Investing in people: What comes first - the chicken or the egg?

If leaders truly believe that people, and more precisely their knowledge and skills, are the most important asset available to our organisations, we need to develop a clear way to articulate the value of knowledge and skills to help investors, employees, owner-managers and regulators understand critical people concepts in our organisations. This type of data is becoming more important to external stakeholders than ever before. For example, from the 6th of April UK employers with over 250 employees will be required to collect data which describes their gender pay gap, their gender bonus gap, the proportion of men and women receiving bonuses, and a quartile break-down the pay structure of their business. This information will need to be published publicly within 12 months, and it is likely that this will be done through the organisations annual report. It looks that important people data will now be more publicly demonstrated and a little more accessible to those interested in it.

However it appears that reporting on people is easier said than done. We are slave to a chequered history in the currency of people in which accountants, academic and practice-based, have attempted to account for human capital, and even try and place this value on a balance sheet. Investments in human capital are of vital importance and should, of course, be valued, but how we report on them in company disclosures needs a new and different approach: one that lives firmly in the realm of transparency of data, clarity, and robustness of data.

The problem is that, for too long, people data has created something of a chicken and egg situation. Investors have had little faith in the accuracy and validity of people data, which has often been reported having resulted from fairly inconsistent and often unreliable analytics processes. This has led to a lack of faith in people data to the extent that rather than demanding report more rigorously on it, investors have filed people data into the ‘nice to have’ rather than ‘must have’ box. Without investors demanding more insight into workforce data, organisations have not been compelled to improve the quality of their disclosures themselves.

However, the tide is starting to turn. Investors are becoming curious, not just about how much (or little) an organisation is spending on building or embedding new capability, but also about the ramifications of such investment strategies. Following a flurry of corporate scandals and crisis of confidence, behaviours, alongside human capital, are becoming a central concern of those investing in our organisations. 

For the investor community the question of what is being done about key people risks and issue around behaviour have become more prominent in recent years. Environment, Social and Governance (ESG) investors are particularly interested in the ethical and long-term impacts of their investments. This community of investors, which continues to grow in number and power, is challenging the convention of corporate reporting and driving organisations to consider if there are other more holistic and effective ways of describing the value and importance of their human capital.

Institutional investors who, by their nature take the long-term view, are one broad group in which the ESG movement is now making waves. The Pensions and Lifetime Savings Association (PLSA) in their 2015 research Where is the workforce in corporate reporting? described this move as a way by which organisations and their stakeholders can both unlock the ongoing productivity puzzle the UK faces, as well as meet the burgeoning trend for more transparent disclosure of organisation value. The PLSA argues that by communicating human capital data, organisations will enable the investee community to act as better stewards of their investee companies. Ultimately this will, the research concludes, bring about a more effective relationship between organisations and their key stakeholders.

Opening up the people discussion between organisations and stakeholders through more transparent human capital disclosures is one of the objectives of the Valuing your Talent programme. The programme has investigated how organisations are reporting today, and is now developing a new approach to describe what corporate reporting could look like for organisations in the future.

In 2016, Valuing your Talent investigated the current standard of reporting by the UK’s FTSE100 companies. The research People measurement and reporting: from theory to practice investigated the type of language used to describe human capital by these organisations in their annual reports and accounts and, by looking at two points of time between 2012 and 2015, was able to assess how the language being used by organisations was evolving. The findings showed a positive shift towards language that describes concepts such health and wellbeing, and ethical employee behaviours. It appears that important people issues, beyond health and safety and regulatory compliance, are now being disclosed more actively by organisations for their key stakeholders’ information.

The same research was complimented by an analysis of media sources to see whether key people issues and risks that were public knowledge were disclosed in annual reports, and to understand exactly how transparent corporate disclosures are. Whilst some organisations were disclosing fully when issues had arisen, or were being flagged, there were some that were not using their corporate disclosures to describe risks to human capital value.

To understand why organisations may not be fully disclosing their human capital data, and why investors aren’t actively requesting it more, it’s helpful to consider the inherent issues in measuring and reporting supposedly ‘intangible’ assets, such as people. The nature of human capital is that there are many constructs which aren’t directly measurable. It’s hard for some organisations to practically pinpoint any real causal or even correlational relationships between certain HR concepts. Basic HR analytics capabilities are also sometimes not in place. Then there’s also the issues of language, which remains a barrier to better use of human capital data. Confusion over terminology and measures continues to prevent better uptake of human capital reporting by organisations and investors alike.

And this can be as much of a problem internally as it is in the outside world which is why it’s crucial that various functions, including HR and finance, work together to help create a common language so that the organisation, and their various stakeholders can easily make sense of people data.

The absence of human capital from reports, and in particular the balance sheet, is particularly important for the finance function. Chris Higson, Professor of Accounting at London Business School, has described the need for both HR and finance to build scorecards to address the measurement and reporting issue. Instead of attempting and failing to locate human capital on the balance sheet, organisations should invest in alternative methods of reporting for both external and internal strategic purposes. The scorecard is an effective way of ensuring that the value of the workforce, and the opportunities and the challenges it faces, are measured and tracked in a way that is clear to both internal and external stakeholders.

Put simply, for organisations to unlock their human capital potential and understand exactly how the knowledge and skills of their workforce contributes to business performance, they must invest in measuring and reporting both internally and externally. Pressure, and perhaps more importantly curiosity, is on the rise both internally and externally and there is an audience of external investors now asking important questions about people, their behaviour and the value they contribute to organisations and wider society. What was once overly complex even for the academic community is now gaining traction throughout the business community. HR should seize the opportunity and lead the way when it comes to explaining why we must invest more in the workforce. We may not be able to answer whether the chicken or the egg came first, but we can agree that from now on people measures and reporting must be top of the pile for business and investors. 

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