CFO Talk:  Human Capital and Its impact on Business Valuation - Transcript

CFO Talk:  Human Capital and Its impact on Business Valuation - Transcript

Steve Rosvold 00:02

Welcome to CFO talk. I’m your host Steve Rosvold, Chief Learning Officer at CFO.University. In this episode, we’ll explore talent and its impact on business valuation. Today we have two distinguished guests who thrive in the human capital and business valuation space. Dave Bookbinder is an expert in business valuations. Dave has dedicated a good share of his career to understanding how human capital impacts valuation. He is the author of the book, The New ROI, = Return on individuals, and host of the internet, TV show and podcast The Behind the Numbers Show. Joining Dave is Mark Iorio. Mark is a seasoned Business Development Executive with a passion for improving his clients brands and culture. The ultimate goal being a step function, increase in business valuation through greater stakeholder engagement. Dave lives in Philadelphia, the City of Brotherly Love, except when the Eagles are playing, and Mark resides in New York, a city that never sleeps. Welcome, gentlemen. It is great to have you on the show.

Dave Bookbinder 01:11

Yeah, great to be here. Thank you.

Steve Rosvold 01:13

Well, we’ll get this thing kicked off. I’m so excited about this topic, because human capital and how finance leaders and CFOs are getting involved in measuring human capital, its impact on valuation is such an important topic and not well understood. I mean, we’re still in the nascent area of a nascent time of really understanding this. And you guys are deep experts in this whole employee engagement, human capital and business valuations. So I’m so excited to have you both on the show. And we’ll get things kicked off. Dave, if you don’t mind, I’ll give you a quick question. What are the key mistakes that executives make when leading people that destroys corporate value?

Dave Bookbinder 01:48

I think the key there, Steve is one fundamental underpinning. And I think it’s the lack of fully understanding the connection between your people and the value of your business enterprise. So it’s about being intentional with a mindset that when you when you’re leading your teams, every decision you make, every word that comes out of your mouth is going to have an impact on your people. And it can either be a positive impact or a negative impact. And if you’re intentional about it, and you’re consciously aware of driving to drive employee engagement, which Mark is going to talk about, you want to do things like lead with empathy, show people that there’s a vision and a mission and getting them as Mark would say, not only rowing in the same direction, but rowing in the right direction. So all of those things impact the business value, because an engaged employee workforce is going to be more productive, a more productive workforce means greater profitability. And greater profitability means a greater business enterprise. So that’s why I’m on a mission to change the conversation about how people are being perceived from the accounting perspective.

Steve Rosvold 02:56

I think, well, that’s a great mission. And I think that’s enlightening from the standpoint of what leaders have to do to create employee engagement and stakeholder engagement, which gets over to what Mark focuses on. So Mark, what remedies do you have on how to improve low employee engagement?

Mark Iorio 03:17

You know, what it is, Steve. First of all, thank you for having us. David, I love talking about this. Dave hit the nail on the head earlier by saying that, you know, it’s got to be leaders who are empathetic leaders who are heart centered Steve, people that really care about their employees. And if you hear people talk about the fact that employees are our greatest asset, and they do nothing about it, and there’s strife, there’s backbiting, there’s, you know, passive aggressive behavior, siloed thinking and lack of collaboration, then you’re going to have a poor culture, you’re going to have a poor engagement. And that’s going to impact valuation. There are steps that we take in our process, to get people aligned around a NorthStar something that is purposeful that that they can do each and every day behavioral changes, micro changes in their current behavior, that align with the promise that they make to every stakeholder out there. So, t without the benefit of having a plan of action, where you’re actually doing something each and every day, it’s like a ship in the middle of a vast ocean without a compass. And without a North Star. You’re just meandering all over the place. And what ends up happening is a breakdown in that communication. As Dave said earlier, it’s not intentional. And people start to feel that they’re not engaged and then they quit. Quietly or otherwise.

Steve Rosvold 04:53

You both use the word intentionality. And I’m thinking the budgeting process and the planning process, which very often is about sales and revenue and margins. Are you seeing the budget process or the planning process incorporate more intentional human capital activities to increase engagement and increase business value from a human capital standpoint?

Mark Iorio 05:20

It really is about the people in leadership positions that have empathy, have that heart centered feeling. And they will put aside funds in the budgeting process to advance their people, advance the relationship within the organization. If they all only care about the bottom line, and they only care about the dollars and cents and people are really not their greatest asset, they may talk about that, they’re not going to put that in the budget. And in the beginning of the year, when you start talking about a program like ours, or like Dave’s, they’re going to say to us, well, gee, that’s not in our budget right now, I don’t know where to get those funds. The organizations that do have funds put aside, they’re ready to go, and they’re ready to help. And they’re ready to grow the business to make it much more profitable, much more valuable.

