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HR: Why Increase Your Financial Intelligence?

Posted by Mark Bennett on October 21, 2009


141273960_06f6cd3412_mWhen in Rome…

si fueris Romae, Romano vivitomore; si fueris alibi, vivito sicut ibi*

My last post asked: how can the perception of HR’s function as being primarily about governance and compliance oversight be dealt with, in order to allow and encourage its role in maximizing the strategic impact of talent?

A key first step is to learn “the language of business” i.e. Finance. Why? Here’s a list from a book** I recommended a while back, outlining the benefits of financial literacy to HR:

  • Move HR from a Tactical to a Strategic Organization – be trusted with organization and talent development investment decisions.
  • Evaluate Your Company Critically – spot trends or problems and understand more of the stories behind the numbers.
  • Understand the Business – knowing how your company makes money is key to your HR strategy.
  • Understand the Bias in the Numbers – have the power to challenge, when called for, the assumptions made by the finance and accounting departments.
  • Form Relationships with Finance – help to align more the efforts of finance and HR for their mutual benefit.
  • Use Numbers and Financial Tools to Make and Analyze Decisions – improve your ability to make better investment choices regarding projects and programs.

It turns out that Trish McFarlane at HRRingleader is addressing this same step in an “HR 101” series on the Creative Chaos Consultant blog, devoted to what an HR professional really needs to know to be successful. There’s also a great article, “Do HR Managers Have the Skills They Need?” by the same authors of the book, which covers exactly the discussion Beth Carvin and I were having here. Namely, it isn’t all on HR’s head or senior management’s head to enable HR to have a positive impact on strategic use of talent, but a shared responsibility. Here are the factors they listed at the root of the problem:

  • Avoidance – HR folks not “dealing with it” and learning about the numbers (as  Josh Bersin and Naomi Bloom said at last month’s HR Technology 2009 Conference(r) Talent Management analyst panel and Naomi’s closing keynote).
  • Perception – Even when HR professionals do know the numbers, the business side still retains the outdated notion that they don’t.
  • Assumptions – Exhibited when companies don’t encourage their employees to be on the earnings call, for instance, because “it’s too complicated” and “they wouldn’t understand.”
  • Trust – A common theme repeated in this blog. In this case, not sharing financial data with employees because you don’t trust them results in people having nothing real to learn from or apply their learning to. Maybe that was the intended effect.

Note that some of the last two issues are not limited to HR, but can be universally applied to all company managers and employees. In fact, there is another article, “The Dismal Financial IQ of US Managers” that covers this pervasive problem and its consequences in more detail. Even though the authors have a vested interest in pointing out these problems (they have a couple of books and a consultancy that address them), the impact is unmistakable.

*”If you are in Rome, live in the Roman way, if you are elsewhere, live as they do there”

– attributed to St. Ambrose (from Wiktionary)

**Financial Intelligence for HR Professionals: What You Really Need to Know About the Numbers by Karen Berman, Joe Knight, and John Case. Despite the drab title, this book is actually quite fun to read (really!) and does not take very long to read (a few hours.) It’s written in a friendly style that comes right out and tells the HR reader which things matter, how they matter, and which things really aren’t as crucial to know so you don’t get distracted by them. Each section is loaded with examples from recent history (especially scandals) linking HR areas of responsibility to financial problems for companies.

Photo by pdbreen

7 Responses to “HR: Why Increase Your Financial Intelligence?”

  1. Nice post, Mark and I appreciate you not jumping to the tired (and incorrect) conclusion that everyone in HR is financially illiterate.

    Though I haven’t read Berman et al’s book Financial Intelligence for HR Professionals, I applaud them if they are able to clearly and accurately delineate which aspects of financial management HR needs to be fluent in versus the areas they need the basics on versus the areas they can leave to the accounting and finance department. Many people speak out about HR becoming more financially literate but they fail to explain which financial areas are relevant.

    I think you are right that financial understanding can help gain biz cred with exec management. But it’s only half the battle. The HR leaders who have the credibility and respect are the ones who can confidently speak to how the people issues of each and every business initiative impact the business. This includes the ability to weigh the pros and cons and the relative risks of each action (or inaction). It’s being able to apply judgment as to how each action will ultimately impact the $$$ of the company. It’s laying out an opinion on which (people related) risks are worth taking and which risks are not worth taking.

    So I think I’ll say that HR people do not need to be accounting experts. We have people in the organization for that. HR people need to be business people and attention to the financial component is certainly a critical component to that.

    Do you agree?

    • I absolutely agree! Just like the folks in Finance don’t have to understand every detail of Marketing, Production, etc. so it is that HR does not have to have know every single aspect of Finance.

      I like your highlighting of HR leaders’ knowledge of how people issues of each and every business initiative impact the business. And vice-versa as well – one can’t help but wonder if more dialog between HR and the rest of the business might have averted at least some of the tragic occurrences recently reported at a European communications company. Was what happened a consequence of over-emphasis on financial measures at the cost of understanding the human impact, and was that in turn a result of breakdown in communication from not speaking the same language? You have to figure that there was never ill intent, nor was it that people didn’t care, but that is usually the case in these kinds of tragedies. Instead, it’s that people “just didn’t realize” the impact of the decisions.

      I want to follow up in another post two terms you just brought up that I feel are often misunderstood and under-appreciated in regards to HR’s impact on business: risk and judgment. I am really glad you introduced them into the discussion!

      • Right on, Mark. More dialogue and inclusion of HR in all business decisions is what happens when you have high caliber HR leaders and smart Senior execs.

        If you are interested in risk and judgment in HR you might want to take a look at an article I wrote back in 2004 on this topic. It’s a little outdated but still somewhat relevant.

        It’s called “A Balanced Approach to Human Resources” and is located in the Library on Nobscot Corporation’s website:
        http://www.nobscot.com/library/balanced-approach-to-hr.cfm

        Thanks for the great discussion.

  2. just 1 word. great discuss.

  3. Oh – I am so all over this! I have seen HR leave lots of money on the table because they couldn’t communicate well enough to corporate finance and the other buiness units the value of their services. It’s no wonder HR is not taken very seriously as a business partner!

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