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Should Companies Expand Their Disclosure on Human Capital?

Updated: Jul 5, 2018

Yes.


As a former CFO with 20 years of corporate experience in some of the most admired companies in the world, I fully understand the significance of ‘additional’ reporting, adding to ever increasing responsibilities and workload for CFOs and accounting. However, since when was level of workload/responsibility the litmus test for what should or should not be reported? Why do some publicly traded organizations report a bare minimum of information to comply with compliance requirements and others report significantly more?


The true standard is materiality. Is human capital material to historical and future organization success? Given that CEOs frequently state people, (i.e. talent, human capital), as their most valuable asset and source of competitive advantage, it would seem so. On the point of materiality, the investment community, Boards of Directors, CEOs and governments do seem to agree. There is also significant evidence supported by research showing the significance (i.e. materiality) of human capital upon financial performance. Representing an investor perspective, the National Association of Pension Funds (NAPF) for the United Kingdom states, “The people who constitute a company’s workforce are in many cases a firm’s most valuable asset – indeed this view is ascribed to regularly by many companies. However, all too commonly they are viewed and reported as a cost.”


Have CFOs ever thought of the fact that people are the only company investment capable of self-improvement. Or that the self-improvement can be continuous over decades?


The question of reporting for human capital logically moves from why to what and how. This leads to arguments against human capital reporting first off, as to what should be reported. If the value and impact of human capital is difficult or impossible to measure then how can it be reported? Second even if some aspects of human capital can be measured, how should it be reported since there standards are lacking as to format, metrics and meaning, either in accounting or HR.


However, What if human capital could be valued and its contribution quantified in the form of productivity or return? What if that return on human capital could be definitively linked to business results as a powerful predictor of management excellence and future success? While some aspects of human capital are hard to measure, other dimensions are readily measured and if the right metrics are combined in a thoughtful, logical flow, a story and powerful insights emerge. (See Human Capital Disclosure Statement white paper, HCMI 2015)

Simply put here is why disclosure of human capital matters:

  • Companies need smart, effective employees to compete, so understanding and quantifying human capital is key to success and growth for all organizations.

  • With almost no visibility into a typical firm’s single largest expense, investors must rely on historical performance and management’s qualitative discussion only. Firms need to provide and justify statements regarding talent quality, training, productivity, succession, career growth, effectiveness, engagement, and retention beyond cost.

  • A lack of disclosure obscures talent management effectiveness and material human capital risks to investors. Organizations have a fiduciary duty to communicate existing and potential future risks deemed material to the business. Human Capital is clearly material, therefore a responsibility exists to provide greater reporting.

  • What gets measured gets managed. For most organizations, human capital is not well measured except as a cost. This suggests unbalanced reporting with only the cost side of the equation represented and the value-add investment side missing.

Arguments can be made that without standards and securities commission mandates that the market is not yet ready for such reporting and disclosure. However, who can possibly argue with the validity of having better workforce intelligence?


Regardless of internal vs. external reporting use, since when is not knowing better than knowing? While many CEOs say that their organization has the best talent in its industry how do they know? How do they measure it?


Finally, here is a list of questions every CEO should be prepared to answer. Why?

Because institutional investors are starting to ask them.

  1. What is your workforce productivity? How does it rank? Is it improving?

  2. Are leaders effectively managing human capital? What metrics in use measure this?

  3. Is the organization building, buying or renting critical and core talent?

  4. What percent of open positions are filled internally? What about management roles?

  5. What is the marginal return of one dollar invested in workforce?

  6. What is our Total Cost of Workforce? Is it growing faster than revenue?

  7. If talent is critical, is the training budget adequate to support the business strategy?

  8. What is the regrettable turnover rate? Why is talent leaving?

  9. Is the workforce highly engaged? Is engagement increasing?

  10. If you state “we have the best talent in the industry,” how do you know?