Dave Bookbinder 06:19

Yeah. And just to add on to that, I think you’ve got some great role models across corporate America and around the globe, when you start to look at companies that are on, like, the great places to work list. And, you know, the, the just capital list of companies that are that are doing just things for organizations, those are the ones that are really taking a leadership role. And as Mark said, investing in their people, and during tough times when the economy is supposed to be bad. And we’re looming recession on the horizon, and so forth, it’s really easy to start cutting things that are people centric, like training and development, just to pick one, for instance. But the heart centered leaders, as Mark says, they’re the ones that are leaning into this, and they’re doubling down on the idea that their people really are their most valuable asset. And I just want to add one other thing, just so that your audience has context here. I’m not an HR guy, you look at my credentials. I’m a finance guy by trade and by background and what I do day to day, and I just happen to believe that people are company’s most valuable asset and trying to connect dots between the relationship of leadership, employee engagement and enterprise value. And there’s enough evidence out there that will point to the fact that the things that we’re sharing here, and the things that Mark is sharing, are not just the woowoo concepts of let’s sing Kumbaya and get people all aligned. This really has hard dollars and cents impact on your business and finance leaders really need to lean into this.

Mark Iorio 07:42

This is not an easy process, right? So, when someone says, ‘Look, we want to really have an engaged employee group, we want to eliminate the silo thinking and the backbiting and passive aggressiveness, and want to invest in our people. I want to have a better communication between everyone and follow this NorthStar for the organization that requires hard work.’ Think about it in terms of a diet or exercise program. It doesn’t happen overnight. It happens over the course of time. And you know, the Sixers a couple of years ago, I know you’re not a Philly fan, Steve, but they had a process and the process had to be followed in order for them to get from a seven win season to, a 62 wins season. It doesn’t happen immediately. So, a lot of times CFOs might look at the process and say, ‘Geez, there’s not really a quick ROI here, return on investment’, (not a return on individuals). And then they say to themselves, ‘Look, listen, I can afford to put this aside.’ They are making a huge mistake by not making the investment, because it’s a long term process. The New ROI Dave teaches is about investing in individuals. It’s a long term commitment.

Dave Bookbinder 09:02

Yeah. And what Mark says is spot on, I’ve interviewed and a lot of CFOs. And CEOs who have been intentional about culture change, and the theme is always the same. 18 to 24 months is roughly the timeline it takes for employees to understand that leadership is serious about this. And it’s not just the latest fad. So, it’s got to become embedded in the DNA through repetition and time.

Steve Rosvold 09:26

I’ll let you guys comment on this. And you just need to shake your head. Yes, if you completely agree or No, if you want to add something. The definition of employee engagement that I like is any emotional or mental attachment to the company. Employee engagement is dependent on how close that attachment is. Does that fit what you think about employee or even stakeholder engagement? Is there more to it than that? Or is it really that emotional and mental connection?

Mark Iorio 09:53

Yeah, I think you have to connect the head and the heart, Steve, I think but the one thing is that that’s not good enough. Engagement is not just about connecting the head in the heart. Where are we going? is really the question. If everyone buys into that process that I talked about earlier, or our purpose, or our North Star, or our role model or avatar, and everyone is jumping in that boat and all rowing in the same direction in the right direction. That is engagement. To me, it’s not just the head and the art, it’s the head, the heart and the hands actually doing something about it. So, there’s a lot of, there’s a lot of chatter out there about engagement. A lot of organizations love to do it, they don’t know how to do it.

Steve Rosvold 10:44

One of the assumptions we’re making is that engagement, employee engagement is a key human capital metric, and improves profitability. And I think what we’ll do is I’ll get some information. I know Dave, you have tons of it, Mark, I think you do, too. We’ll include that. So rather than go through all the studies that tell us this works, we’ll make sure we include that when we publish the CFO talk, we’ll use those statistics.1 So people can validate that, yes, this does make a difference. Think about employee engagement metrics. How does a company know if they have engaged employees? How can the finance function help with these metrics, not only improve employee engagement, but how do we help the company measure it?

