Human Capital Management

The Holes in Human Capital Metrics

Prodded by investors, some companies are disclosing more data about their workforces. But how much value will that information have?
David McCannOctober 11, 2016

16Oct_DisclosureAfter many years marked by varied, mostly unsuccessful initiatives to prod companies to disclose more information about their human capital, the movement is finally gaining some traction. At least two groups of institutional investors representing trillions of dollars in assets under management (AUM) have piloted programs in which they’ve engaged directly with companies to elicit information on employee turnover and engagement, and spending on training and development.

The institutional investors so far have focused their efforts on large retail companies. One of the groups with a pilot program, Principles for Responsible Investment (PRI), is a United Nations–supported network of about 1,500 institutional investors worldwide. Over the past two years, a subset of 24 PRI members with collective AUM of $1.5 trillion has conducted engagements with 27 global retail enterprises—22 of which have improved their public human capital disclosures as a result, according to Fiona Reynolds, managing director of PRI.

The other group, the Human Capital Management Coalition (HCMC), comprises 25 U.S.–based institutional investors totaling $2.5 trillion AUM. The HCMC seeks enhanced disclosure as one of several goals for elevating human capital management as a key aspect of company performance. It persuaded 8 U.S. retailers to provide non-public information on how they address human capital issues.

The investor groups have publicly divulged no specifics on the retailers’ additional disclosures and have identified only a few of the companies they’ve engaged with (none of which agreed to speak with CFO for this story). But it’s early days for these efforts, and any disclosure of additional human capital information is a big stride forward.

PRI did say it asks for increased disclosure on employee turnover and absentee rates, training programs, and employee engagement scores. And active equity firm Martin Currie, a PRI member, released a bulletin describing the results of an interaction with Russian food retailer Magnit: following the engagement, Magnit tasked its investor relations leader with improving human capital disclosure and for the first time published key performance indicators (KPIs) relating to employee relations, including turnover and training.

Meanwhile, the institutional investors are trying to involve the analyst community in the quest for more human capital disclosure. The HCMC, for example, is talking with analysts to prepare a guide outlining questions to ask during earnings calls, says Meredith Miller, chief corporate governance officer for the UAW Retiree Medical Benefits Trust, which is leading the coalition.

Observes Jeff Higgins, CEO of the Human Capital Management Institute (not to be confused with the similarly named coalition): “The conversation is changing. I’ve been taken by surprise by how many big investors are getting on board and the speed with which momentum is building.”

16Oct_Disclosure_p38A Question of Value
How useful will human capital data prove to be? Reynolds says PRI is pushing for human capital disclosure because metrics on things like turnover, employee engagement, and training suggest how well-managed a company is. Tessie Petion, vice president of responsible investment research at Domini Social Investments, which is looking into joining the HCMC, agrees. “It tells you something about priorities in managing the business and is an indicator for whether we want to invest in that business,” she says.

But a former finance and marketing executive waves off the notion that such data is a good barometer of management quality. Tom McGuire, now talent strategy leader at Talent Growth Advisors, says: “Whether a company is well-run is a good question, but a more relevant one is, how do its people impact its value? To understand that, you need to look at the company’s intellectual capital—patents, brands, and proprietary technologies and methodologies. The only source of any of those things is people.”

For that reason, McGuire also quarrels with the idea that disclosure about a company’s entire workforce has much value. “You want to know about the turnover and engagement of critical talent,” he says. “At a pharmaceutical firm, those are people in the research area. At a consumer products company, it’s people in consumer research and marketing, and some innovation areas. You don’t really care if an accounts payable clerk turned over.”

Similarly, Higgins points out, if you lose 20% of management in a year, that’s way too high. Losing 20% of your call-center workers is OK. It’s also fine if 20% of a retailer’s customer-facing staff is lost. But it’s disastrous if a professional services firm has 20% turnover among customer-facing professionals.

The metrics that come out of the investor groups’ engagements with retailers may be used to compare the companies with one another, but it’s unknown how granular the information is, so therefore it’s unknown how useful such comparisons will be.

“We still have to go back and huddle with our coalition members, so we’re not in a position at this point [to talk about that],” says Miller. “What we’re trying to do is distill [from] the metrics the kind of information that would really get at drivers of long-term shareholder value and that is measurable and could be standardized.”

Lisa Disselkamp, a director in the HR transformation practice at Deloitte Consulting, is skeptical that companies can actually provide the kind of information that would allow such efforts to bear fruit. “I’m not a big fan of KPIs and benchmarks,” she says. “Most employers don’t embrace them much, from an actionability standpoint. They may have turnover data, but what’s actionable is the root cause of something.”

For example, Disselkamp points out, turnover is a symptom of many things that go on in an organization, like how flexible schedules are, employees’ satisfaction with supervisors and management, and what kind of career paths are available. “Turnover is just the result,” she says.

16Oct_Disclosure_p39Even a great advocate for human capital disclosure like Higgins suggests that the investor groups’ approach needs refinement. “They’re getting what they want—a number for turnover and a number for engagement—but then what do they do with that?” says Higgins, a former CFO. He says he has encouraged PRI to at least ask for information segregated by basic job groups, like management vs. non-management, STEM workers vs. non-STEM, or sales vs. service. “It’s very much about the context,” he says.

Another problem with disclosure of human capital data is that it’s frankly not too difficult to fudge. “The fudge factor is consistently a problem for things that aren’t regulated,” says Petion, although she adds that sometimes there are clues as to whether a company is shading the truth, such as the changing of a metric or methodology without explanation.

Still another potential issue, if the goal is to motivate such disclosure on a broad scale, is the administrative burden it might place on companies. For their part—and perhaps to Higgins’ point—both Reynolds and Miller say the information they’re asking companies for can be easily obtained. “These are metrics that currently exist and are important in running a company and planning,” says Miller. “I don’t think we’re looking at anything that would impose additional costs or reporting.”

Looking Ahead
Why start the disclosure push with retailers? For HCMC, it’s partly because of the extreme attention focused on the tragic fires at retailers’ factories in Bangladesh and Pakistan in 2012. “We decided it was important to also address the kinds of issues that could come up state-side,” says Miller. “The retail industry is so labor-intensive and ripe for these kinds of issues.” As for PRI, Reynolds says retailers are often in the headlines with respect to employee relations.

But both groups are planning to target other industries. PRI has had discussions with mining companies, and HCMC may opt to look next at the health-care industry.

Ultimately, the investor groups, as well as other interested observers like Higgins, hope that pressure from investors and analysts will result in the emergence of de facto standards for human capital disclosure. “We want to identify a suite of important metrics on which we could engage with companies across all industries and sectors,” says Miller.

Might de facto standards, if they do come about, evolve into formal regulation? “Hopefully it won’t need to be regulated,” says Reynolds. “Maybe it can be just a norm, as other areas have become. We see reporting in different countries around diversity and pay gaps, for example. Some of those are engrained in regulation, and some aren’t—there’s just investor demand, so companies do it.”

Miller is somewhat more strident. “I do think there is a clear opportunity to explore with public regulatory agencies,” she says. “[I have] gone through a number of disclosure movements with the SEC and FASB, [so I know that] once there is a public record we can move toward showing that this is a corporate governance best practice and [that it] helps the market value companies.”

Higgins, too, thinks the climate is right for an accelerating movement toward regulation. One big reason for that is the developing “gig economy,” with more people doing contract work and fewer working for a single employer full time. “That’s got to prompt a regulatory response,” Higgins says. “If you’re disaggregating your workforce, you probably have a responsibility to tell your shareholders about what you’re doing, who’s an employee and who is not, and why.”