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Why investors/CEOs not yet talking about Human Capital performance as much as they do for Financial Capital?

This post was originally published on my Linkedin Pulse. Additionally, you can listen to my blogcast here

A month ago I attended a round-table discussion in London comprising investors, industry experts, Human Resource practitioners and few C-suite members. The learning from the conversation was immense – investors current mindset, why Human capital measurement is not must-to-have yet, what would they like to see from companies/startups and more importantly what can CEOs/CHROs do to create an appetite for Human Capital in their mind.

Let’s take a quick look at an industry research on investment pattern in intangible assets.  Research by NESTA (Goodridge et al 2014) estimates that between 1990 and 2011, the value of intangible assets in the UK grew from £50.2 billion to £137.5 billion, while at the same time the value of tangible, physical assets has increased much more slowly from £72.1 billion to £89.8 billion. Within intangible investment, the asset categories for which the most investment is observed in 2011 are: workforce training (£33.6bn); organizational change (£25.5bn); and software (£24.3bn).

In the current knowledge economy, the importance of intangible assets is obvious as established by the above research. Still, why investors are yet not asking about Human Capital performance as much as they do for Finance Capital? Or if I reverse the question – Why CEOs/founders are yet not telling their Human Capital performance story as much as they tell Financial performance. There are 2 key problems:

  1. Chicken and Egg: While organizations have started to understand and articulate the importance of Human Capital and measurement (Deloitte – Global HR Trends 2016ADP – 5 Top HR Trends to watch for in 2016CEB – 11 trends identified by HR Leaders), investors are yet to catch up with the pace. Their current ask is primarily limited to staff related productivity, cost and attrition only. To be precise, it is not their openness to value Human Capital but the limited awareness and accessibility to Human Capital information – what to ask and the uncertainty about company’s ability to produce and sustain that ask. They are currently consuming what they are being offered by the CEOs/CHROs i.e. a limited set of usual Human Capital metrics and hence they have less appetite. Both of them are stuck between  “push” and “pull”.
  2. Single version of the truth – Annual Report: Investors do care (one and) only one company published document i.e. Annual Report. Currently, organizations are publishing their people asset story in their annual reports but not as detailed as they do in other publications such as “sustainability reports”, Human Capital reports etc (a great example of HC Report by Deutsche Bank). Investors do not classify these documents as must-have for them hence less appetite for asking more of these.

As a CEO of the company/startup, if you want to demonstrate the value of your Human Capital as an asset to your investors, you need to do the following:

  1. Push the Information: If you want your Human capital to be seen as one of the competitive advantages, you should push those Human Capital Management KPIs that you believe in. The more you help them understand the Human Capital value (push), the more investment your organization will attract.
  2.  Human Capital Statement in Annual Report: Create a detailed Human Capital Statement section in annual report, similar to Finance Capital Statement. The KPIs under Human Capital statement of the company should be well thought through, agreed, measured and not limited to reporting Headcount, diversity, Attrition and cost of staff etc only. However, depending on the maturity level of HR Analytics function of the company, sophisticated KPIs measurements may not be available and in which case above KPIs could be a good starting point.
  3. Content is the King (Value): The key Human Capital metrics that investors may be interested are: (1) Leadership index i.e. ability to cope with changing economic situation & fierce competition and execute strategy of the organization (2) Culture & values index i.e. ability to demonstrate brand & reputation of the company to attract & retain talent, customers & investors (3) Learning & Development i.e. workforce planning – Buy vs Build – what gives confidence to investor that company talent is future ready or have a strategy in place? and (4) Governance i.e. sustainability of Human Capital). These are the 4 key Human Capital KPIs your investors would love to see.
  4. Narrative: Most importantly, investors are interested in learning your Human Capital story, not just metrics. You (with your CHRO) should talk your Human Capital story as passionately as you do for Financial capital. The knowledge capital story of your organization story is not accessible to anyone else outside of your organization hence treat that as your IP. Your investors want to hear your holistic, interconnected story more often than you think. Publish your data-driven Human Capital story as competitive advantage.

So, it’s you (CEOs/CHROs) who is needed to change the approach from pull to push to demonstrate the power of Human Capital of your organization. The question that we need to ask ourselves – Are we telling investors right insight-based story enough, that can give confidence in company’s capability to produce sustainable profit year over year to our investors. The potential of Human Capital multiplies many folds when tapped, measured and narrated fact based to our stakeholders (internal and external both) and through annual report/investor’s update.

How are you dealing with this part of investor conversation in your company/startup? I’d be interested in hearing your examples in the comments below.

Thank you for reading my post. I write whenever I stuck on an idea worth sharing here at Linkedin.

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