What is the point of human capital reporting?
Paul Kearns, April 14, 2015
Human capital reporting is underdeveloped, but it is too important to be ignored
The need for a method by which companies can report on their human capital has been acknowledged for many years, but it has had a rough passage and the field is still under-developed.
In the 1990s Leif Edvinsson’s work on trying to put ‘intellectual capital’ on the balance sheet at Skandia never gained wide acceptance. In the UK in 2003, the Labour government commissioned a report from its ‘Accounting for People Taskforce’ but the companies held up as exemplars did not subsequently fare too well. RBS was highlighted as a leader in the field and its subsequent collapse damaged the whole notion of HCM reporting.
In the US in 2010, SHRM decided that its members needed better measurement of human capital practices and attempted to produce its own standard on ‘investor metrics’, only to be met with such fierce resistance from influential CHROs that it had to withdraw. And those with long memories have still not forgiven the accountants and auditors who failed to expose what was going on in large corporations at Enron, WorldCom just before they collapsed.
Against this troubled background it was brave of John Stewart, HR director at SSE, to commission a report valuing human capital, knowing that “as the first UK company to carry out this assessment we don’t have a benchmark to compare our human value capital against".
Maybe this is the present state of play in the field? There is no framework by which companies can be benchmarked; accounting conventions do not help when we are trying to measure people; senior HR people do not want their HR practices to be publicly assessed; and there is a danger that all of this effort could result in a bloated bureaucracy of data mining with no obvious outcome.
If we haven’t found any clear answers so far then maybe we should go back to the original question. What is the fundamental problem that keeps us searching for the right type of human capital report? Therein lies the conundrum. There are too many questions.
Here are just a few that have been conflated with human capital reporting:
- Corporate social responsibility – how can we make corporations and their employees more socially responsible, rather than just profit driven?
- Diversity and inclusion – how can employment practices be made fair with no discrimination?
- Evidence-based management – the need for better evidence for better decision-making where intangibles (such as human capital) are critical
- Corporate governance – is executive remuneration broken and can we trust boards and their executive committees to do what is right?
- Accounting and auditing conventions – these do not cater effectively for intangibles of culture, innovation and integrity
- Environmental concerns – are we killing the planet in our pursuit of profit and wealth?
This complex mix of issues has produced a wide variety of responses. The SASB (Sustainability Accounting Standards Board) seems to view the problem as an ‘accounting standards’ issue, while Harvard Business School’s Michael Porter has been instrumental in FSG – an organisation following a concept of ‘shared value’ and ‘social impact’.
An organisation that has tried harder than anyone else to get reporting right is the IIRC (International Integrated Reporting Council), which posits six different types of capital (financial, manufactured, natural, intellectual, social/relationship and human) that come together in an integrated report, related to short-, medium- and long-term value.
What the IIRC fails to define is what ‘value’ actually means. The accountant’s simplest definition of value is profit margin (revenue minus cost) but there is widespread recognition that this definition is too narrow to serve wider society and the planet. The IIRC and others have been working hard to broaden this definition, but their efforts are hindered by not having any new ‘accounting technology’ to produce a meaningful alternative.
There will only be a coherent answer when society poses a coherent question. John Stewart’s question for commissioning his report was to “prove” that SSE’s approach to HR management was “good for business”.
If ‘good for business’ means maximising profit then we are back at square one. If, however, the right question is ‘do we create the most value possible with our human capital?’, and value is defined as the best financial return possible while satisfying all other societal needs, then we might have the basis for a coherent solution.
At the Maturity Institute, our over-arching purpose is maximising societal value (defined as the best possible quality at the best possible cost) and we know that can only be achieved by maximising the value of human capital.
Stewart’s main strength is that he does not see his report as the endgame but part of his learning journey. He invites “other organisations to actively engage with us on how we can refine this process and create new benchmarks for business in understanding the value of the people they employ". It’s now time for senior HR professionals everywhere to declare their hand and actively support what John Stewart has started.