Why it is vital for firms to measure their human capital

23 January 2015 -

Quantifying talent within organisations is a strong deterrent against corporate failure, according to leading business thinkers

Matt Packer

It is vital for bosses to increase their focus on human capital management (HCM) if they are to boost performance and avoid further economic crises: that is the key message from a report published today by the Valuing your Talent (VyT) Initiative.

According to the report – titled Human Capital Management: Investing for Sustainable Growth – between 1990 and 2011, the value of the UK market for intangible assets, including workforce talent, grew from £50.2 billion to £137.5bn. However, companies are generally lax at compiling data that accurately quantifies the abilities of their staff.

That also applies to investors, who are not calling for those measurements to be provided while mulling over their funding decisions. Indeed, the report says, demand from investors for better HCM data is “wholly insufficient (some would say completely absent) in respect of encouraging companies to provide better HCM reporting”.

On why investors are particularly blind to the value of HCM data, the report adds: “One reason this research identifies … is that many investors are both so focused on other types of data and, simultaneously, so unaware of the potential value of HCM information that they simply don’t consider it – even when it is presented to them.”

In parallel with this malaise, though, “a growing body of evidence highlights the relationship between high-quality leadership and people management, more engaged and resilient staff, and improved business performance”. On that basis, “[it] is surprising that uptake of improved human capital reporting standards has been so slow. Human capital clearly matters given that it is directly linked to the creation of value, and there is increased scrutiny on the way organisations are managed and operated: toxic organisational culture, poor people management and inadequate training are all now widely recognised as having played significant roles in numerous corporate failures over the last 10 years.”

The report was unveiled this morning at an event attended by business secretary Vince Cable, plus figures from the bodies behind the VyT Initiative: the Chartered Institute of Personnel and Development (CIPD), Lancaster University, the Chartered Institute of Management Accountants (CIMA), RSA and the Chartered Management Institute (CMI).

According to Cable, the message of the VyT report is intrinsically linked to work the government has done – and is doing – to sharpen up corporate governance in the wake of global economic turbulence. “I am determined to tackle the short-term investment culture that helped to cause the 2008 financial crash,” he said. “That’s why I commissioned John Kay’s review of the equity markets, and why we’ve given priority to implementing his recommendations. We have comprehensively reformed reporting frameworks, enhancing the focus on long-term strategy and removing the requirement for mandatory, quarterly reporting to encourage companies and investors to take the longer view.”

Cable added: “We have overhauled the governance of executive pay, empowering shareholders to ensure companies’ pay structures are genuinely linked to longer-term performance. We have supported the development of the Investor Forum to make collective engagement by investors more effective. And we have made good progress on boardroom diversity.

“I know that we now have laid the solid foundations to build a real shift away from the ‘quick buck’ culture that wrought such damage in the past. Today’s report is a very interesting contribution to the debate on where to go next, focusing on reporting standards around people-led performance to ensure that business investment is maximised and productivity is improved upon year after year.”

CIPD chief executive Peter Cheese stressed: “Human capital reporting is often misunderstood. It’s not simply about looking at individuals and the value that they provide per head, per hour – or reducing people to numbers on a balance sheet. It’s about a much more fundamental recognition that the people we employ, the ways we manage and develop them, how we organise our businesses and the cultures we build within them, are all critical to measuring and driving business performance. Developing a consistent way of recording and reporting the small number of key metrics we’ve focused on in our reports would start to help employers and investors to build a clearer picture of the intangible factors that play such an important part in delivering long-term success.”

Unilever chief HR officer Doug Baillie said in a statement that a full-fledged application of HCM techniques is dramatically improving processes at his organisation. “People are our most precious resource,” he noted, “and the effective investment and management of them is critical to the continued success of Unilever. By adopting human capital reporting, we are increasing our accountability and presenting a more transparent and coherent picture to our stakeholders on the health of our business. Having an accurate picture can also lead to competitive advantage by unlocking the full potential of our people – making the case for its adoption a resounding one.”

For CMI chief executive Ann Francke (pictured above at today's event), the corporate world could benefit from more of that kind of engagement. “People matter and drive long-term business success,” she said. “On this, we all agree. So why don’t more top companies report on their people using a clear and common set of simple metrics? Valuing your Talent is a great initiative to promote more transparent measures for human capital reporting.”

Francke added: “Let's capitalise on a proven model. The 30% Club and [Mr Cable] spearheaded progress for women on boards. Now, we need a ‘Culture Club’ that rallies influential allies around a target – like getting 50% of the FTSE 350 signed up to reporting on the Valuing your Talent Framework by 2020. Then we can track progress and shine the media spotlight on those who don’t sign up. Investors, employers and UK Plc will benefit – and so will people across those companies!”

Download the full report from here.