Just think of the post-pandemic chaos currently being experienced by airlines and airports. Or the industrial action being taken by railway workers in the UK and being threatened by teachers, NHS workers, doctors and police; the latter two who are not even allowed to strike.

The Real Problem

Many headlines described the P&O Ferries debacle as an example of the ugly side of capitalism. Such claims merely politicize the issue and add no real substance to a subject that needs to be properly addressed and promptly rectified. However culpable P&O Ferries are for their management decisions, they did nothing more than shine a light on an extreme case of poor business leadership and practice.

The situation arose from a “profits before people” corporate philosophy. Our current state of affairs shows the problem runs deeper. This kind of decision-making is simply the inevitable consequence of executives failing to recognize the value of people, and accounting for, managing and treating employees exclusively as a cost.

Here Jack Welch once again provided a useful insight saying, “If the rate of change on the outside exceeds the rate of change on the inside, the end is near.” It certainly seems that the rate of change is greater than we can handle at present. So, it definitely appears to be time to do things differently.

Enlightened executives do speak of people as being their greatest asset. Yet they also persist in accounting for employees entirely as a cost. Businesses thus continue to be able to make their employees redundant without any concept of the value they are discarding. In the process they all make the same mistakes as P&O Ferries and:

 • Destroy value; • Fail to take advantage of the very resources that could best help them solve the problems they are trying to address; • Jeopardize longer term performance and results for ‘apparent’ (but possibly dubious) short term benefits; • Fail to properly meet what has traditionally (but perhaps erroneously) been cited as their primary fiduciary responsibility: to safeguard shareholders’ investments.

Let’s take a closer look at these points.

Destroy value

Regardless of the fact that they are not reflected as assets on the Balance Sheet people are corporate assets. Without them you cannot fulfil your corporate objectives or achieve any of the things you set out to achieve. Remember the old nursery rhyme about the kingdom that was lost for the want of a horseshoe nail? The same applies to any corporation: every employee plays a part in fulfilling a role that enables delivery of the corporate purpose. Dispensing with people with no regard for their value detracts from the overall value of the corporation. The intellectual capability, and years of knowledge of how everything fits, walks out of the door with them. It’s like losing part of a set; the value of the set is reduced when any part is damaged.

Regardless of the fact that they are not reflected as assets on the Balance Sheet people are corporate assets. Without them you cannot fulfil your corporate objectives or achieve any of the things you set out to achieve

Failure to take advantage of resources

It was Ken Blanchard that said, “All of us are smarter than any of us.” Unfortunately, this is a lesson that many executives have failed to learn and so get caught up in their own hubris. It certainly seems to be what happened at P&O Ferries. I am convinced they could have achieved annual savings of considerably more than anything they hoped to achieve, and certainly more than they now look like achieving, if they had only approached their people honestly and discussed the situation with them more openly. Instead, their approach— evidenced by Hebblethwaite’s statement that he would “do the same again”—lends itself to a belief in their executive’s exclusive intelligence and ability: something little different from the ancient “divine right of kings.” Making people redundant at any time, but particularly in a recession, is likely to handicap your position and slow your progress when things improve.

Jeopardize the longer-term for the short-term

Reducing employment costs is pretty much a knee-jerk reaction of executive management to poor results or changing trading conditions. This ought to be fairly easily identified when corporations are ready to contemplate incurring “short-term”, one-off costs in order to save future costs. It is clearly evident in the P&O Ferries example with the company being prepared to pay significant redundancy costs in order to reduce their ongoing salary charge, as well as the likely “fallout” costs of their decision to do things the way they chose. This compounds the loss of value and makes these costs more difficult to recover and likely to take longer—because you no longer have the people who would enable you to do so. P&O Ferries pursued a route that will make it very difficult to re-establish the viability of their business if their action fails to provide the “Hail Mary” solution that its executives opted for.

Failure to meet fiduciary responsibilities

If P&O Ferries intended to safeguard their shareholders’ best interests they have certainly achieved the opposite. But that is the least of it. There is increasing recognition of the need for business to move beyond focusing on shareholders and to meet all stakeholders’ needs. This demands wider recognition of business as part of an ecosystem; operating as part of the wider community and thus recognizing the community as one of its stakeholders. (Surely what Corporate Social Responsibility (CSR) is all about?) It would seem P&O Ferries failed to meet any stakeholder’s interests, least of all those of the community.

