Human Capital Disclosures: How HRDs can stay ahead of the curve
Human capital reporting has become an increasingly hot topic for businesses and regulators across the globe.
This follows a petition by the Human Capital Management Coalition (HCM Coalition) to the US Securities and Exchange Commission (SEC) in July 2017, calling for regulatory intervention to force businesses to disclose more in-depth information about how they manage their staff.
The HCM Coalition, which comprises institutional investors with $2.8tn worth of assets, wants all investors - irrespective of size - to have greater access to human capital information. In turn, this would help them assess a company’s performance, the potential risks it faces and its prospects.
This information should, the Coalition suggests, range from how a company approaches its workforce demographics and workforce stability to its regard for human rights.
Redefining the value of human capital
The Coalition’s letter paved the way for a much-needed dialogue about the need to redefine value in the context of company performance, and the importance of human capital as a value driver.
As Jay Clayton, chairman of the SEC, said in his remarks to the SEC investor advisory committee in March 2019: “…the historical approach of disclosing only the costs of compensation and benefits often is not enough to fully understand the value and impact of human capital on the performance and future prospects of an organisation.”
Silvia Hernandez, partner at EY People Advisory Services, agrees: “In the last 100 years, manufacturing - producing goods - was the key source of creating value, and so capital and assets were driving how we think about value, and that’s how the financial markets work. With the advent of the knowledge economy, value drivers within a corporation are rapidly changing.
“The fact is that things like brand, culture, intellectual capital and brand awareness increasingly define value. The traditional reporting metrics that we use to understand how companies create value were not designed to measure them. This lack of understanding is fuelling an investment disconnect. To retain control of their equity story – organisations should consider how to include these elements in their narrative and clearly communicate those to their stakeholder community.”
With the advent of the knowledge economy, value drivers within a corporation are rapidly changing
The urgency with which organisations must understand the role of such non-financial assets in driving business performance is clear, in light of the Global Intangible Finance Tracker’s estimation that a company’s intangible assets (including, for example, human capital and culture), are now estimated to comprise on average 52 per cent of a company’s market value. But there is a long way to go.
Human capital reporting is patchy at best
EY research into the current range of human capital disclosures among Fortune 100 companies reveals inconsistencies in reporting.
For example, only half (50 per cent) of Fortune 100 companies voluntarily make workforce diversity disclosures, and just 22 per cent of companies report on workforce health and safety and workforce stability, respectively, according to the report, How and why human capital disclosures are evolving by the EY Center for Board Matters.
Challenges with disclosures
But the challenges involved in disclosing more granular information around human capital reporting may help to explain the current disparity in reporting. For example, companies’ time and resources are scarce.
Ensuring the accuracy of disclosures is also a concern. Toyin Ogun, chief human resources officer at supply chain management business, HAVI, believes the biggest challenge lies in ensuring there is clean data, so that the reporting and disclosures represent an accurate picture of the organisation.
The biggest challenge lies in ensuring there is clean data, so that the reporting and disclosures represent an accurate picture of the organisation
Further, Mr Ogun suggests that it is critical to leverage technology to enable more effective organisational reporting. Doing so can improve the alignment on which human capital key performance indicators (KPIs) have a direct linkage to organisational performance.
Mr Ogun adds: “Creating a people analytics platform and practice to ensure we have this data at our fingertips, and more importantly provide insight into our people, has become a critical imperative.”
Six key performance indicators
The absence of standardised KPIs and appropriate vocabulary to support these is also a contributing factor in patchy reporting. Accordingly, EY has identified six human capital KPIs on which it believes organisations should report.
- Total rewards, compensation and pay equity
- Attraction, recruitment and turnover
- Organisational culture (including alignment with purpose, values and strategy)
- Training, learning and development
- Engagement, and health and wellbeing
- Composition and diversity
Hernandez says: “Businesses tend to focus on gender diversity (inherent diversity), but they could – in addition - connect other dimensions of diversity (acquired diversity). For example, how many people in [their] company have worked in different industries and come from different companies? How many of them speak a different language, [and] how many of them have been exposed to different cultures?”
Hernandez adds that organisations should consider the extent to which they optimise their ability to mix their human capital (for example, employees with differing and complementary skill sets and experience) to achieve better outcomes.
Meanwhile, as we think about health and wellbeing, organisations could integrate the role of stress and sleep deprivation as part of their disclosures around health and both mental and physical wellbeing.
Organisations should consider the extent to which they optimise their ability to mix their human capital to achieve better outcomes
Together with other metrics, these could lead to establishing a consistent baseline across the global organisation to enable enhanced business performance.
Start with a board level conversation
Human resource directors (HRDs) can help their organisations to consider their approach to human capital reporting by initiating conversations at board level about their business strategy, their people strategy, their corporate values, and the extent to which there is alignment between all three.
This should be done in the context of a commitment to corporate social responsibility, which requires a shift in leaders’ mindsets, from focusing on short-term profiteering to long-term value creation, says Hernandez.
For example, organisations considering job cuts need to consider the long-term impact of these cuts to local communities, the career prospects for the employees involved and the implications for reputational damage to their business.
Hernandez says: “HRDs could frame this decision around very simple questions, [such as] what is our legacy going to be?”
Hernandez considers culture as vital to a company’s long-term success and says that organisations should be intentional about defining it. “If we can get key [business] leaders to think differently about how they view their workforce, then we can find a much better story about how businesses can thrive, and a much better story for society overall,’ she says.
“We need to help organisations understand that there’s a bigger game to play than boosting the short-term performance of their business.”