Published on July 30, 2019
“Our people are our most important asset.” “Our success depends highly on our ability to attract and retain talent.” “Our workforce represents the diverse communities we operate in.” These boilerplate statements should be familiar to any investor who has consulted a corporate sustainability report, or even a Form 10-K. The contributions of an engaged, healthy, diverse, and skilled workforce to a company’s performance have been well-established. And with “intangible assets” representing a significant and growing portion of company valuations, one could be forgiven for wondering why a financially material area like human capital is not required in current corporate reporting.
So what makes human capital management (HCM) different from human resources management (HRM)? Although both terms seem to be used interchangeably, HCM is generally considered to be a more strategic way of viewing an organization’s people (vs. the traditional compliance function perception associated with HRM). HCM-minded organizations invest in people as assets, whose happiness and well-being are not only complementary, but essential, to corporate strategy.
The HCM umbrella includes areas like training and development; workforce diversity and demographics; employee health and safety; labor relations; pay and benefits; engagement and satisfaction; and supply chain labor standards. Essentially, how are companies positioning themselves to be an employer of choice in a low unemployment economy? Are they providing a work environment that fosters diversity and inclusion, internal advancement, and engagement? Do they extend the same commitments and protections, that their direct hires enjoy, to their contractual and supply chain workers? How are they measuring, evaluating, and improving their performance?
The scope and relevance of certain topics will vary by industry and business context, certainly. But as it stands, HCM data remain limited, sporadic, and inconsistently presented. Incredibly, in some of the reports I analyze, I’ll find much more information on employees’ charitable giving and volunteer activities than on the employees themselves.
The momentum behind better HCM reporting is already building among institutional investors. This past March, an Investor Advisory Committee voted to ask the SEC to review and consider the value of HCM disclosure in its framework. This follows on the heels of a rulemaking petition filed by the Human Capital Management Coalition in 2017. The Workforce Disclosure Initiative is an investor coalition representing more than $14 trillion in AUM whose annual survey aims to improve the quality of jobs in multinational companies’ operations and supply chains. SASB’s industry-specific standards and indicators are frequently referenced as a roadmap for building comparable HCM information.
In absence of mandatory reporting and widely-adopted, comparable indicators, investor-company dialogue on these issues becomes even more important. The beautiful thing about HCM, as a general engagement topic, is that it is agnostic to industry, geography, and market cap. Every company has some form of a workforce and set of challenges – and opportunities – related to it. Nearly all the companies we engage on behalf of our institutional investor clients tell us that the inability to attract and retain good people is very real business risk. And yet, very few have been able to provide satisfactory information on how they oversee and manage this risk. Continuous dialogue and questions on HCM can help push corporates to consider their unique human capital context more holistically and strategically.
It is understandable why companies would be hesitant – to put it lightly – to publicly share metrics like turnover, average hourly wages, and number of labor law violations. But without disclosure of key indicators or an ability to articulate how HCM is being prioritized at the board and management levels, companies cannot expect investors to take them at their boilerplate word.
In an environment of unequal wage growth, purpose-driven millennials, heightened employee activism, and technological impacts on the labor market, traditional HR management thinking is not enough. Institutional investors have an important role (and a fiduciary duty, many would argue) to engage companies on HCM and advance the marketplace towards better – perhaps even mandatory – disclosure on this important value driver.