The Risks, Rewards, and Fallacies about Human Capital Reporting

The quality level of the most important human capital — the executive kind — can't be quantified.
Mark OppenheimerMarch 16, 2016
The Risks, Rewards, and Fallacies about Human Capital Reporting

Many people would agree that quantifying the worth of human capital would be advantageous to a company because, putting aside the administrative burden, it would permit them to shift the focus away from tangible assets to the real core of value creation.

Mark Oppenheimer

Mark Oppenheimer

Human capital reporting would also provide analysts, institutional investors, and private shareholders with a variable that would permit comparison and differentiation within a particular sector, thereby aiding investment decisions.

But how can the value of human capital actually be assessed, quantified and put into accounting speak? What common yardstick can we find that would reflect real value and be applicable to all companies?

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Trying to answer those questions illuminates a significant potential problem. When we start to look at people value through an accounting lens, we have to be careful. There is a danger of analyzing the workforce as if it were made up of robots or clones doing the same job, sharing equivalent skills and operating in a sterile environment.

We already apply words like “quality,” “productivity,” and “yield” to human beings, just as we do to a manufacturing line. Whether that’s appropriate can be debated. The question is, if there’s going to be a lot more human capital reporting, what comes next? “Service interval” and “life cycle”? Such a dystopian view of people would not, we should hope, sit well with a company’s culture and values.

That said, with regard to rank-and-file workers there is a fair amount of human capital data that can be measured and reported in a meaningful way. One of the most compelling is predictive analytics.

It is not uncommon for large retailers, for example, to experience high staff churn and spend a fortune on rehiring and retraining. By analyzing data across the workforce, employers can isolate key factors that are linked to employee attrition or productivity. The resulting ROI is more interest to stakeholders than many existing measures of workforce productivity.

However, it’s arguable that the bigger determiner of corporate value in relation to human capital is the quality and effectiveness of leadership. That is difficult, if not impossible, to measure, and it’s not going to get any easier. The business landscape is changing: boardrooms will look very different in five years’ time as the millennial generation rises through the ranks, and the attributes of this new breed of executive are not easily computable.

Of course, millennials still have clear commercial goals and know the importance of delivering profitability and shareholder returns. But the way they add value is not so much about skills and experience as attitude, flexibility, emotional intelligence, and vision.

Millennials are all about “mindful leadership” with a focus on values, conduct and people. They thrive on building and motivating teams. They applaud diversity, are passionately customer centric, and are digital natives. They possess a remarkable ability to achieve goals in a shifting environment.

Such leadership effectiveness variables do not lend themselves to quantification and measurement.

Executive recruiters do have to assess this new genre of leader and, ironically, some use a “balance sheet” scorecard technique. But that is backed up by qualitative interviews and expert judgement. A recipe of science and art blended with psychology and psychiatry does not readily transition to the world of financial reporting disclosure and corporate governance.

Furthermore, assessment techniques are weighted toward future promise rather than past performance. That something else that does not sit well within corporate reporting frameworks that shun forward-looking statements.

Mark Oppenheimer is chief commercial and innovation officer at Marlin Hawk, a leadership advisory and executive recruiting firm.

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