Most fundamentally, in light of the trend toward globalization, the evolution in the skills and knowledge of the US workforce has been inadequate for most workers to maintain the standard of living to which they have been accustomed.  For years, jobs have been moving offshore, where any given level of skills could be purchased at a far lower price.  At the same time, the goods produced by those workers (and purchased by US workers) contributed to the trade deficit—which then had to be financed through massive international borrowing.  China, in particular, allowed trade imbalances to continue because they helped keep its massive population employed.

So when the financial crisis came along in 2008, it was the economic equivalent of an already severely ill patient then catching a bad case of the flu; such a person simply can’t recover as quickly (or possibly at all) as would a healthy person.

This suggests that, while quick fixes (e.g., a stimulus plan) can help ward off disaster, addressing the underlying structural problem—the skills and knowledge of the U.S. workforce—will be necessary if the US  is to maintain a resilient middle class (a hallmark of a stable democracy).

The Obama administration’s Race to the Top competition is a good step in the right direction for our K-12 education system.  But much more will be needed, including a coherent and aggressive strategy that provides incentives and resources for private employers to invest more heavily in the education and training of the U.S. workforce.

Given this apparently stellar performance, many questioned the wisdom of the board’s decision to oust Hurd.  For example, on August 9, the New York Times reported that Oracle CEO Larry Ellison submitted an “impassioned e-mail” to the Times in which he “chided HP’s board for what he said was a grave mistake.”

But subsequently, Joe Nocera’s August 13 NYT column speculates that  Hurd was actually removed for a variety of other reasons, which Nocera sums up as “putting up dazzling short-term numbers that have the effect of enriching himself while robbing HP’s future.”  The column explores in detail employees’ intense dislike of Hurd; how he decimated HP’s legendary investments in R& D in exchange for short-term gain, and Hurd’s likely involvement in HP’s shameful spying on both its board members and journalists.   One former employee is quoted as saying that Hurd was “wrecking our image, personally demeaning us, and chopping our future.”

The analysis we’ve been compiling for Good Company: The New Economics of People, Profit and Planet, is consistent with this image of Hurd - and Nocera’s explanation for his departure.  As a part of our research, we have been using data available through Glassdoor.com to explore the relationship between employees’ ratings of their CEO’s (along with broader measures of being a “good employer”) and stock performance. 

Here’s what we wrote in our draft of Chapter 6 of Good Company (dated May 14, 2010):

“One of the notable names that employees rate in the bottom one-eighth of employers [on Glassdoor.com] is Hewlett-Packard, a company that has a long and proud tradition of being an enlightened and forward-thinking employer.  But under the leadership of its most recent CEO, Mark Hurd, big changes have been made.

One interpretation of Hewlett-Packard’s low employee rating is that its employees had long been coddled, and that by putting an end to that, Hurd has put the firm on a path to sustainable long-term profitability.  (This is a view that tends to be favored by Wall-Street-analyst-types.)  Or it may be that by hacking away at employee perks and privileges, Hurd has weakened Hewlett-Packard’s ability to sustain itself in the future.  Only time will tell.  But what can be said with certainty is that employees’ rating of Hewlett-Packard puts it at the bottom of the distribution on Glassdoor.com, and the firm’s long tradition of relying on its employees as a major source of sustainable advantage has been called into question. 

Here’s something else that can be said with certainty.  The employee-provided ratings available on Glassdoor.com are highly correlated with firms’ stock performance.   When we compared Fortune 100 firms within the same industry, and controlled for other factors (through multiple regression analysis), the most consistent factor associated with higher stock performance over 3 years and 5 years is Glassdoor.com ratings.  Put another way, the higher the Glassdoor.com rating, the higher the stock performance over 3 years and 5 years, controlling for all other factors.”

The situation helps to confirm what we at McBassi & Company have long known to be true—that there is a great deal of wisdom in the workforce, and sites like Glassdoor provide a window into that wisdom.  Boards of directors and Wall Street analysts would be well served by tapping into that wisdom with much greater frequency.

