IMD International


Governance and talent management are key drivers of profitability

By IMD Professor Arturo Bris and Thomas D. Meyer - December 2014

Intangible and "soft" factors can be more powerful than narrow financial indicators in explaining why some companies grow more than others. This is the central finding of a new joint business competitiveness study by Accenture and the IMD World Competitiveness Center, which analyzes the behaviors and practices of 104 of the largest Swiss companies by surveying 660 senior executives. The results show that the most significant influences on performance at "growth companies"—based on their average profitability between 2009 and 2013—are related to intangible factors, in particular governance and talent management.

Good governance pays off

Our executive survey shows that growth companies perform better than companies with lower growth and profitability in the fulfillment of board responsibilities. The results indicate that the boards of growth companies effectively fulfill their two roles: oversight of management, plus the strategic task of steering and guiding the company's direction. By doing so, these boards engage in a constructive partnership with the top management team.  

Growth companies have more diverse boards in terms of gender, age, professional experience and competencies. We find, in addition, that in growth companies board principles are designed to directly contribute to the strengthening of the firm's long-term development. The survey results also show that boards of growth companies adopt proactive disclosure policies rather than reacting to imposed regulations. There is one aspect of governance in which the other companies in the survey perform better than growth firms: executive succession. Companies with lower growth and profitability obtain better marks for having an established process for the succession of senior leadership. 

A question of talent

Regarding talent development, the survey scores show that growth companies have established a corporate culture that fosters collaboration and knowledge-sharing between all levels of the organization. Growth companies also have more productive workers, and emphasize diversity initiatives. One of the keys to talent development in growth companies is the adoption of core values as an essential element of everyday business and the upholding of those values by executives and employees. The results also show that the top management teams of growth companies actively engage employees and in so doing are able to strengthen employee commitment and motivation.  

One of the main differentiators between growth companies and the others in the survey is that in the former, turnover of key executives is significantly lower. Survey respondents said the number of high performers resigning from growth companies is lower than in the other firms. Growth companies, in addition, have lower employee absenteeism due to illness. 

In some aspects of talent development, growth companies under-perform. They receive lower scores than lower-growth companies with respect to the active management of employees' overall well-being. Growth companies are in this regard not necessarily "good" employers. In both categories of companies, new employees find it difficult to fit in and to deliver expected results. Scores for employee mobility (e.g., frequency of transfer within firms) at both growth companies and the other firms indicate that respondents perceive limited possibilities to change jobs or roles outside their immediate functions and career paths.  

Food for thought

The results make for interesting reading. Although good governance is generally accepted as a key intangible factor behind business success, talent development is normally put in the "important, but…" category. Talent development improves performance and productivity, allowing companies to nurture innovation and offer better products and services. But in economically challenging times, many firms spend less in the development of their talent pipeline.  

Our competitiveness study shows that intangible factors have greater weight in the success of growth companies than is generally assumed. Moreover, the results indicate that "important, but…" factors such as talent management may be indispensable for firms' success after all. The message is clear: companies seeking to grow faster should think beyond the balance sheet. 

Arturo Bris is Professor of Finance at IMD and directs the IMD World Competitiveness Center.  

Thomas D. Meyer is CEO and Country Managing Director of Accenture Switzerland.

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