The Worri$ome Weight Of Wall Street

Does the pressure from stock analysts for manufacturers to "make the numbers" hinder workforce development? Yes and no. But publicly traded or not, companies cannot afford to ignore investing in their employees.

Conventional wisdom holds that Wall Street's short-term emphasis on achieving ever-increasing quarterly earnings hinders the development of a truly skilled U.S. manufacturing workforce, with some people claiming that privately held companies do a better job of training employees because they aren't subject to the Street's performance pressures. Unconventional wisdom questions private-company advantage, contends the Street isn't necessarily the big bad bogeyman, and posits that leadership, a focus on people, and workforce and market flexibility are really what determine competitive success.

Both views are right. The worrisome weight of Wall Street on creating and sustaining a competitive and motivated U.S. manufacturing workforce is both reality and myth. At some companies, it's a matter of degree. At others, it's more defining. More important, however, is that U.S. manufacturers ignore investing in a truly modern workforce at their peril -- even their very survival.

"Being employee-centric is going to be in the very near future a matter of survival," contends Joyce Gioia, president of the Herman Group, a Greensboro, N.C., firm focusing on workplace issues. Companies will "live or die based on their ability to attract and hold on to the good people they need to get the job done," Gioia insists.

"There is no question . . . that Wall Street is a part of the problem because its focus on this quarter's earnings," asserts Laurie Bassi, chair of Bassi Investments Inc., Bethesda, Md. Couple Wall Street pressures with the fact that investments in employee training must be accounted for and reported as costs, and the result is a "very bad combination," Bassi believes. "It's endemic to publicly traded firms. . . . Our analysis has shown clearly over the years that, holding all else constant, privately held firms make larger investments in the training of their people than do publicly traded firms," she states.

"We've had more success in talking with privately held organizations about moves that they need to take to hold on to their good people," relates the Herman Group's Gioia.

"It is certainly my impression that [both] public and private companies are incredibly bottom-line oriented right now, but public companies do have that additional pressure of shareholder and analyst expectations," says Don Kirkman, president and CEO of the Piedmont Triad Partnership, a 12-county regional economic development organization in Greensboro, N.C. "It is probably the case that public companies have essentially foregone . . . investments in workforce and machinery as a result of placing greater emphasis on short-term numbers."

Bowing To Analysts

Indeed, publicly held companies are under pressure to please investment analysts, says Peter Cappelli, a management professor at the University of Pennsylvania's Wharton School in Philadelphia. "The investment analysts have particular views about things they sort of like and things they don't like. And with respect to employment issues, they have, I think it's fair to say, a relatively simple view -- you might say a simplistic view, too -- about how things ought to be run. They believe in low costs."

Specifically, analysts tend to like companies that reduce the size of their workforces, outsource to such lower-labor-cost places as China and make other moves that "look cheap," says Cappelli.

The professor is hard-pressed to come up with a recent example of a public company CEO telling Wall Street the firm is going to be making significant investments in its people whether the analysts like it or not. And you "absolutely" won't hear a CEO saying an action is being taken because it's important to the employees despite its cost to the company, claims Cappelli. "The reason [the CEO] won't say it is because [he or she] will get sued," he says. "The shareholders will sue you, and you'll probably lose."

Nevertheless, there are publicly traded companies -- large and small -- investing in their workforces and improving their rates of return. Bassi turns to some research she and Daniel McMurrer, now chief research officer at Bassi Investments, a firm with funds invested in companies that make major investments in employee development, began when they worked for the American Society for Training and Development. Their work shows that companies making the largest investments in employee development between 1997 and 2001 had an annualized rate of return on invested capital of 16.3% compared with l0.7% for the S&P 500.

Applied Materials Inc., Dow Chemical Co. and General Electric Co. are large publicly traded firms that now "look more like privately held firms" in the size of the investments that make in their workforces, Bassi notes, figuring they are investing 3% or 4% or more of their payrolls. This trio also is among the approximately 35 companies in which her firm's funds make investments. (See Page 48 for the names of nine large companies on Bassi Investment's investment roster.)

"I hear good things about Kohler," a Wisconsin-based maker of kitchen and bath fixtures, adds Wharton's Cappelli.

