2017-04-10

Material world: human capital disclosure matters

Jeff Higgins

It's really quite simple: Because human capital is material to a company's success, much information about people should be disclosed.


As a former CFO with 20 years of experience at some of the world’s most admired companies, I fully understand the significance of calls for companies to report yet more information, in light of the ever-increasing responsibilities and workload for CFOs and accounting. However, since when was workload and level of responsibilities the litmus test for what should or should not be reported?


The true standard should always be materiality. Is human capital material to historical and future organizational success? The investment community, boards of directors, many CEOs, and governments all seem to agree that it is. There is also a body of research showing the material significance of human capital on financial performance.


Given all of that, how many CFOs have considered that people are the only company investment capable of self-improvement? And that the self-improvement can be continuous over decades? Where there is such an awareness, questions around human capital reporting logically move from “why” to “what” and “how.” What should be measured and reported? That question is often met with an insistence that the value and impact of human capital is difficult or impossible to measure, so how can it be reported? If some aspects of human capital can be measured, how should they be reported? That question may draw another negative response: there are no real standards within either the HR or accounting worlds as to the format, metrics, and meaning of such reporting.


However, what if human capital actually could be valued and its contribution quantified in the form of productivity or return? What if that return could be definitively linked to business results as a powerful predictor of management excellence and future success? The fact is, while some aspects of human capital are indeed hard to measure, others are readily measured. And if the right metrics are combined in a thoughtful, logical flow, a story and powerful insights emerge.


Simply put, here is why disclosure of human capital metrics matters:

  • Companies need smart, effective employees to compete, so understanding and quantifying human capital is key to success and growth.
  • With almost no visibility into a typical firm’s single largest expense, investors must rely only on historical performance and management’s qualitative discussion. Beyond cost, companies should provide and justify statements regarding talent quality, training, productivity, succession, career growth, effectiveness, engagement, and retention beyond cost.
  • A lack of disclosure obscures investors’ view of talent management effectiveness and material human capital risks. Companies have a fiduciary duty to communicate existing and potential future risks deemed material to the business.
  • What gets measured gets managed. For most organizations, human capital is not well measured except as a cost. This creates unbalanced, with the cost side of the equation represented and the value-add investment side missing.


Arguments can be made that without standards and regulatory mandates, the market is not yet ready for such reporting and disclosure. At the same time, who can possibly argue with the validity of having better workforce intelligence? Since when is not knowing better than knowing?

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 level? 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 percentage of open positions are filled internally? What about management roles?
  5. What is the marginal return of one dollar invested in the workforce?
  6. What is the “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?

Reprinted with the permission of Jeff Higgins, CEO of the Human Capital Management Institute, a driving force in workforce analytics helping companies transform data into intelligence and ROI via workforce planning and predictive analytics. He can be reached at jeff.higgins@hcminst.com

12/10/2021

How To Set New Year Goals and Stay On Track

Drake Editorial

The final month of the year offers an opportunity to reflect upon the year, including the challenges and achievements, and to ponder on the opportunities for the next 12 months. It is a time for setting goals and establishing New Year's Resolutions; and to drive performance and fulfillment in the new year. This article explores the concept of a New Year's Resolution, how to stay on track with your goals, and suggests strategies that you can implement to ensure you achieve your New Year's Resolution.

Read more

08/01/2022

Why can’t I get a job? Top tips for success in you...

Drake Editorial

Have you applied for multiple roles but never heard anything back? Job hunting can be frustrating at the best of times, but it can be downright disheartening when you are constantly being passed over for jobs. We give you the key steps you need to help you identify your soft skills and the steps you can take to make your application stand out. 

Read more

02/01/2021

Cutting to the Chase with Cover Letters - Career A...

Drake Editorial

If you think you don’t need to put much effort into writing cover letters—or don’t need to send them at all because nobody reads them—think again.

Read more

11/12/2021

Coping with Increasing Levels of Anxiety

Drake International

07/21/2021

7 Ways to remove bias from your recruitment proces...

Drake International

To ensure your recruitment process remains competitive in the modern business environment, a robust diversity strategy and stringent methodology is essential. Without a strong direction and framework in place, achieving meaningful workforce diversity and inclusion will remain a goal. 

Read more

01/21/2022

What Work Do You Really Want To Do In 2022?

Michelle McQuaid, Wellbeing Lab

As millions of workers around the world join The Great Resignation, the desire to throw in the towel for the potential of work that has more meaning, more flexibility, and more money has never looked more tempting. 

Read more