Their disregard for the laws is prima facie evidence of that.

They may be unique in that, but not in the general effect of their efforts, which is to transfer living costs from the company to the community. (People who aren’t earning in the UK are entitled to “benefits” which are paid for by the taxpayer.) This is hardly being a “good corporate citizen.”

The whole P&O Ferries saga was unquestionably an unethical fiasco that raises some very serious questions about the executives running the company. But it runs deeper than that.

The way that this has been allowed to happen and its portrayal as “the ugly side of capitalism” highlights the major weakness in our accounting systems and practices. It is imperative that we find a way to start valuing our people as assets and take greater cognizance of their value and contribution to our corporations and businesses.

The Solution

If the problem is the failure to recognize people as assets, the solution is obvious: reverse this and recognize people as assets. Of course, that is easier said than done. This is because valuing people in a consistent way is a challenge. My three-step Every Individual Matters Model is the basis for addressing that challenge and as a means to avoid P&O Ferries type problems.

The first step is pivotal and is the valuation: incorporating a formula for determining an initial value for each and every employee, which is aggregated and held as “Human Assets” in a notional balance sheet account. Thereafter the challenge lies in accounting for changes in value over time. These are determined by identifying key criteria of any specific role and adjusting the value proportionately for any notable shifts in accordance with pre-determined rules. This would include such circumstances as changes in role, hours, responsibility etc. but, most inventively, by increasing value by capitalizing a fixed portion of any training and development program the employee undertakes. This creates a process where training costs are balanced by a notional increase in asset value, in the same way that other assets are enhanced with additional investment, and so should encourage finance directors to direct money towards training rather than away from it.

Although GAAP would not currently permit this to be incorporated in published accounts there is nothing to prevent us doing all this in the internal management accounts.

This demands wider recognition of business as part of an ecosystem; operating as part of the wider community and thus recognizing the community as one of its stakeholders.

Perhaps the most controversial aspect to this approach is that there is a fixed factor used in the formula for the initial valuation. This facilitates the consistency, universality and ultimate equitability of the valuation process, but favours the lower paid employees. This is needed to help close the ever-widening income disparity that underlies so many of the industrial and societal problems we face. This rationale will become clearer from the next two steps, but it is essential to create the shift in the workplace that will otherwise remain elusive and leave us with traditional worker versus management conflict and the kinds of problems we have been reviewing.

Step Two entails the creation of a Human Capital Account.

This is necessary to balance the Human Asset Account and keep the balance sheet in balance. However, by treating this as part of Owners’ Equity you create the capability to give each and every employee a ‘virtual’ ownership stake in the business equal to their asset value. This creates all the benefits of employee ownership without any of the drawbacks of traditional employee ownership schemes or share stocks, and is a much more effective means of engaging employees and encouraging a culture where everyone thinks like an owner of the business. It creates a partnership between the individual and the corporation to optimize the value of the individual, for the ultimate benefit of both.

P&O Ferry protest
Protest at P&O head office at the sacking of 800 workers. (Shutterstock/Philip Robinson)

Step Three takes the virtual ownership to the next level.

By rewarding employees through a “labour dividend” paid on the same basis and at the same rate as the traditional share dividend. This recognizes employees’ ‘life’ investment and allows them to share in the risks and rewards of the business in the same way as capital investors, but without diluting the latter’s stakes. Applicable even if there are no shareholders, it is cost neutral if it replaces an existing bonus pool and most incentive-based remuneration. It also offers a considerably fairer and more equitable basis of reward while recognizing the integrity of the business as a single entity.

The model’s main attraction is its simplicity, and while no doubt requiring some tailoring when put into practice in different businesses, I believe it can square the circle around creating a mindset where employees are truly viewed as assets.

Once we start to see how valuable our people are, on the balance sheet as well as on the ground, attitudes will change around how we handle them—in the same way as we treat other expensive assets. We will not ‘slash and burn’ them at the first sign of trouble, but instead will naturally lean towards investing in their development and caring for them better. This will lead to those ‘assets’ then feeling more valued themselves, and just that fact, unlike with a piece of expensive machinery, will elicit greater productivity and engagement.

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