Mark Iorio 11:27

In our process we have something called an Index of Alignment that measures if everyone is bought into this this purpose. What we’re trying to do with Dave and the New ROI is correlate the Index of Alignment with valuation. It’s difficult to do, because there’s so much noise out there. There are companies who have measured stock price of publicly traded companies with engagement. And there is a direct correlation. Some of the things that Gallup has produced over the years. So, it is intuitively, instinctively, we know that when employees are engaged in the work, they care about each other, the leadership cares about their team, they’re going to produce more, productivity is going to be more and greater, there’s going to be more collaboration, there’s going to be more profit as a result of all of that. And then the profit obviously, rolls very, very nicely into valuation. So, you know, there is a direct line there, it’s just it’s a tough thing to prove that engagement equals valuation. But when we build all these data points, it’s very, very obvious, Steve.

Dave Bookbinder 12:55

I’ll help you just put a little exclamation mark on what you just said Mark and for the finance leaders out there who want to get a little bit wonky and technical. It’s evidenced and documented that the companies that are doing these right things around treating their employees well, and driving engagement, enjoy a lower cost of capital. And in the valuation world, the value of business is really a forward-looking exercise, it’s a present value of the future economic benefits of the company, they’re discounted back to today’s dollars, at the cost of capital. So, all of the things equal, the lower cost of capital translates into a higher valuation. It’s all connected.

Steve Rosvold 13:32

That makes sense, the lower cost of capital and higher profitability. That’s kind of a you know, that’s, that’s a pretty valuable way to create value.

Dave Bookbinder 13:41

You’re one of the things that Mark alluded to, and during this great resignation, over the course of the pandemic, we learned a lot of things. And one of them is that people really want to be part of a bigger mission. Yeah, they show up to work every day. Some just to collect a paycheck. But there’s a lot of folks out there, not just millennials, who really want to be doing something more meaningful. The companies that are doing the transformations and tying the financial transformation to a mission transformation are the ones that are the most successful.

Steve Rosvold 14:11

Think very few business leaders would disagree with that but it’s the implementation because it gets down to the day to day, hey, I’ve got to increase sales, I have to reduce my costs. I have to increase my volume. And you forget who does that. It’s the people who do that. Maybe that’s why we spent too much time not using our whole team and trying to do too much ourselves. That’s one of the issues. There’s no business leader who doesn’t believe engagement helps. They don’t say, ‘Geez, we have poor engagement.’ They are more likely to believe ‘I’m doing all the right things.’

So how do we win in the measurement of engagement? We have the employee turnover. It’s one key measurement. We have employee surveys What other tools can leaders use to start measuring engagement?

Mark Iorio 15:06

Well, a lot of its retention. It is getting people to understand what their mission is each day? And what are the things that I can do to improve each day? And, you know, is there constant communication? I see this all the time, Steve. Dave and I do back to back shows on RVN television and what’s interesting is that more and more, I’m getting people that I’m interviewing, whether it’s C level executives or consultants, that talk about the idea of heart centered or empathetic leaders. The old command and control way of leading is passe, that doesn’t work today, whether it’s Gen Z, boomers, or millennials, no one wants to be commanded and controlled. So, if you don’t have that level of communication back and forth, and I’m talking about true communication, not let me dictate to you what I’m feeling and not listen to you. I want to hear from you, I want to listen, I have two ears, one mouth, I want to listen to you. And that helps with engagement. Steve. It’s not that difficult. In terms of understanding, it’s more difficult in terms of execution. I see it in my own business. I see it in my family’s business, I see it in all the consulting work that we do. People are afraid, they think it’s confrontational. It’s not it’s having communication so that you have a better understanding of what people are going through day to day, so that you can deal with that for them as a leader. And then you start to see emergent leaders coming out of the organization.

Dave Bookbinder 16:52

Yeah, and one of the things that leaders can do right now this afternoon, is start to demonstrate appreciation. Vocalize it and be specific about what they’re appreciating in their people. Everybody wants to feel valued. Everybody wants to feel appreciated, and appreciated, employees are going to do more, there’s empirical data on that. And what if I told you, Steve, that a particular manufacturing company increased productivity by 6%, just because leadership thanked the workforce. That’s a fact.

Steve Rosvold 17:22

That’s pretty big, that big numbers on something that’s really easy to do, and frankly, fun to do. You know, it’s fun to it’s a lot, a lot less fun to tell somebody, there’s a problem than it is to thank them.

Mark Iorio 17:38

You know, what be authentic about it for crying out loud? Don’t be as people I mean; they’ll see right through that. Be transparent. ‘Dave, I appreciate what you did for me. And or for the company, this is for you and Amy, you guys go out and have dinner together on us. Or here’s some flowers, take them home, or anything like that. But it’s got to be authentic, it’s got to be real.

