Non-financial risks generally centre on sustainability and governance. Now investors are looking closely at human capital management (HCM), according to Jonathan Williams

It is customary for companies to praise the contribution of their workforce once a project is done, or to reward efforts through bonus payments when targets are met. But whether a firm pays in lip service, through promotion or cash and shares, it remains difficult to assess the true value of employees as a resource.

There have been a series of global initiatives to quantify human resource factors. French firms are required by law to disclose staff turnover and the debate in the UK has started – and stalled – in the wake of the 2001 Kingsmill Review on women’s employment conditions and pay. Despite increasing acknowledgment of the importance of human capital management (HCM), the absence of reporting metrics, investors often find themselves unable to assess whether firms will be able to deal with the risks that arise from staffing.

Awareness is increasing, thanks in part to the 2013 International Integrated Reporting Framework. Its authors conclude that maximising one source of capital at the expense of others, such as human capital, is “unlikely to maximise value for the longer term”.

David Russell, co-head of responsible investment at Universities Superannuation Scheme (USS) Investment Management, notes that companies often see employees as the most important company resource. “The obvious question is ‘Prove it’. What are you doing to look after this very important asset?”

Human capital metrics

• Total cost of the employed workforce: allows discussion of a firm’s ability to improve human capital return. Also requires common definitions of head count.
• Recruitment costs: allows for insight into staff turnover and therefore ability to retain staff. Also acts as indicator of company atmosphere. 
• Expenditure on training and staff development.
• Employee engagement survey scores: offers an insight into employee satisfaction and potential improvements.

From ‘Valuing Your Talent’, January 2015.

A consortium of UK local authority pension investors consisting of London’s Islington, Greater Manchester and Nottinghamshire has repeatedly attempted to put HCM on the agenda at National Express Group, arguing that a company with staff numbering 35,000 should have a board-level committee monitoring the alignment of its staff retention and growth strategies. 

In 2014, the consortium tabled a shareholder resolution to this effect, and also raised questions on behalf of a US Teamster union that complained its workers were exposed to safety risks. Kieran Quinn, chairman of Greater Manchester Pension Fund, argued that good HCM policies were “crucial to delivering sustainable returns”.

One industry that is aware of the value of employees is the resources sector. But, Russell says, while the oil, gas and mining companies might be talking about the problems posed by their workforce retiring, the discussion does not spread to annual reports. 

Analysts have nevertheless taken note, and much has been written about the geographic spread of a labour shortage in the resources sector, largely the result of skilled workers opting for post-35 career breaks, which leaves firms with age cohorts (25-35 and older than 45) that are statistically more prone to injury. Additionally, the relative lack of those halfway through their career, leaves firms struggling to replace retiring senior staff.

Efforts to improve disclosure include the UK’s Valuing Your Talent (VYT) initiative, which this January issued a report gathering investors’ views on the four potentially key metrics that companies should consider publishing. It concluded that the total cost of salaries, annual recruitment costs, the amount spent on training and staff development, and employee satisfaction were important statistics that investors should be able to access. 

But why do such disclosures matter? Jean-Philippe Rouchon, socially responsible investment analyst at France’s civil service scheme ERAFP argues in VYT’s ‘Investing for Sustainable Growth’ report that disclosing internal mobility is about ensuring firms look beyond the short-term needs of a vacancy. “Companies should be thinking about how they train people to do jobs that are more skilled. Not just looking short-term and trying to have the right people in the right jobs for the current performance – but how they develop staff to deliver future performance.”

AXA Investment Managers’ Jean-Marc Maringe, who heads its seven-year-old, €360m HCM fund, concurs that such inward spend on training, “even in tough times”, is a positive indication of quality. However, Rouchon admits the metric is hard to interpret, and it is arguably the reason those who are currently using HCM employ easily understood metrics, such as turnover. 

Firms must also be aware that context is important, and Russell recalls an annual report that praised the 50 managerial positions filled by women in a workforce numbering in the thousands. “It’s a meaningless number if I don’t know how many men there are in management positions. Without comparable information it’s difficult to know how important [a figure] is.”

“Companies should be thinking about how they train people to do jobs that are more skilled. Not just looking short-term and trying to have the right people in the right jobs for the current performance – but how they  develop staff to deliver future performance”

Jean-Philippe Rouchon

The absence of comparable data is an issue, he says, particularly when looking at matters of health and safety in the UK compared with emerging markets. 

Safety can act as a useful proxy for investors, Russell goes on to admit, often demonstrating management’s overall skill, while certain companies can see their licence to operate and their fundamental future endangered if accidents are too frequent or if fatalities occur. 

A prime example where the safety record could have signalled future risk is BP, where imperfect safety procedures in its US operations led to accidents and eventually the Gulf of Mexico oil spill that cost the firm tens of billions. 

Maringe says it would be helpful if greater disclosure were mandated, which could either be achieved through European intervention or by individual countries putting it on the legislative agenda. “I’m quite sure that companies have the indicators already internally. It would be good of them to publish the data.”

The view that it should remain up to companies to voluntarily disclose data prevails among those opposed to further red tape, and Andrew Ninian, head of corporate governance at the UK’s Investment Association, notes that this would allow boards to disclose the metrics most important to the company or sector. For its part, VYT suggests that a third option would be for governments to lead by example and establish a consistent framework for HCM reporting across public sector bodies. 

However, data should not be valued above all else, warns Maringe, although all information is important as a part of wider discussions – similar to those unsuccessfully attempted with National Express prior to the shareholder motion.

“More and more, we also want to have a qualitative approach, and also a dialogue with companies,” Maringe says. “Calling it ‘engagement’ is probably too strong – but at least a dialogue to better understand what is behind the figures and scores.”


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