The Bottom Line On Human Capital

Human Capital is no doubt immensely important, as it is a business’s most valuable asset, on which success depends and without which, no company could function. Therefore, it must be a business’s most valued asset too

The Need For Human Capital Reporting

The fact is, however, staying it does not make it so. The problem, in a nutshell, is that human capital is often assumed to be purely intangible and difficult, or perhaps even impossible, to define and measure.

As for why this is a problem, the matter can be summed up neatly in a famous business maxim attributed to the legendary business consultant, thought leader, and author Peter Drucker: “What gets measured gets managed.”1 The point is, if something can be easily measured — if it has a metric attached to it — it will simply get more attention. This might be true in life in general, but it is even more certain to be the case in business and the world of work, where the bottom line and other hard, quantifiable financial concerns get the lion’s share of attention.

The implication, simply enough, of the dictum that “what gets measured gets managed”1 for human capital is that accounting and reporting methods for human capital need to be put into place. A recent report from the World Economic Forum argues for “the development of a new human capital accounting framework” that will “enable a company’s board and management to track how their investment in people is augmenting the firm’s human capital.”2 What has been assumed to be intangible needs to be made concrete. Failing to implement human capital reporting standards can lead companies to overlook the value that human capital represents for a company’s future organizational performance, value creation, and company valuation.

Metrics For Human Capital Accounting

Which methods of reporting human capital are most effective will vary somewhat from industry to industry. Business leaders should always take into account the individual circumstances of their company and its industry. But, there are some tried and true metrics companies can start with – what is important is that you start.

Deloitte’s Global Human Capital Trends survey illustrates the need for more data to evaluate human capital, as well as suggesting some areas in which to institute metrics.3 The survey finds that the need for more data was practically universal, with 97% of the respondents indicating they needed more information on their workforce. Such information is needed to prepare for the future; management is “looking for predictive metrics,” with 59% of respondents saying they are motivated by a need to shore up the readiness of the “workforce to meet new demands.”

Deloitte makes the case that what they refer to as “human capital centered issues — culture, inclusion, leadership behavior, the treatment of workers” — are becoming more important. Thus, developing metrics to report on these issues is wise. The health and character of a company’s culture could be measured by employee surveys  which might be especially valuable since no one knows a company’s true culture better than its workforce. Surveys could also be used to generate data on how workers are treated in the company. Gathering concrete data about inclusion should be easily manageable too.

Human capital appreciates when Talent increases their knowledge, skills, abilities, and outcomes. There are two ways in which Talent can increase their human capital: upskilling opportunities and new jobs. When the former is not available, Talent will go for the latter. And the cost to replace valuable Talent is much greater than the cost of upskilling. Therefore, another area in which it is worthwhile to report on human capital is that of an organization’s skills. More so since “the rapidity with which skills become obsolete due to technological and economic change” 3 is greater today than any previous time in history. According to McKinsey, 87% of companies either have a skills gap or will have one soon.4 A world in which skills are not long-lasting, a skills gap in side an organization — in which a workforce does not have the set of skills a company needs — can mean death for that company.

More Human Capital Investment

hile means of reporting human capital in a company are important, they are not the complete picture. The other element is the need for businesses to devote greater resources to human capital development. The value represented by human capital is not static — human capital can be enhanced if resources are devoted to the effort.

Investing in human capital is really a win-win for both parties. Employees benefit from improving their skills, while companies benefit by having a more capable, effective pool of talent, which ultimately results in greater individual and organizational performance, higher profits, and increased company value. The extent to which employees gain from human capital investment is found in a statistic from McKinsey: “human capital represents two-thirds of wealth for the average individual — and work experience contributes almost half of that value.”

The report from the World Economic Forum on human capital makes a strong case for the importance of human capital investment.2 They argue that “it is essential that the workforce be viewed as an asset rather than as an expense or liability, with investments in the workforce (such as learning and development) being” measured thoroughly.2 The goal should be to transform “accounting principles so investments in the workforce are not penalized but are instead recognized as a source of value creation.”2
However, as important as human capital investment is, there is reason to believe that companies are not doing all
they should in this area. A report from Deloitte on trends in the future of the workforce illustrates the point, finding that “74% of respondents believe that the development of new skills and capabilities is strategically important in their organization, but less than one-third (32%) say they are rewarded for developing new skills.”7 Clearly, many businesses need to step up their human capital development efforts.

The Bottom Line is The Bottom Line

There is a distinct imperative for the need for companies to implement more robust accounting for, reporting on and investing in human capital, and to devote more human resources to human capital development. Thinking of human capital as being absolutely intangible and impossible to measure leads to undervaluing not just human capital, but workers themselves, as well.
The bottom line is the bottom line, in that the downsides of not measuring human capital or investing in workersproperly are financially significant.

Authored and Research by Anton Platt
Commissioned and Edited by Hason Greene

Sources:

1. https://hbr.org/2010/10/what-cant-be-measured
2. https://www3.weforum.org/docs/WEF_NES_HR4.0_Accounting_2020.pdf
3. https://www2.deloitte.com/us/en/insights/focus/human-capital-trends/2020/workforce-metrics.html
4. https://www.mckinsey.com/featured-insights/sustainable-inclusive-growth/chart-of-the-day/mind-the-skills-gap
5. https://www.mckinsey.com/capabilities/people-and-organizational-performance/our-insights/the-organization-blog/using-skill-gap-assessments-to-help-future-proof-your-organization
6. https://www.mckinsey.com/capabilities/people-and-organizational-performance/our-insights/human-capital-at-work-the-value-of-experience
7. https://www2.deloitte.com/us/en/insights/focus/technology-and-the-future-of-work/importance-of-investing-in-employ-ees.html