Steve Rosvold 18:06

What you guys are really capturing here is the shift in executive leadership. The technical skills, the things that got you there as a star sales performer, or a great CFO, or whatever it might be. But those technical skills isn’t what you are talking about. I mean, the company needs to have those. But, as a leader, it needs to be much more focused on how your talent is being appreciated, being led, being trained, and all that. And Dave, you start getting into this with the New ROI.

Would you tell us a little bit about how people can use the New ROI in their businesses to improve valuation?

Dave Bookbinder 18:52

Yes, sure. So just a real quick primer, the new ROI, Return on Individuals started out as my journey to explore my belief that people really, really are a company’s most valuable asset. And what happened was, I wound up collaborating with about 20 thought leaders across North America. And it resulted in what became book number one. Book number two, the new ROI going behind the numbers is a compendium of the conversations that I’ve had with leaders on my show, behind the numbers and what those two books really combined to do is, number one, demonstrate that the connection between your people and your enterprise value is real, that leadership matters. It provides a roadmap from the various thought leaders who have participated in these interviews that I’ve conducted. So you can as a leader, or an aspiring leader, understand the tips that you need to implement the techniques you can use to create a more engaged workforce to build greater leadership skills. And then there’s the empirical evidence and some wonky math that demonstrate that when you do these things, you will have a positive impact on your business value.

Steve Rosvold 19:57

That’s great. So I encourage everyone to take a look at both books. I’ve read them both, and they’ve got rabbit ears, and there is highlighter all over them. So appreciate that, Dave, and thank you for sharing the books with our audience, Mark, what are the effective ways you’ve seen that companies can improve employee engagement and its impact on valuation.

Mark Iorio 20:23

You know, Steve, thanks, I we’ve been doing this for about 20 years, my partner, Al Cine and I have developed a program that helps get people together and rally around a purpose or a Northstar. We do two things. One is we have a four hour half day workshop. That’s called Pro Fit for teams, we go out we can do it virtually get people rallied around thinking about their business as though it were a single person doing its best work on its best day. And once you get to the point where you have a consensus where everyone believes that that is our Northstar, that’s who we are, we eventually get to the point where we have we build a series of ideals or a group of ideals or behaviors for the organization and then drive down to each individual, what are the two or three things that you think you can do each day micro changes in your behavior, that align with this promise that we make to all stakeholders that will help migrate this culture, this engagement toward our avatar toward our North Star, roll target? And then you have to follow up on that, Steve, it’s it’s got to be something that you know, each individual is held accountable. You know, What are the obstacles that you’re running into day by day? How can we help you overcome those. And as Dave said earlier, as s that changes, as that culture changes, as the engagement becomes more effective and collaborative, you start to see value go up, people become appreciated more. And, you know, they care about each other, and they care about the employees that work with them and for them. So two things, you got Pro Fit for teams, and then B cat, which is a brand and culture alignment toolkit. It’s a much more extensive program. And, you know, as Dave said, takes time, it’s 24 months.

Steve Rosvold 22:25

Well sounds like some really valuable programs for people to go through to kind of move them off the old paradigm to the new human capital management paradigm. You know, I think about you know, we talked a lot about employee engagement, what, but we also the stakeholder side of things, the stakeholder engagement, do these same concepts apply? And if you apply the concepts that it from your book, Dave, and from your seminars, Mark, do they also kind of filter into, then you’re going to treat your customers better, you’re going to treat your suppliers better, does it? Or does that have to be different intentional program?

Dave Bookbinder 23:01

Mark, I’m going to jump in first, if you don’t mind, because I’m going to let you be able to correct me afterwards. In case I blow this one, but my perspective is and you’ve seen various quotes, I think Richard Branson’s, probably one of the most noted work noteworthy of the quotes for this, that if you take care of your people, first your people will take care of your customers and everything else that follows. And I believe and I’ve seen that if you create this engaged environment where you’ve got people really bought into the mission, and they become your brand evangelists. From a retention and recruitment standpoint, they’re out there telling people that your company is a great place to work, come on and work here. And they’re also giving your clients and your customers much better care and much better service. Because they’re bought in, they’re engaged, and they care about what they’re doing. So and I think that ripples through for all stakeholders, and ultimately, it impacts investors, of course, in a positive way, I believe in terms of the manifestation of greater business value.

