Is 2021 the Next Y2K for the World’s CEOs?

By Dr. Ron McKinley and Lee S. Webster 

 

Sixty ISO standards now include new Annex SL people management requirements that 80% or more organizations would not meet if thoroughly audited now. Companies were given time to adapt to these major new requirements, but that time is running out, say the authors. 
 

Before the year 2000, CEOs worldwide faced the risk of the “Millennial Bug” that threatened to shut down millions of computers. By 2021, CEOs at about 2 million companies will face another ominous deadline: the risk of losing any one of 60 ISO (International Organization of Standardization) certifications many depend upon to do business. 

 

What changes do CEOs at these companies have to make? Well, they need to prioritize a strategic and tactical plan to engage all their people in the success of the enterprise…and the new requirements had to be extended to give CEOs time to comply because it’s not as easy as it sounds. 

 

Executives at public companies, take heed: your turn is next. 

 

Why did ISO add such fundamental new requirements for people management to all 60 of its management standards, including the widely followed ISO 9001 quality standards? In the late 2000s, after about 20 years of successful implementation, ISO experts noticed that many performance improvement efforts had stalled. Upon investigation, they identified the reason: the standards overlooked the importance of people. So in 2015, ISO published new Quality Management Principles addressing stakeholder engagement, a new set of ISO 10018 people management standards and, most significantly, it issued new standards known as Annex SL which specifically require CEOs at organizations with any of 60 ISO certifications to develop and lead a formal, systematic human capital strategy to engage all stakeholders in organizational goals. By stakeholders, ISO means an organization’s customers, employees, distribution partners, suppliers, communities, investors, regulators, etc. 

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Under the new Annex SL requirements, CEOs have two options: comply or relinquish their ISO certifications. Significant research supports the basis for these new requirements:

 

• Gallup puts the cost of employee disengagement in the U.S. at about $350 billion year. 

• Despite about $1 trillion spent annually on safety training and other precautions, over 12 workers and 800 hospital patients die each day of accidental deaths—far more than from opioids—often because workers aren’t engaged. 

 

• Two major studies published in the Harvard Business Review in 2005 and 2008 identified a clear financial connection between employee and customer engagement and profitability. 

• A study of the publicly-held “Best Companies to Work for” by London Business School Professor Alex Edmans found that these companies outperformed the stock market average by about 3% per year over 28 years. 

 

• The Engaged Company Stock Index of companies with engaged customers and employees and low litigation rates has outperformed the S&P 500 by more than 40 percentage points in nearly six years. 

 

Poor people management takes a personal toll as well:

 

• About 70% of employees are disengaged, according to Gallup, despite at least $100 billion spent each year on human resources, motivational speakers, etc.—and the levels haven’t changed in two decades.

• Three-quarters of employees experience Sunday night blues, a Monster survey found.

 

• The satisfaction of the American consumer remains stuck at about 75%: where it was in 1994, despite annual U.S. marketing expenditures in the hundreds of millions of dollars.

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The purpose of the ISO standards is to address the significant opportunities to create new wealth and better experiences for employees, consumers and society, as well as the equally promising possibility to address the financial and human toll of failing to do so. Because of the Annex SL requirements, CEOs at about 2 million ISO-certified companies will now have to create and annually disclose a formal people management strategy. 

 

To address the issue of people management, ISO applied the same logic that helped transform quality: the application of a strategic, systematic and proactive approach, rather than the reactive, ad hoc strategy applied in the 1980s in the U.S., before the application of ISO 9000 Quality Management standards and systems used by the Japanese to become global leaders in customer satisfaction. 

 

What is missing at most organizations, and what is now required in ISO, is a similar CEO-led strategic and tactical approach to the management of all human capital. While no one knows how many organizations would qualify today, according to Gallup, only 22% of employees believe their organization’s CEO has a vision for the organization, and 60% don’t know what their organization stands for. A recent study by Temkin Group found that only 40% of companies have any kind of human capital plan and only about 20% meet the company’s definition of a “mature” approach. This suggests that many ISO-certified and public companies have some catching up to do. 

The pressure is also mounting on public companies:

 

• In 2013, the Human Capital Management coalition of about 25 pension funds with $2.6 trillion in capital was formed to draw attention to the importance of human capital. It drafted a set of disclosures that require the companies its members invest in to disclose information about their human capital practices and statistics demonstrating the levels of customer and employee engagement and well-being, including turnover and employee accident rates. 

• In early 2017, Larry Fink, CEO of BlackRock, which manages close to $10 trillion in assets, made news when he wrote that: “in order to fully reap the benefits of a changing economy, and sustain growth over the long-term, businesses will need to increase the earnings potential of the workers who drive returns, helping the employee who once operated a machine learn to program it…When BlackRock does not see progress despite ongoing engagement…we do not hesitate to exercise our right to vote against incumbent directors…” 

• Later in 2017, CalPERs, the largest U.S. pension fund, urged the SEC in a petition to require new disclosures by public companies: “Enhanced human capital disclosures are…critical to an investor’s ability to promote governance, transparency, and board accountability in the effective management of human capital. Research shows there is a correlation between investing in people—their compensation, training, health and safety—and shareholder return.” Thirty-five leading pension funds, including the Human Capital Management coalition, investment companies and academics supported the petition; none opposed new human capital disclosure requirements.

• Commenting on the petition, Richard A. Bennett, CEO and President, and Nell Minow, Vice Chair, of Value Edge Advisors, wrote, “Accounting principles no longer reflect true organizational assets. The inability of an organization to provide key human capital data is, in and of itself, a red flag.” 

• “Poor human capital management carries substantial risks to employee engagement, innovation, supply management, and reputation, as well as to customer and talent recruitment and retention,” wrote Kathy Seabrook, Chairperson of the Center for Safety and Health Sustainability.

• A recent study finds that 71% of active individual investors are interested in companies focused on people and sustainability, and about 65% believe sustainable investing will become more important; Millennials and women lead the charge. 

• A JUST Company Exchange-Traded Fund launched by Goldman Sachs focused on companies that invest in people raised a near record $215 billion on its first day of trading earlier this year.

• Recognizing the overlooked importance of human capital, 200 leading multinationals have created the Social and Human Capital Coalition to create voluntary disclosure standards and promote effective practices. 

To those CEOs hoping this goes away, forget it. The failure to have a strategic plan in your organization for the management of people is the equivalent of overlooking an important new wealth creation process that offers rewards to all stakeholders and society. 

 

About the Authors 

Dr. Ron McKinley, Vice President and Chief Standards Officer, Healthcare Management Institute at the University of Texas Medical Branch, and Chair of ISO Technical Committees 260 - Human Resource Management and 304 - Healthcare Organization Management.

Lee S. Webster, Director, Standards Development, Healthcare Management Institute at the University of Texas Medical Branch, and Secretary of ISO Technical Committees 260 - Human Resource Management and 304 - Healthcare Organization Management.

 

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