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Investing in Talent Development

  • By Brooke Ballenger
  • Published: 8/30/2021

To position employees for career advancement and build a better workforce, organizations must invest in talent development strategies that capitalize on the strengths and abilities of employees.

In a recent episode of the AFP Conversations podcast, AFP President and CEO Jim Kaitz spoke with Dennis Carey, vice chairman of Korn Ferry. In this episode, Kaitz and Carey discuss how, as companies focus on seizing new opportunities and adapting to the constantly changing environment, they must build on employees’ talent to remain competitive.

Kaitz: From your perspective at Korn Ferry, what have been some of the most significant impacts of the coronavirus pandemic on the job market?

Carey: We have all been wrestling with answers to that question, and it depends on the industry, geography, state of the vaccination rollout, etc. However, it has been a reflective period for finance executives and an opportunity to take stock of where they invest, how they invest, and how effective the investment has been in various activities to support corporate strategy. Even corporate strategy has been reassessed in many companies as they think about supply chain issues, as well as the stimulus program and how it might impact inflationary pressures on budgets in consumer spending.

One of the things that I keep hearing about is the impact of the coronavirus pandemic on the acceleration of digital transformation ⁠— a concept that we all talk about often, but very few CEOs can articulate. I have interviewed several CEOs about the impact of the coronavirus pandemic on their digital plans, and I picked up a couple of useful examples.

We tend to think of digital as something that is rooted in data analytics and requires hiring 50,000 data scientists. Rich Kramer, CEO of Goodyear, explained how the coronavirus pandemic forced Goodyear to think about itself in a different light. They moved from just selling tires in various retailers around the country to becoming the soup to nuts suppliers. Not only do they supply the tires, but if a customer goes online, they can say, “I want four new tires. I have this model car. I have this kind of timeframe. I would like you to show up in two hours in my driveway with those tires.” This is an example of digital transformation, and it is not very complicated. It was a plan that they had, but they had to re-up the acceleration of that plan due to the pandemic.

So, we have seen on balance a reflective period where companies, CFOs, treasurers, and the like have started to rethink the business model and how effective it is, and now focus more on the customer, employees and cost.

Kaitz: I am sure you have seen research that states virtually every organization has large digital transformation efforts. What are you hearing from CEOs related to their spend on technology? And secondly, what are you hearing about their biggest concerns related to the job market?

Carey: I am a believer that talent is the foundation for everything that follows. I just completed another book with Bill McNabb, the former chairman and CEO of Vanguard, and Ram Charan, and we looked at this from an investor perspective and how investors and boards are redefining, and we described this as the new TSR. We all think of TSR in terms of “total shareholder return.” We define it in the context of talent being the foundation, the big T, if you will. Strategy represents the S, and R represents risk. Without the right talent, you cannot execute strategy.

The CEOs that I talked to are saying the right things about the need to go digital. You must think about “digital or die” as part of your business model, and CEOs are recognizing that digital is more than just a nice word people say in boardrooms and the investor community. However, many companies are not rooted foundationally in a digital platform, like Amazon and Facebook are, and that becomes a hurdle.

One example is Steph Timm of Raytheon Technologies, who articulated to me recently that they have competitive advantage at Collins Aerospace, which is a multi-billion-dollar business in and of itself as a stand-alone unit within Raytheon Technologies. The competitive advantage they now have is that they can predict the lifespan of aircraft parts, and if you can predict the longevity for when a tire or engine might fail, you can beat the competition. This information is available to them through algorithms and data collection and is a prime example of a CEO saying, “We have to figure out a way to capitalize on the aggregation of data to provide competitive advantage to our clients and customers.”

Kaitz: I want to ask you about how you see the role of CFOs evolving. I have yet to see any documentation that CFOs have embraced digital transformation within their finance organizations and invested in the talent. Are they talking out of both sides of their mouth?

Carey: For starters, there must be linkage between the CFO and the human resource (HR) chief. When you think about companies, they only have two things: people and money. How to deploy financial capital has been the primary focus of most companies. How you deploy human capital has not been front and center in most boardrooms until recent years. Why is that? I do not know.

However, more and more companies and CEOs are recognizing and embracing what we advanced from the book, which is a G3 model. This model is where the CEO sits down with the HR chief and CFO and figures out a way to best deploy the capital on both the finance side and the people side. Since they are inextricably linked, CFOs must start learning the language of human capital, and HR chiefs need to become more financially literate.

That is one of the reasons why we are seeing more HR executives being recruited who have actually run a P&L, know how to read a balance sheet, and know something about an earnings per share model to cash per share model. We have recognized more and more that cash is king. If you do not have cash, you better hang it up, right? This leads to an appropriate next step: how do you bring data from the enterprise into those discussions? The best way is to have a data czar or, in historical context, a CIO who reports directly to the CFO to provide the data that CFO needs.

Kaitz: After rereading your book, “Talent Wins,” how do you think about a return on investment for that talent? How do you get the CEO, CHRO and CFO to think about the return on investment and investing in that talent?

Carey: You have triggered one of the most important elements of our book: If you go into a boardroom and sit down with the comp committee, audit committee, CFO, HR chief or CEO, the first point I raise is about how 2% of the executive team in an organization creates almost all of the value of a company.

