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