If you were to overhear someone saying “The SEC, FASB, Bloomberg and the Bank of England,” the last thing you’d expect to discover is that the speaker works in human resources. However, through a confluence of events HR folks are indeed uttering those words, and CFO’s need to know why.
The idea that human capital “matters” is old news — just look at how much of your company’s market value depends on intangibles. What’s new is that there are two substantial institutions pushing for more substantive reporting of human capital information. In the United States there is the Sustainability Accounting Standard Board (SASB). It’s chaired by business titan and former New York City Mayor Michael Bloomberg, its vice chair is former SEC chair Mary Shapiro, and Robert Herz, ex-chair of the Financial Accounting Standards Board, is also on the board.
In the U.K. there is the International Integrated Reporting Council (IIRC), with Mark Carney, governor of the Bank of England, publicly supporting initiative. There is enough momentum and fire power behind SASB and IIRC that we can expect something to come of it.
This movement is timely for CFOs who believe their organization needs a better grasp on human capital risks and how the human assets of the company drive strategy, growth and shareholder value.
IBM’s 2013 study “Pushing the frontiers: CFO insights from the Global C-suite Study” found that high-performing CFOs were “Value Integrators,” and within that category the very best were “Performance Accelerators.” In essence, CFOs had gone beyond reporting and compliance requirements and were playing a central role in strategic decision making. “Integration” is the key word: the percentage of Performance Accelerators that were effective at integrating enterprise-wide information was double that of the remaining Value Integrators.
For that kind of CFO, the human capital reporting guidelines espoused by IIRC and SASB will fit neatly with what they are already trying to do.
So what should CFOs be doing to ensure that reporting on human capital, as part of some kind of integrated report, actually does provide useful, actionable information? Simply following the pack by reporting on basic facts like employee turnover, a human capital metric commonly included by companies producing integrated reports, may be minimally useful. The problem with a metric like turnover is that in isolation it does not tell us much.
Barclays Africa Group leads us in the right direction by reporting on “regrettable turnover”— i.e., losing people you don’t want to lose. It is easy to see how regretted turnover could create material risks: it could be a leading indicator of falling sales, delayed projects or poorly controlled costs. The CFO’s role is to assist in taking the “raw” human capital insight and helping quantify the extent to which it creates a material risk that could impact strategy and growth.
There are two main ways to approach human capital reporting, and both are helpful. The first is to start with strategic issues and then dig out the human capital factors underlying that issue. Deutsche Bank does this in its stand-alone Human Resources Report 2013. The bank writes, “The financial crisis eroded people’s trust in the banking industry. To regain this trust, it is up to every Deutsche Bank employee to prove to our clients, investors, legislators, regulators and the general public that we are a trustworthy partner determined to bring about cultural change.”
The report then goes on to show how human capital initiatives underlie this strategic change and how the bank measures their success (such as improved governance of compensation and a survey to measure employee understanding of what they need to do).
The other approach is to report on human capital metrics that we can expect to have a material impact in a specific sector. For example, SASB suggests that companies in the electronic manufacturing services sector report on “Number and total duration of work stoppages. Disclosure shall include a description of the reason for the work stoppage, the impact on production, and any corrective actions taken.”
If it’s just a matter of compliance, then a junior analyst can dig up the appropriate number and stick it in a report. If the goal is to create insight into underlying factors that drive performance and create (or mitigate) risk, then the CFO will play a key role in helping quantify the importance of various human capital factors.
What should you do right away? The first step is get integrated reporting on the agenda, create a working committee, and make sure that HR is not working in isolation. Engage with the HR function in developing those analytics, insights and reports that will matter most to the business. This needs to be a true collaboration benefiting from the distinct worldviews of finance and HR.
We see the work of SASB and IIRC as a sharp call to do something we should have been doing all along: develop an integrated set of insights and measures on how organizations create value for all its stakeholders. Finance has long worried about the cost of human capital, but there is so much more to be gained by flipping that focus and looking, in an analytical way, at how the organization can harness human capital to drive growth.
We have done a study on what human capital information is being included in integrated reports; if you’d like a copy, send an email to [email protected].
Laurie Bassi is the CEO of McBassi & Company, a leader in using human capital analytics to improve organizational performance. David Creelman and Andrew Lambert are co-founders of Creelman Lambert, a research and advisory firm specializing in human capital.