How human capital reporting aids performance

“Toxic” organisational culture, poor people management and inadequate training are often contributing factors in corporate failures. Can better human capital management (HCM) make a difference?

According to a recent British report, “Human Capital Reporting: Investing for Sustainable Growth,” while the value of intangible assets such as human and intellectual capital has increased significantly in recent years, companies and investors have failed to recognise HCM’s importance in generating long-term value.

HCM’s value is demonstrated by estimates that in Britain alone, the value of intangible assets increased from 50 billion to 137 billion British pounds from 1990 to 2011, with intangible investment in 2015 expected to be 50 per cent higher than investment in tangible assets. In Australia, the nation’s intangible asset base was valued at around $250 billion in fiscal 2011, compared to $1,807 billion in total tangible assets.

Yet while some organisations present HCM-related data in their annual reports and sustainability reporting, the information is frequently under-reported by companies and misunderstood by investors.

According to the Chartered Institute of Management Accountants (CIMA), one of the “Valuing your Talent” (VyT) partners responsible for the report, its “Global Management Accounting Principles” provide a framework to value HCM, including through effective communication, joining the dots to provide the “big picture” and “practising stewardship to build trust.”

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Key HCM measures

Four key HCM metrics are recommended:

1. Total cost of workforce employed (including contingent labour)
2. Staff recruitment and turnover costs
3. Investment in training and development
4. Employee engagement survey scores.

Although VyT’s survey of the investment community found support for these metrics, it was seen unlikely to create a “virtuous circle in which a critical mass of investors sees the value in such metrics and communicates additional demand for better HCM reporting” since “a significant proportion of investors are blind to the importance and value of such data.”

Improving HCM reporting

The report suggests a number of ways in which the quality and frequency of HCM reporting could be improved.

Investors are urged to “build a bank of case studies” on HCM, ensuring that fund managers and others are aware of its importance. Asset owners should ensure that investment managers take HCM performance into consideration in their processes, along with investment consultants.

Investor education also could be improved to better evaluate HCM, while reporting companies should provide better data. Policymakers and government could also intervene to ensure more consistent HCM reporting, such as in the public sector, as well as considering voluntary reporting targets.

Does HCM drive better performance? At British leisure and auto products retailer Halfords, a push to improve staff recruitment, training and retention helped cut turnover from 21 per cent to 10 per cent, also raising staff engagement and its “Net Promoter Score”. This sparked a turnaround in same-stores sales growth, with its share price rising by a third.

For investors and organisations, improved HCM can deliver substantial value growth, as well as helping identify potential corporate disasters before they strike.