Does human capital matter to investors? A new research initiative.

Dr Raj Thamotheram, CEO of Preventable Surprises, argues in his analysis of the BP Deepwater Horizon disaster that long-term investors need to re-think how they understand and assess sustainability. He argues that this event was a ‘preventable surprise’ that could have been anticipated had attention been paid to readily available warning signs. He makes the case for better metrics and reporting with a focus on ‘lead’ rather than ‘lag’ indicators and calls out the need to focus on issues such as leadership and organisational culture and not just on technical solutions when assessing safety. This requires a focus on human capital management information and how this data is generated, analysed and reported. However, existing narrative reporting on human capital in the UK is not sufficient to provide investors with the type of insights necessary to deepen their understanding on whether organisations are led and managed for long-term value, or to help identify potential systemic people risk. Human capital is called out as one of the six fundamental capitals within the Integrated Reporting framework. The Chartered Institute of Personnel and Development (CIPD) has been working with the Chartered Institute of Management Accountants (CIMA) on research exploring where human capital management information is material to organisational performance and should be considered for reporting purposes with the IR framework, as well as how some organisations are using this type of data. What the research shows is that overall the current quality of human capital management information and analysis within organisations is poor, although some companies are beginning to use more sophisticated analysis of human capital information to help understand how they can align their human capital and business strategies to maximise sustainable return on investment.
Nonetheless, external reporting of this type of human capital data is inadequate to say the least.A recent roundtable run by the UK National Association of Pension Funds (NAPF) with members of the investment community found a chicken and egg problem: investors are not valuing or scrutinising human capital management information because the quality of data reported externally is poor, and organisations are not providing better data because investors are not asking for it. To try and understand the barriers to better reporting of human capital management information, the CIPD is working with shareholder lobby group PIRC on research exploring the views of members of the investor community on:

• how important is it for organisations to report on human capital management in their annual reports?

• what is the current quality of existing human capital reporting by publicly traded companies

• would there be more value for key stakeholders such as shareholders and regulators if there was better and more consistent HCM reporting?
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The research is also testing investor views on four measures: total cost of workforce employed (including contingent labour), recruitment and staff turnover cost, total investment in training and development, and employee engagement survey scores (three-year rolling average). Would consistent reporting on such core metrics provide useful data to over time enable benchmarking within sectors, identify trends and improve transparency on culture and governance? If not why not? Are there other measures that would be useful?
If you are in an investment advisory/analyst role and would like to take part in the research or find out more, please email Ben Willmott CIPD Head of Public Policy.