The Coronavirus Ushers In The Human Capital Era

Human beings are remarkably resilient and highly adaptable creatures. It took a pandemic to make that plainly obvious

Consider how much – and how much we – have changed in the eight months since the World Health Organization declared the Covid-19 to be a pandemic. Governments and businesses began to take the virus seriously and issued shelter in place and work from home orders. In early March,  I proposed that the coronavirus pandemic would be a great catalyst for business transformation. It would, I predicted, accelerate the transition from an analog to a digital economy. I was right, yet I may have missed the mark when imagining how significant a catalyst it would be and the opportunity that might present.  In truth, the coronavirus didn’t just accelerate change; it launched a business revolution, one that suggest that investing in human capital just might be our most prudent bet on long term value creation.

Coronavirus Has Triggered a Transformation

In my prior work advising higher education presidents and provosts, I often heard that certain classes and, more specifically, certain instructors would “never teach online”.  Yet, in just two weeks, schools at every level developed distance learning programs. When I advised senior business leaders, I regularly heard that leaders were uncomfortable with the idea of managing remote teams. Now, when I talk to those same leaders, they tell me that they are surprised at how well work from home is going for them.

None of these situations is ideal, mind you, but they show our tremendous capacity to adapt. They demonstrate our seemingly limitless ability to become even more human in the face of profound challenges. Schools and businesses adapted to learning and working from home, while companies globally pivoted product lines, altered process, and reinvented entire businesses. We radically transformed how we work, where we work, and what we do.

Even as many people long for the “normalcy” that was our pre-pandemic lives, the truth is that we have learned far too much from this forced social experiment to “go back” to the way things were. We may not yet know what the next new normal will look like, but it is clear that we can’t go back. Telepresence- from healthcare delivery to distance learning to remote work - is here to stay. Companies and leaders that have built remote work on a foundation of trust and transparency are proving to be far more resilient and much more able to adapt at the new speed of business.

In fact, as businesses adjusted to the demands of pandemic-driven operational changes in the eight weeks from mid-March through mid-May, we fast-forwarded the advance toward digital transformation by five years, according to McKinsey researchers.   Similarly, the CEO of Accenture, noting the rapid changes sparked in response to the pandemic, recently stated “Today we are 20% in the cloud. We are moving to 80% [and] instead of happening in a decade, it is going to happen in five years.”

In this blur of fast-moving transformation, it would be easy to chart the adoption of technology, tools, and services, while missing the more significant business evolution, so let’s make it clear: Digital transformation is, at its core, human transformation. No matter how sophisticated they become, tools need humans, and as new tools have become necessary, we humans have adapted rapidly. So much so, in fact, that it is fair to say that we are entering a new economic era, the Human Capital Era.

Beyond Reskilling: The Human Capital Era

In the Human Capital Era (HCE), investing in human potential is the most valuable form of capital, and it is much, much more than an investment in workforce training and reskilling. In fact, it is not an investment in reskilling, at all.  Reskilling demands that we know the precise skills and knowledge that need to be download into humans to update our workforce. The world is simply moving too fast for this codify-and-transfer model of training to be sufficient at this velocity.

Certainly, reskilling is necessary, but just like software updates for our technology, reskilling will be a way of life. We need to go beyond reskilling to invest in the learning and experiences that unleash human potential beyond the edge of known knowledge. In the HCE, a company will learn together faster than an individual can learn alone so that the workers develop the capacity to create value for customers even before the customer knows they need it or want it. Autodesk’s Mickey McManus puts it better than I could: “Humans are what we call passionate, but passionate is such a weak word. Humans can’t help themselves. Humans riff on stuff. Humans putter and create. They can’t be stopped.” It is for this reason we need to move past playing catch up with reskilling to make deeper investments in humans so we may explore beyond our current frontier.

I’ve used this graphic for more than five years to explain the need to shift from one-time reskilling to continuous learning. Now, the need for that shift has become critical.

The Human Capital Era Supplants the Shareholder Value Era

The Human Capital Era follows the Shareholder Value Era, a near-fifty-year period that focused the work of a company on delivering profits to shareholders, as famously pronounced by economist Milton Friedman in 1970. And while this period did, in fact, deliver out-sized returns for investors, it resulted in declining return on assets (ROA, or the real value created by investment) according to research by Deloitte’s Shift Index. The myopic focus on profits led to the highest levels of income inequality since the Great Depression (Pew Research). In that same time, social mobility declined by half, according the Harvard economist Raj Chetty. In simple terms, this means we stopped creating new high earning taxpayers (social mobility) and we seeded fewer consumers to drive our economy (income inequality). The long-term consequences of this stagnation are just beginning to impact us.

