By Stephanie Sharp

A friend of mine was looking at accepting an executive position at a high tech company and she asked me to look at the financials to see what I thought of the company.  After a couple of minutes, I said to her “How do you feel about working for a screamer?”

“What do you mean?” she said.

When I read financial statements, they tell me about the personality of the leader.  In this case, the financials told me that the CEO was the type to scream and rant and pound his fist on the desk.  How did I know this?  The numbers told me.

Financials measure the results of human behaviour within an organization. Decisions about buying, selling, hiring and firing. Financials also reflect changes to relationships between the organization and its stakeholders – customers, suppliers, shareholders and others.

You can use financials to determine how behaviour and relationships have changed over time and armed with that data, use them to predict the future. I call this “behaviour-based finance”.

As a human resource professional, you can use behaviour-based financial analysis to:

1. Improve hiring;
2. Assess and develop incentive systems;
3. Prepare business cases; and
4. Optimize restructuring initiatives.

And the best thing is that a behavioural approach to finance doesn’t require in-depth spreadsheets or complex mathematics because it is focused on reading financial data not producing it (let’s face it, that’s what your analysts, accountants and finance whiz-kids are doing!).

The key to successful analysis is a deep understanding of human behaviour. How and why people make decisions. What makes individuals and teams act the way they do. The critical elements that change relationships over time.

You already have those skills. Once you learn to read the financial “story”, your expertise and experience will propel you to a new level of understanding about what is driving financial results. Armed with that knowledge, your contribution to the design and success of initiatives and plans within the organization will increase substantially.

Let’s look at a few examples.

Hiring: Organizations often look to HR to recommend hiring practices and find the person that will best “fit” into the organization and produce the desired results. Using behaviour-based financial analysis you can look at a personality profile and determine the financial results that person will drive.

Incentives: Of course, individual behaviour can be modified through incentives. Traditionally, this has been done by implementing a “one size fits all” incentive system. Fact is, everyone is motivated by different factors. This is particularly evident in multi-generational organizations. To improve effectiveness of incentive systems, use financial statements to assess past behaviour patterns and develop targets to encourage better decision-making and risk-taking. (Hint: your incentive system should NEVER be based on achieving one number, such as “sales” or “profit”).

Business Cases: For major initiatives, business cases are often full of financial models, complete with assumptions that can go on for pages. Unfortunately, the model won’t drive the success or failure of the initiative! Only people can do that. As an HR professional, you should be reviewing and preparing business cases by looking at what the numbers are actually saying about how people will behave. Does it make any sense at all? Often initiatives fail because the business case has been based on mathematics, not people.

Restructuring: Change is stressful. And stress causes people to act differently than they would under normal conditions. This is the major reason that restructuring initiatives turn out to be less successful than management expects. When looking at the projected financial results of a restructuring initiative, the HR professional should be assessing whether the story reflects people under stress or whether it assumes that everyone is happy and joyful and fully productive.

Fact is, financial results are entirely driven by people – their day-to-day decisions, how they react to unforeseen events, their willingness to take risks and their ability to rely on other people (relationships). People are also driven by financial results. As a result, behaviour-based financial analysis is a critical tool for hiring, assessing and developing incentive systems, preparing business cases and organizational restructuring.

Oh, and about my friend? She took the job and called me 3 weeks later to report that the CEO had been in a meeting with some major investors and “completely lost it …screaming and pounding on the table to make his point like a two-year-old having a temper tantrum”.

How did I know? The financial statements told me.

Stephanie Sharp presented Finance for HR Practitioners – Where Finance Meets Reality in Burnaby in September 2009.  Stephanie has served as a lead financial advisor on over $10 billion worth of large financial transactions from RFP through contract negotiations. With her unique combination of investment banking, government and corporate experience, she is in demand providing workshops and seminars to corporations, associations and government to help them understand the crisis and restructure to take advantage of opportunities as they arise. Stephanie’s fast-paced, entertaining style makes even the most complex technical information understandable.

For more information on other sessions, please refer to BC HRMA’s online calendar.