Measuring People Management and Shareholder Value Creation Relationship. An Empirical Approach from Italian Firms

When you talk about Italian reality, you are talking about something of particular: you can find many small and medium size firms, but you can also find some large organizations facing new challenges to improve financial results. In later years being an Italian market player is not so easy for a firm - even if large and with a considerable production capacity – because market conditions not always allow to sustain long term competitive advantages. Moreover, is progressively considered and shared the shareholder value theory, that is based on two fundamental postulates: 1) the objective of management is to maximize the return for the shareholders; 2) stock markets give a value to the company's shares based on investor expectations regarding the present value of the cash flow, which will be generated by the firm itself. “Shareholder value is therefore defined as the difference between corporate value and debt, where corporate value is the sum of the future (or free) cash flows discounted at the WACC” (Black, Wright, Davies, 2001). The principles on which the creation of value for shareholders are based were already widely accepted in the United States and Great Britain beginning in the 1980s due to the existence of phenomena such as the defence from raiders, the crisis in the pension system, and the growing participation of institutional investors. Only subsequently did the convergence of other factors, such as globalization, the end of capital and foreign exchange controls, the growth of information technology, and the advent of the Euro as a single currency have played an important role in the growth of capital investment in Europe, thereby changing corporate culture and the role of managers (Pellicelli, 2007). “The move towards wider regional financial markets is something that is particularly apparent in Europe, facilitated by the euro as a common currency. Freed from the constrains of currency risk within the Euro-zone, the European investor is now starting to take a much close interest in what is going on next door.” (Young, O’Byrne, 2001). Following the acceptance of the principle that management must aim toward the production of shareholder value much has been written about the advantages and operating policies in order to obtain shareholder value (Rappaport, 1998; Hennel, Warner, 1998; Cornelius, Davies, 1997). In this context, starting in the 1990s, first in the Anglo-Saxon countries and only subsequently in Europe, the principles on which Value Based Management is based gained wide acceptance as a managerial approach that accepts as the main objective of firms the production of value for capital in terms of both dividends and capital gains. Said that, is important to discover what are the assets able to impact to the value creation. Literature and case studies show that human resources are considered a very important strategic lever in companies. So “managing people” in organizations doesn’t mean just managing and organizing workforce as the others costs, what’s more, the traditional corporate balance cannot account for the ethical values and other intangibles which are fundamental to the success of the enterprise in creating economic values. This shows the relevance of human capital and intangible assets (Bahra, 2001) in value creation decisions (Griliches, 1996) and the need for a strategic people development and management; we can talk about leadership and leadership development practices (Ulrich, Smallwood, 2001, 2004, 2005, 2007, 2008; Ulrich, Zenger, Smallwood, 1999; Tichy, 1998; Carter, Ulrich, Goldsmit, 2005) as succession plans, turnover management, training, firm board commitment, leadership brand. Thesis supporting the relationship between employee development and responsibility and productivity improvement, employees commitment and financial performances now have more importance, but not only; the impact of the most advanced ways for managing people take companies to very positive long terms results. This can confirm that leadership development practices need to be integrated in workplaces to take real advantages as a major productivity creation and, in consequence, a major shareholder value creation (Rappaport, 2006). Definitively, a calibrated grade of turnover, a correct allocation of financial resources for internal training, appropriate methods to make every employee feel himself as a part of a the company he/she works for are important factors impacting on value creation. Most of researches studies have shown that the human factor makes organizations able to face markets in which they are competing and the competitive advantage has been the most important factor in changing the labour market and the people management (Pfeffer, 1999; Caudron, 2004; Armstrong, 2006; Kaplan, Norton 2004). For instance, Jac Fitz-Enz (2001), pioneer of human capital impact valuation, gave the bases for empiric support of theories that claim how workforce is strategic to obtain great financial results. In other words, organizations can measure and maximize the value of their investment in employees. Other researchers have demonstrated that companies with superior leadership development plans (Carter, Ulrich, Goldsmit, 2005) can create substantially more shareholder value than companies with average human capital practices and that great human capital practices prevail, regardless of the economy; the same key practices that are associated with higher value show up in bull, bear and flat markets. As result, one of the literature's most interesting topic is the relationship between human capital and shareholder value. The main purpose of this study is to gain additional insights into the nature of this relationship by examining empirically the relatively less explored areas. This work, following the main accepted theories, investigates the dynamics of shareholders' value creation (Alessandri, Robertson, Wright, 2008) related its main factors (Ullmann 1985; Canarellaa, Nourayi, 2008). Actually, the methodology adopts a composed set of variables used to evaluate this relationship within listed companies on the Italian stock market. The statistical universe is now (2008) composed of approximately 300 companies. In the first part of the paper, par. 1-3 (M. Pellicelli), we’ll present the shareholder value theory and the value based management principles in the European context. In particular we’ll analyse the significant results obtained by companies listed on the Italian stock market in terms of total shareholder return. In the second part of the paper, par. 4-6 (C. Casalegno), we’ll present leadership and leadership development theory and we’ll analyse the principal factors adopted by companies named above that have obtained the best shareholder value results. In the third part, par. 7-8 (E. Cerruti), we'll illustrate the methodology, the dataset characteristics used, as well as the variables set characteristics chosen and the research results adopted on the Italian stock market companies. At last we'll analyse in detail the level and the intensity of relationship between human capital and the dynamic of shareholder value creation.