"It is puzzling that many CFOs have a disinterest in human capital where their involvement has been purely of a control nature. Companies spend a great deal on employees, yet few finance executives understand any detail how this investment creates value to the organisation," Peiris said addressing the 3rd LBR-LBO Chief Financial Officer Forum recently.
Peiris pointed out to a recent study conducted in the US showed that while companies spent more than 36 percent of their revenues on human capital expenses only 16 percent of the CFOs understood the nature of the returns these investments were making.
"JKH spends about 70 percent of its revenue on human capital in the services sector while the manufacturing sector spends about 12 percent of its revenue. As a group, JKH spends about 20 percent of revenue on average. While companies continue to spend so much on human capital it is puzzling how CFOs can be disinterested in this area."
The traditional role of the CFO had always been that of the caretaker of an organisation’s "purse". A CFO is absorbed in the company’s accounts, controlling finances that effect performance through a plethora of targets, budgets, incentives and measures.
Peiris said that this setting created a bureaucratic organisation, one that stifles creativity of employees and results in uninspired leaders and frustrated managers who are not trusted to make decisions. Because of the CFO’s narrow minded focus on bottom-line results, short term measures are often adopted which result in higher costs and wrong behaviour.
"Very often CFO’s paid a lot of attention when purchasing a machine which comes with a limited capacity, but are often stingy when investing in employees. The human mind is limitless in capacity and CFOs underestimate or do not know the potential of people," Peiris said.
He said that CFOs need to change the old-world mindset, steeped in traditional accounting based on historically assessing physical assets, to the new-world mindset that focuses on eking sustainable value from physical assets, and most importantly intangible assets such as human capital to improve organisational performance.
The dynamism of business is changing fast and survival, success and failure will depend on people within organisations. This would mean that CFOs will have to venture into areas hitherto dominated by psychologists, behavioural experts.
Peiris strongly advocated performance based remunerations with fair assessment mechanisms in place as it will not only link executive pay to bottom-line results, easing tensions of shareholders, but encourage employees to perform better.
"Not every employee is interested in money. To some it is personal pride that motivates them, while for others it may be job satisfaction or a personal desire to contribute," Peiris said, stressing the fact that higher pay alone will not guarantee results.
The concept of performance based remuneration is "hard and unemotional," Peiris pointed out but said the system could work if organisations could minimise, if not eradicate, the causes of employee disengagement to achieve optimum productivity.
Employee disengagement is where employees do the minimum that is required of them in order to collect their pay check.
This is caused by a conflict of interest between individual goals with that of the organisation further aggravated by the lack of training, development, mentoring and unclear lines of communicating with the hierarchy.
Non empowerment of employees leads to frustrations which also result in disengagement because a bureaucratic setup may require rigmarole of approvals and procedures for even mundane of transactions.
Disengagement is also caused by poor working conditions.
"Poor working conditions will include an inadequate system of recognition and reward, inappropriate tools and insufficient resources and an unsuitable work environment," Peiris said.
He said that when JKH adopted a performance based remuneration scheme it had its trauma.
"But as mindsets began to change things began to improve."
While past relationships between HR and Finance functions had been on an adverse footing, Peiris said that CFO’s will have to engage in closer collaboration with HR, simplify processes, get involved in recruitment, development and training processes of the organisation and learn to understand Human capital in all its complexities, ambiguities and paradoxes.
"CFOs need to ally themselves with the entire organisation. The first step in creating a high performance based organisation will be the step taken by the CFO in changing our own attitudes," the CFO of John Keells Holdings concluded.
