Sunday, 24 October 2010

New Assumptions about Strategic HRM?

I attended the Strategic Management Society annual Conference in Rome where I went to find out about what strategy academics have to say about HRM as a source of value creation.  And I’m pleased that I went if only to confirm what I’ve said in other blogs about the search for new business paradigms. Like many of the other management scholars, strategy academics have fallen out of love with business and with some of their most treasured assumptions about shareholder value.  This was evidenced by two new special interest groups that have formed in the Strategic Management Society on human capital and on stakeholder theory.

The opening plenary session given by some of the most prominent strategy academics  - Jay Barney, Russ Coff, Ed Freeman and … - raised lots of questions and some answers on the topic of ‘where strategic thinking in business needs to go’.  Jay Barney, the man most associated with what has become one of the most discussed ideas among management academics – the resource-based view of strategy (RBV) – outlined some of the assumptions/ predictions it has made with respect to human capital.   One of the most important is that firm-specific, as distinct from general (or transferable), human capital is a potentially great source of competitive advantage because it can be valuable, rare and inimitable.  This is why firms seek to engage employees to secure their identification and willingness to ‘go the extra mile’.   It also explains why firms are much more eager to train employee in the routines, processes, and ways of ‘doing things around  here’ and much less eager to give them a more general education, such as an MBA, which  they can use for their own advantage and for the advantage of other firms.  This last point, however, highlights a problem for the RBV: rational employees recognise that they do not benefit as much as firms from investing in their own firm-specific human because of what is called asymmetric power relations.  Basically, this refers to the lack of power and knowledge of individuals in relation to firms.  Thus, we are left with a distribution problem:  after all costs are paid, who should benefit from residual profits and how should this residual amount be shared?

The traditional answer, which has underpinned strategic management theory and corporate governance since the 1980s, is the normative theory of shareholder value.   Employees are paid a wage for their investment in general human capital in the firm and may gain in some of share ownership if they in invest in firm-specific human capital, but the shareholders have sole ownership rights and thus the only legitimate claim on residual profits.  Firms in the 1990s did try to limit their investment in firm-specific human capital by retrenching into employment contracts that were largely transactional rather than relational – the so called ‘employability contract’.  This, more or less stated that firms were unable or unwilling to guarantee the old style contract based on job security and firm-specific careers, but were willing to help employees develop skills (general human capital) that they could use to make them more employable in the future in return for their temporary demonstration of high commitment.  However, such psychological contracts have not proven successful, especially in attracting and engaging knowledge workers and senior managers, who often have high levels of general human capital and are capable of bargaining away much of the residual profits that would normally accrue to shareholders.  This is best exemplified by the case of premier league professional footballers and many CEOs and other star employees (who are both unique and capable of adding high value).

Russ Coff suggested the answer lay in developing a different theory of strategic management, one that is based on stakeholder theory rather than shareholder value.  This was hardly revolutionary stuff, but was positioned as such by these eminent strategy academics.  It was left to Ed Freeman, who has a new book coming out on stakeholder theory, to put the argument for a different view of what might count as useful theorising about strategy and where it may need to go.  His time seems to have come, especially given the weakening position of the US in the global economy.

I’m still stunned, however, over how large the gulf is between assumptions made by American scholars and those made by their (particularly continental) European counterparts.  However, we should be grateful for small mercies.

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