Several months ago I was having discussions with a number of people in the private equity industry. At that time I was suggesting to them that valuing organisations solely on the basis of their cash flows had its limitations and that they should also consider utilising human asset/capital evaluation and assessment techniques.
I was told that while my proposal was entirely rational, the industry had its own way of doing things, and that given the normal investment time horizon, measuring human assets would be a nice to have, but not in any way necessary.
Since then, the industry has undergone a fundamental change partly as a result of what is happening within, but more importantly because of the pressures and changes on the outside.
As the industry moves from the acquisition of niche or medium-sized entities into the acquisition of larger companies that hire thousands of people, as long as it is perceived to be more preoccupied with investor returns than the public good, it will always be a target for its many detractors.
Criticisms will surface and barbs will be thrown irrespective of the honesty and integrity with which the industry does its business. The problem is that much of the public is already predisposed to thinking that it is merely a collection of asset-strippers whose only purpose is to line their pockets.
This will only serve to make future large transactions more difficult as governments and regulatory authorities come under pressure to curb or otherwise increase the scrutiny of each transaction. Moreover, there are some governments that will readily yield to populism and hold themselves out as guardians against the excesses of Anglo Saxon capitalist greed.
Others, such as the unions, will also take their pot shots knowing full well that their protestations in no way need to reflect the actual facts.
As they say, perception is reality. Therefore one has no option but to deal with that reality.
One of the principal tenets of The Human Asset Manifesto is that organisations should lead social change or otherwise risk being dragged kicking and screaming into making that change.
As of right now, the industry has a golden opportunity to adopt that social leadership position, or otherwise spend the coming years bickering and warding of unnecessary if not unenlightened intrusions into its activities.
So, what would such a move entail?
The first and most important step would be to establish a framework within which the human and social issues that impact each business are placed at the very core of its strategy. One only has to witness the problems KKR and Goldman Sachs are facing in their attempt to acquire the Texas utility company TXU, to realise just how important this is.
The full ramifications of such a step is best understood when we look at a company like BP, who for all its nice CSR programmes, failed in its mission to protect both people and the environment.
Leading social change means ditching the CSR niceties and fundamentally refocusing priorities such that they reflect the concerns of the wider community.
A second step is that of demonstrating a belief in the value of people by establishing guidelines for assessing and developing employee skill sets to match the needs of a restructured organisation.
The above does not preclude making people redundant. However, adopting such a people-focused approach might come in more than handy in union negotiations.
Ultimately, only by viewing their targeted acquisitions as networks of human assets – managers, employees, customers, suppliers, and the public – which must be aligned in pursuit of a common vision, will the industry be able to meet the considerable challenges ahead.
Private equity firms have proven their leadership in corporate takeovers and restructurings. If the industry is to continue its impressive growth, then it will also have to prove its leadership in respect of social change and optimising human assets.