That is not to say that the “nonessential workers” are not important, they are. But 98% of the value, based on the data I have seen, is created by 2% of the people. So, the questions you ask in a boardroom are: Who are those 2%? Have we mapped our people against the market? Have we mapped our people against the strategic imperatives and challenges to the company? Unfortunately, the answer in most all cases is, “We do not know.” We better find out who those people are and make sure they are creating value.

Kaitz: How would this conversation happen at the board meeting?

Carey: There is strategy relative to the creation of long-term shareholder value. Typically, one of the answers that they expect to hear if you are an investor, albeit the owner of the enterprise, is, “How are we doing? How is John Smith as chief of supply chain? How is he doing relative to the best-in-class companies in supply chain?” That is called a straight line.

If you want to go from point A to point B, take a straight line. Look at the best performers and find out what they are doing and who is doing it. If they are not in the top quartiles, you are failing and you need to replace that person. The value creation model, if you will, must be compared to something. Creating benchmarks is a place to start.

Kaitz: Describe what you think is a tipping point for CEOs and boards to say, “You know what, we need evidence that finance organizations are committed to investing in talent.” What is your perspective?

Carey: I have witnessed a huge sea change in the recognition of talent in the boardroom, especially over the last five years. McKinsey conducted an interesting study a while back where they interviewed board members specific to the question of, “What are the top three, four, five issues that you worry the most about as directors?” Talent used to be numbers four, five or six in most companies. Today, it is indisputably number one of the concerns of board members, and they are now embracing this notion that there's 30% less pay for HR chiefs who typically are not well schooled in finance.

It needs to change, and they need to find HR executives who are P&L savvy, understand finance, and can sit down with the CFO and have a challenging conversation. There is a need for much more finance training and understanding not only for the boardroom but also for HR executives.

Kaitz: What are you seeing at Korn Ferry in terms of key skills and attributes that organizations’ CEOs are looking for in their CFO?

Carey: The number one, two, and three answers to that question is understanding not only how to drive the numbers internally, but more importantly, how do you deal with the externalities? By that I mean the media, particularly investors. How do you deal with activists when they knock on your door? How do you deal with the tension between the long- and short-term shareholder interests in the investment community? How do you articulate the strategy? Articulate why this strategy makes sense for long-term value creation.

Also, 15% of the Fortune 100 CEOs today are former CFOs, as the logical step to the CEO chair is the CFO. CFOs are the most visible; they are on the street, buy and sell side, boardroom, or audit committee. Increasingly, the intelligence quotient required of a CFO dealing with these externalities has been magnified almost ten-fold in the last five years. The complexities of the job are accelerating dramatically.

Kaitz: From the standpoint of long-term shareholder or long-term value creation, there’s always tension between the short-term quarterly earnings and the long-term value creation. How do you see CEOs and CFOs grappling with this inherent tension?

Carey: The flood of capital into the major index players is nothing short of extraordinary. CEOs now have an opportunity, since 60% of the Fortune 500 stock is held by the long-term players. They have an extraordinary chance to wed themselves to that investment class, which is going to stick with them through thick and thin. While their appetite for lack of performance might impact the answer to your question, there is a shift for the good for CEOs.

CFOs must be on guard and anticipatory now more than ever before because there is the likelihood that if you ignore the activist, the activist will go to the long-term players. They will knock on the door of Vanguard, Blackstone and State Street and say, “We have a problem here. We want you to support our position.” Unless you are prepared to deal with the short-timers and hold them off, you could be in trouble because they will go to the long-term players, and then you have got a proxy challenge that you may lose.

Kaitz: We are on the cusp of the “Great Resignation,” where lots of turnover in the workforce is happening. This has serious implications for organizations. What are you hearing from CEOs who are faced with massive resignations in their organizations? How should they think about it in terms of your well-documented philosophy on really investing in talent?

Carey: I believe that most CEOs have seen the pandemic as an opportunity to take people out who were not high contributors so that they can shift the bell curve further to the right, which is a good thing. They have also seen this as an opportunity to really identify real contributors.

Most high contributors and high performers will return. I also think you will see a reinvestment in people who are not up to speed coming from corporate budgets. I was in government many years ago, and I saw so many government training programs that were a ridiculous waste of money. If that government money went to corporations to train the right skills, you could get five times the return on investment. Corporate training and development programs will accelerate.

Kaitz: Anytime we go into any bit of economic turmoil, the first things that gets cut are professional development and professional association budgets. Do you think this is going to change?

Carey: I will harken back to my comment about how boards have rethought the importance of talent in their company. I think you are going to see an increase, not a deceleration, of investment in training and development.

Kaitz: What advice would you give someone who is just starting out in their career?

Carey: Foundationally, get up to speed in finance. No matter where you go, get a good understanding in finance. One of the reasons I ended up getting a PhD in finance is because I believe it prepares you for almost everything, outside of medical and law school.

Secondly, associate yourself with a high-performing, well-managed company early on in your career. I cannot think of a single search I have done where I have tried to pull someone out of a bad-performing company to a high-performing company. You learn from the ethos and DNA of a high-performance company, and that will serve you well.

Listen to the full AFP Conversations podcast episode here.

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