Last week, Slate writer Daniel Gross tackled the same issue – and came to a similar conclusion: “employers shouldn’t be surprised that Americans won’t take their crummy, low-wage jobs.”  He notes that even in an era of high unemployment, “the laws of supply and demand apply” and employers may simply not be offering terms that are attractive enough to potential employees.

It is astonishing to read that “BP is continuing to contest $30.7 million in proposed penalties for the 439 new safety violations that OSHA inspectors found.”  It seems likely this stance will add to the already high level of public outrage against the company. 

If BP’s behavior on this front is any indication of the future, it certainly bodes poorly for its employees, who must continue to work in unsafe conditions, as well as for shareholders and the environment.

The research, by Raj Chetty and colleagues, examined what’s happened to almost 12,000 children who were included in a large educational experiment in Tennessee in the 1980s.  They find that students who learned more in kindergarten went on to earn more money and were less likely to become teenage parents (as well as a variety of other positive outcomes).

Extensive research has been done on the positive economic effects of education, but almost none of it has reached all the way back to kindergarten.  As Leonhardt notes, this new research suggests that early education may be an example of a long-term investment that has benefits that don’t fade away.  We should always be on the lookout for how to take advantage of those sorts of opportunities.

Among the S.& P. 500 companies that have reported second-quarter results, more than one in 10 had higher profits on lower sales, nearly twice the number in a typical quarter before the recession … Even at corporations where both the top and bottom lines are expanding, the focus remains on keeping profits high, not rebuilding work forces decimated by the recession. 

One possible interpretation of this ongoing “right-sizing” is that large, U.S.-based firms are adjusting to the “new normal” by finding ways to remain sustainably profitable in the face of permanently lower demand. 

Alternatively, it may be that many of the companies exhibiting this behavior are engaging in the corporate equivalent of eating “the seed corn” (the seed saved from one year’s harvest to use for planting in the following year) by grabbing whatever short-run profits they can get their hands on, despite the negative long-term consequences.

In either case, the implications for investors are the same.  While firms that are exhibiting this behavior will generate tidy returns in the short-run, they are a much riskier bet in the long-run.  Eating the seed corn is never a smart strategy – unless your existence is in peril.

In a data set this large, the last digit of EPS measured to the one-tenth of a cent (for example, the number “6″ in $0.516) should be evenly distributed between 0 and 9.  But Grundfest and Malenko find that is not the case.  Rather, they found that the number 4 appeared only 8.5% of the time (instead of the expected 10% of the time), and the numbers 2 and 3 are also under-represented. All other numbers were over-represented.

This suggests that some publicly-traded firms are expending effort to manage revenues and costs in such a way that allows them to “round up” their earnings (e.g., from $0.516 to $0.52) rather than “round down” (e.g., from $0.514 to $0.51), improving their apparent earnings and making it more likely they’ll meet Wall Street expectations (or exceed those expectations by one cent).

Not only does this represent an economic inefficiency (in that it requires an expenditure of resources without any increase in “real” economic value), but Grundfest and Malenko find that firms that suffer from so-called “quadrophobia” are also more likely to be subsequently charged with accounting violations.

The obsession that Wall Street has with short-run earnings continues to be a destructive force.  We need to develop alternative measures that help to focus investors’ attention on long-run value creation.  That’s one of the reasons that the emergent field of human capital analytics is so important.

While this information is encouraging and it’s promising to see that technology is being used to drive business results and improved human capital management processes, it does beg the question what are the hidden costs and time involved with teaching people how to use all of these new technologies? Furthermore with the inherent distractions that come with mobile browsing, will there be any losses to employee efficiency as a result?

The important, and as yet unanswered question is, “When all costs are properly considered, how much will this “advance” actually contribute to the bottom line?”

I hope (and expect) that Jac is right.  Business intelligence tools are ever so slowly making their way into the people side of the business—and it’s about time.  Jac’s newest book helps move the ball forward, and for that, he has my thanks!

This analysis points to two important conclusions.  First, is the importance of “human capital analytics”—using data to shed light on a real business problem.  Second, is the importance of effectively addressing this cost/productivity problem through improved human capital management.