Business leaders widely accept the idea that an organization’s workforce is an asset rather than just a business cost. 1 Yet in annual reports to shareholders and those routinely shared with directors, meaningful information about the workforce and how it is managed— “Human Capital Management” (HCM)—remains remarkably sparse.
This omission has not gone unnoticed. In recent years, there have been serious efforts to get HCM out of the reporting shadows. Some have emanated from the accounting world, and some from the environmental, social, and corporate governance (ESG) domain. In addition, various investor groups, whether they are government or private pension funds, shareholder activists, or responsible investment (RI) organizations, have been pressing hard to get more meaningful human capital reporting standards.
But the push for greater disclosure increasingly is emphasizing the economic value of better transparency about HCM for shareholders and the investment community. For example, in July 2017, the Human Capital Management Coalition filed a petition with the US Securities and Exchange Commission (SEC) to “require issuers to disclose information about their human capital management policies, practices, and performance.” 2 They argued that deeper and more comprehensive workforce information is required to enable investors to take proper account of HCM in firms when making investment choices. And in March 2019, the Investor Advisory Committee (IAC), an investor group that advises the SEC, recommended that the SEC require public companies to disclose information on HCM – such as workforce diversity, turnover and training, and employee safety and satisfaction.
Why focus on HCM now?
A staggering 73% of companies expect significant disruption according to Mercer’s 2019 Global Talent Trends Study. Rapid technological change, increased competitiveness, economic globalization, and generational and cultural shifts are shortening the life cycle of products and business designs for many businesses. Companies are obliged to adapt constantly now and in the future of work. It is often human capital that enables effective adaptation to these new realities, yet it is also at the greatest risk of sudden depreciation in the face of change. 3
The proliferation of workforce and business data combined with advances in workforce analytics make it possible for organizations to anticipate and address these issues and to manage their human capital in the more disciplined, quantitative way of the kind they bring to other assets.
Why should directors care about HCM?
A significant body of scholarly research has demonstrated strong empirical links between HCM and business performance, including shareholder value. To effectively manage risk and protect investments, directors should have a strong interest in learning more about how companies determine if they have secured the right workforce to achieve their business objectives and whether they are managing that workforce effectively. If business transformation is not supported by corresponding workforce transformation, short-term performance will likely decline, and shareholder value will be threatened. Human capital risks are often among the most severe threats to shareholder value. Directors need to know if and to what extent these risks exist and what is being done to address them.
A proposed approach
Because of the highly contextual nature of HCM, standardized workforce metrics such as voluntary turnover rates, supervisory spans of control and percent of pay “at risk” are problematic indicators of HCM effectiveness. As an alternative, we propose that human capital reporting provide information with which directors and investors can gauge whether the organization is securing the right workforce—the right mix of skills, capabilities, and experience—and whether it is managing that workforce in a way that drives productivity. Investors need to have some knowledge about the methods and processes used by company management to ensure human capital is being effectively managed as an asset.1
From the standpoint of workforce optimization, critical questions include:
- Does the organization have in place an explicit workforce strategy that defines the talent requirements necessary to achieve strategic goals as well as a set of mutually reinforcing management practices to ensure this talent is secured and productively managed?
- What kind of quantitative and qualitative information is management relying on to inform its workforce decisions, and how will it hold executives and line leaders accountable for results?
From the standpoint of human capital risk, key questions directors should pose include:
- On what methods and data sources does the workforce planning process rely to identify, measure, and address potential talent gaps?
- Does the organization have in place a plan to mitigate any risks identified?
In today’s economy, an organization’s human capital is indeed an asset, often the single largest and most important investment the organization makes. The effectiveness with which that asset is assembled and managed is central to creating value for shareholders and mitigating significant business risks. Careful attention to decisions about HCM, therefore, becomes a critical part of good board governance now and in the future of work.
The information commonly available to directors is often inadequate for them to fulfill this duty. Advanced workforce analytics and easily accessible workforce data are enabling the flowering of workforce management as an asset management discipline. As such, there is no longer an excuse for organizations to keep their directors and investors in the dark about the people side of operations.
1Haig R. Nalbantian, “When it Comes to Human Capital Reporting, Mum’s Still the Word,” Risk & Compliance Magazine. Financier Worldwide Ltd., October-December, 2016.
2“Rule-Making Petition to Require Issuers to Disclose Information About Their Human Capital Management Policies, Practices and Performance,” SEC File Number 4-711, July 6, 2017.
3Haig R. Nalbantian, “Human Capital: Risk vs. Uncertainty,” CFO Magazine, October 5, 2017.
This article is an excerpt from the NACD book “Governance Challenges 2018: Board-Shareholder Engagement in the new Investor Environment” (see Chapter Human Capital Management and Reporting: Key Considerations for Institutional Investors and Directors.” (1515 N. Courthouse Road, Suite 1200 Arlington VA 22201, Phone 571-367-3700, NACDonline.org)