Yet for manufacturers large and small, making investments in their workforces takes courage and commitment on the part of senior management. "The best way to get around this focus on short-run earnings is to resist it," stresses Bassi, and that "takes a gutsy CEO with the courage and commitment and a view beyond this quarter's earnings." It also takes some patience -- probably 12 to 18 months, she figures -- for companies to begin to see their investments in people pay off. "The more consciously and clearly you can articulate your strategy -- both to your board and to the analysts -- the less will be the ding that you take in the short run."

Meanwhile, Neal Verfuerth, president of Orion Energy Systems, a Plymouth, Wis., privately held manufacturer and marketer of energy-efficient lighting systems, disputes the notion that companies like his aren't subject to the same performance pressures that public companies face. "Although we're private, we still have 250 shareowners here at Orion. I have a board of directors. And most significantly [I have] myself. No one holds me to a higher expectation for performance than I do." The metrics Verfuerth focuses on include top-line sales and profitability. "We have very aggressive growth expectations in this company. Historically we have been doubling our sales every year, and we intend to do that for the next couple of years."

Creating and sustaining a competitive manufacturing workforce in such an environment is "not all that difficult," Orion's president claims. "Business is about people. It's not about process. It's about people, first and foremost." Business, he insists, is about treating employees -- Orion has 85 -- and customers fairly. Verfuerth specifically criticizes companies that start jettisoning plants and people at the first sign of a business downturn. They should be taking stock of their people and tools, looking at the market situation as a challenge, and asking what they can produce and sell to make their numbers. "Nobody knows better how to make or assemble this widget that we're making than the guy that does it every day. So I go and ask him," says Verfuerth.

Armand V. Feigenbaum, the originator of the manufacturing improvement process known as Total Quality Control and once an apprentice toolmaker, doubts that Wall Street pressures hinder the ability of public companies to invest in employee training and retraining. "I haven't seen any evidence it. And I get around quite a good deal," states Feigenbaum, the globally traveling president and CEO of General Systems Co. Inc., a Pittsfield, Mass.-based consulting firm.

Indeed, Feigenbaum says, it's hard for him to think of any manufacturing leader who, "for almost any reason," could be dissuaded from holding onto skilled workers in a world where, he believes, skill equates with flexibility. "While I am not as enamored as some are with the way the term lean has come to be stretched, the reality certainly is that skill today means flexibility and the ability to deal in various dimensions of the product or process you're likely to encounter," he says. "You have to have the flexibility to be responsive to a changing marketplace, and what that tends to mean is that you have to have a workforce with a comparable degree of flexibility." Feigenbaum deflects a question about whether the presence or the absence of a union in a plant affects flexibility, saying that what counts is the character of leadership. "I draw a distinction in this case between leadership and management," he says. "Leadership is setting the direction you need to go competitively. Management, some people believe, is making that happen once defined. And what we're talking about here is clearly leadership." The starting point, he says, is with a recognition of flexibility's importance among supervisors. "You can't have a suitably skilled workforce unless you have a suitably oriented-to-skill supervisory organization," he emphasizes.

A Worker's Perspective

Would John Fern, a 45-year-old Crystal, Minn., machine operator, and 40 of his laid-off colleagues still have their jobs if a year ago their publicly traded company had been making its numbers and had been profitable? Maybe.

What is clear, however, is what investing in employees means to Fern, who now cuts fiber optic cable for a new employer. "Most people in my situation were not going to go out and get any kind of extra training on their own," he recalls. However, if you get such training at work, "it's going to make you a more valued employee, it's going to make you feel that your job is more important, and it will also give you a feeling that you are growing with the company," Fern states. "If they do that, it speaks volumes about how they feel about you, too," he adds. "They're showing that they want to retain their workforce."

He contrasts that practice with manufacturers seemingly unconcerned with the long-term value of their production employees, where the practice is to get them on the job as fast as possible and then work on them to get their numbers up. "I think with a little training and bringing them [the employees] along slowly, in the long run you're going to have someone who's not only going to stick around, but [also] somebody who is good at their job and likes their job." Investing in your workers "makes for a better skilled employee, a more loyal employee, and once you have that your turnover rate is probably going to be low," says Fern.

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