Mark Iorio 23:58

It’s got to be a fully immersive, fully inclusive program, Steve, and what was interesting is that 20 years ago, we first started doing this, we had a very, very large membership based organization come to us, and asked us if we could help them increase their relationships per member. People know them for one or two services. They really offer 200 Plus services, and that relationship per member, tick up from 2.2 relationships per member to 2.8 or 2.9, really changed the course of how they treated their clients, their members. And it touches everyone because as Dave said and Al likes to quote this is quite, ‘People come to work for you for the same reason they want to buy from you.’ So they feel that brand equity they feel that connection to your brand. It touches all stakeholders; this is not isolated. And if it is, it’s not going to be something that works. It’s not about just the leadership or the middle managers, or the rank and file. It’s about everyone.

Steve Rosvold 25:16

Well, let me ask you a similar question in a little different vein. Would you suggest that where this whole journey starts, call it the, human capital mindfulness? Does it start with employees? Or is it more general, if you if if I, you know, if I went down the road of hey, searching for employee engagement, and improving on that, is that the place to start this whole journey?

Mark Iorio 25:42

Totally, I mean, it’s, it’s, it starts from the inside out, Steve, it’s got to be, you know, you, you get healthy from the inside and spread the word spread the good news, externally. And once you do that, people will start to flock toward you. And, you know, employees are an amazing, as, as Dave said earlier, we use the word brand ambassador a lot. When they become ambassadors for your brand, when they espouse things about your brand, your service, your product, to their friends and colleagues and family members, and potential prospects, the game changes. Everything changes. There’s a great story about the CEO of I think his name is Doug McMillon, at Walmart, and he said, you know, we’re gonna have a hell of a time competing against Amazon. But the one nice thing about this is that we have 2 million employees, and you 2 million employees, if we can be, you know, turn you into brand ambassadors, rather than have someone walk into Walmart, and scan an item and then buy it from Amazon right there in the aisle, let’s try to engage with our customers. And as that happened, just go take a look at Walmart stock since Doug McMillon took over. It is an amazing trajectory. And that’s the kind of thing we’re talking about on a gigantic scale. But a company that’s five or 10, or 20 people, or 100 people, they can make as big an impact. But it’s got to start from the inside out.

Dave Bookbinder 27:19

And I agree, I think everyone has a responsibility for showing up as their best self. But I think it starts at the top of the organization chart, I think the leader of the organization, the CEO, has to be the one to set the tone, in terms of mandating what culture is going to be, what kind of behaviors we want to emulate what kind of behaviors we’re not going to tolerate. And there’s a lot of no assholes policies being instilled across the country now from the folks that I’m talking to. They’re being enforced, and they’re sending a strong message. And I hear stories where best intended leaders are trying to do the right things. But if one particular person in a particular office in a particular city didn’t, quote, ‘get the memo’ and still treats their people the old way, then then the wheels just fall off. So it has to start at the top. And it’s got to filter all the way through leadership.

Steve Rosvold 28:09

The fun part about this whole change is treating people good as fun, right. That’s that. But the hard conversations are the ones that I think we really have to work on, where there needs to be improvement where there needs to be and how we negotiate those and show a human piece of that. Because being nice to people is that’s just the way to be right? That’s great. But there’s also those tough conversations that come to we have to perform better, how are we going to do that, and how we how we do that in a way that that is well received and keeps that employee engagement up is going to be important. So you know, you guys have so many, there’s so much to so much to cover in this whole area.

Dave Bookbinder 28:46

And leaders can do that. Because like Mark said, it’s about just leading with empathy. I mean, empathy is one of the key criteria for excellent leadership and the impact on business value. We’ll talk about that in the second book. But when you’re talking about having the tough conversation, Steve, if you just remember that these are human beings. They have families, they have aspirations, they may have kids, they may have parents, they have the same emotions that you do. Treat them with respect, treat them like a human being, treat them the way you would want to be treated.

Steve Rosvold 29:15

By the way, we’re working with a firm out here called the Executive Forum. And we’re developing a tool in this area. It really revolves leadership. Call it a leadership index, let’s call it but I really want to plug you guys into that. We’re just kind of in the early stages of starting it, but I think you guys would have so much to lend to that. Anyway, I really appreciate the time that you guys gave us on this topic. Clearly you guys are the experts in this area, and I sure appreciate you, you know, sharing CFO talk with me today. That wraps up CFO talk. Thank you, David and Mark, I really appreciate you joining us today. CFO.University is a community of member scholars, companies and trusted advisors committed to the professional development of chief financial officers. Learn more about us at www.CFO.University. Until next time, Enjoy. Learn. Engage.

1 Statistical references highlighting how employee engagement improves profitability.

The Benefits of Employee Engagement - Gartner Updated article January 7, 2023

10 Timely Statistics About The Connection Between Employee Engagement And Wellness Forbes January 16, 2019

Developing and Sustaining Employee Engagement - SHRM Date undisclosed

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