The Shareholder Value Era relied on scalable efficiency, a term Deloitte’s Hagel coined to describe a company’s focus on reducing risk and uncertainty to scale. “The focus on cutting costs and becoming more efficient at scale, ironically, became less and less efficient over time,” Hagel told me recently. The Shareholder Value Era was a zero-sum game that, for too many, drove to zero. Even with the efficiencies brought about by the use of technology to replace human workers and technology platforms that reduced employee costs by shifting work to contract gig workers, we have run the Shareholder Value Era to the end.

In the Human Capital Era, however, workers truly become an asset to be nurtured rather than an expense to manage. Creating customer value is the goal and investor return is the byproduct. Remember that adage, “The company’s greatest asset walks out the door each evening”? It was a nice idea, but too often, in the era of shareholder value, companies would just as soon usher employees out the door than retrain them for new and necessary work. Now, in the Human Capital Era, business leaders can now repeat that adage with a straight face.

“Rather than laying people off as their work gets taken over by technology,” Hagel told me, “companies need to focus on human capital and redefine  the work of the workers so they are focused on addressing unseen problems and opportunities to create more value. This requires shifting the focus from ’re-skilling’ to cultivating enduring human capabilities like curiosity, imagination, creativity and emotional intelligence - but it's all about creating environments that help workers to learn faster.”

In this scenario, return on assets begins to grow again because the focus of a company becomes actual growth and value creation rather than value extraction that marked the Shareholder Value Era. In August 2019, the Business Roundtable, an association of CEOs of America’s leading companies, turned away from Milton Friedman’s economic view. The purpose of a company, the Business Roundtable wrote, must be greater simply generating profits for shareholders. Instead, the goal must be “promoting an economy that serves all”.  To achieve that goal, then, companies must prioritize human capital as their greatest asset and most valued capital.

Human Capital Era Takes the Long View

Currently, though, we are too often leading our companies as if we were driving a car while looking in the rear-view mirror. That’s a pretty dangerous stunt at slow speeds; when velocity accelerates, driving with a backward view becomes homicidal.  Today, we are driving at speed that make looking only over the hood dangerous. If we are to be successful leaders in the Human Capital Era, we have to fix our gaze far out on the horizon to meet customer needs today and investor needs tomorrow. Unlike in the Shareholder Value Era that put investors before customers, in this new era we will deliver value to our investors by focusing on our customers first. Only by looking beyond the hood will we develop the competence and capabilities to meet current opportunities, and – more prudently – make invest in employees to the expand our capacity to develop long term value for opportunities not yet known.

COVID-19 Forced the Issue

While the rapid transformations, the forced experiments in remote learning and work, are not ideal, they do provide a path forward to this new Human Capital Era. To cross into this new era, however, we need to continue on this path of transformation with a focus as intensely on people as on technology.  To achieve optimal value, let’s be clear: the Human Capital Era means all humans, and here we have a lot of work to do to remove the structural barriers that prevent us from unleashing the potential of more of us.

The Shareholder Value Era etched troublesome ideas and practices into our management operations, habits we will have to shatter if we are to thrive in the Human Capital Era. We need to break the habit of short term thinking that focused leadership on stock price, quarterly results, and annual bonuses. We desperately need to dismantle institutional oppressions that prevent every worker from expressing their full value. We will need to build better and stronger leadership skills to break the habit of scalable efficiency to embrace scalable learning and capacity building.

Over the coming weeks, I’ll dive into each of these ideas to provide a blueprint for business leaders navigating this challenging, yet essential transformation.

We have chased the shareholder value theory to its ugly end. The World Economic Forum recently predicted that the COVID-19 pandemic has accelerated our need for immediate re-skilling. Some 50% of the existing workforce will need to be retrained in the next four years. Among the top skills needed by 2025, the WEF suggests: analytical thinking, creativity, and leadership and social influence. These are skills developed over a lifetime.  They are investments in capacity building. Re-skilling will not be a one-time thing, but rather a continuous and increasing need necessary to satisfy today and tomorrow. To create long term value, we need to make deep investments in human capacity.

President John Kennedy famously said of the country’s space program,  “We choose to go to the moon not because it’s easy, but because it’s hard; because that goal will serve to organize and measure the best of our energies and skills; because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one we intend to win.” .”

The Human Capital Era is a moonshot. The massive recalibration and investment in our workforce will, in fact, measure the “best of our energies”. It cannot be postponed.

The Human Capital Era is here.

Thank you to Chris Shipley for her invaluable insights and contributions to this article.

This article first appeared in Forbes.