For the times they are a-changin'

Times are certainly changing – COVID-19, social unrest, racial injustice and the emergence of a multi-stakeholder view of the economy are tilling up fertile soil in which to plant the seeds of a new era.  The harvest?  Stronger, more productive and higher performing organizations.  How do I know?  As Peter Drucker once said, “What gets measured gets managed.”

Over the last few years a number of organizations have pushed for greater insight into and measurement of human capital – people-stuff, especially in publicly traded companies.  The argument is investors – shareholders and institutions should have access to information which is material (important to the outcomes of the individual business), and human capital is typically a black-box.  Hoorah – the day has finally arrived!  The SEC recently announced the modernization of Regulation S-K which will require public companies to disclose material aspects of human capital activity.

In his August 26, 2020 announcement, Jay Clayton, Chairman of the SEC said,

I fully support the requirement in today’s rules that companies must describe their human capital resources, including any human capital measures or objectives they focus on in managing the business, to the extent material to an understanding of the company’s business as a whole.  From a modernization standpoint, today, human capital accounts for and drives long-term business value in many companies much more so than it did 30 years ago.[6]  Today’s rules reflect that important and multifaceted shift in our domestic and global economy.

2020 has highlighted the importance of people to businesses, economies, safety, health, security and the fabric of our communities more than we could have ever imagined.  It has also shed light on our fragility in an age when being resilient isn’t enough.  More data isn’t the answer, however it points us in a new, positive and potentially more profitable direction.  It is a long overdue step toward accounting for the value created (or perhaps destroyed) through our human capital practices.  

How do you measure the value created through people, and more importantly, what of those measures applies to my business?  This is the question of materiality, which figures prominently in the most recent SEC ruling.  While the answers aren’t all clear, there are a number of organizations, including the Sustainability Accounting Standards Board (SASB), the International Standards Organization (ISO) and the International Integrated Reporting Council (IIRC) among others, who have designed tools to help.  

SASB offers an interactive materiality map to help you answer materiality questions for your industry, and are engaged in a concerted effort to further explore the relationship to human capital.  Globally recognized standards for human capital measures can be found in the ISO 30414 guidelines for internal and external human capital reporting, and recommendations for qualitative and quantitative reporting of human capital and other ESG related items can be found in the IR Framework.

You may say, “I am a private company or an investor in private companies so none of this applies to me.”  True, the SEC ruling and the recently introduced House Bill H.R. 5930 “Workforce Investment Disclosure Act of 2020” don’t apply to private organizations, however, if you have an interest in making an initial public offering (IPO) or you are investing funds that have been raised from limited partners who are also members of the Human Capital Management Coalition (HCMC), among others, you will eventually be asked to account for your human capital practices.  More and more, stakeholders are looking at companies’ people-practices as indicators of their ethics, values and integrity.  Consumers make buying decisions, prospective employees make career choices, partners, affiliates, vendors, suppliers and contractors choose who to associate with on the basis of your reputation. You need look no further than Glassdoor, Rate My Professor or Angie’s List for confirmation.

Experience has taught us businesses both large and small are underinvested in human capital capabilities and the human resources function.  The mere mention of Human Resources causes people to roll their eyes, snort with derision, and share stories of the insufferability of an HR ‘professional’ they had the misfortune of working with.  It’s quite possible they’ve gotten what they’ve paid for.

Many organizations lack solid people processes, practices and technologies and dedicated human resources staff; which will make measurement and reporting a virtual impossibility.  It will also hamper your ability to create value – remember, you can’t manage what you don’t measure.  Contrary to outdated accounting principles, you can measure the value and contribution of your employees.  In fact, the International Federation of Accountants (IFAC), in collaboration with the American Institute of CPAs (AICPA), released two whitepapers in June highlighting the critical role finance, CFOs specifically, play in a multi-stakeholder world:

While accounting for the balance sheet will always remain important, not least in preparing for and managing through difficult times, performance and value cannot be adequately captured and measured in financial terms by the balance sheet or by financial shareholder value metrics. Success requires creating and demonstrating value for all stakeholders, not just shareholders, and addressing societal expectations related to sustainability and broader impact.

As this new world rushes in, here are a few ways you can ensure you’re ahead of the curve:

1. Start with an HR Audit
2. If you are an investor, conduct comprehensive human capital due diligences on all deals
3. Identify areas of risk and build a remediation plan
4. Align your people-practices with your business strategy and budget
5. Create a value-creation action plan focused on strategic and tactical people-related opportunities
6. Implement basic HR technologies to capture and report human capital data
7. Identify specific, strategically relevant and material human capital key performance indicators (KPIs)
8. Tie human capital data to financial and operations decisions
9. Invest in your people leadership – these are critical roles and should be treated as such – make changes, provide learning and professional development opportunities, augment your team with coaches or consultants to build capability
10. Monitor and measure performance
11. Incorporate human capital into all of your business review activities – this critical function should be connected with your entire operation
12. Assess your culture, get intentional about the employee experience
13. Engage all of your leaders in the process – HR doesn’t ‘own’ human capital, it is a shared accountability!  

A word of caution:  If you treat these emerging mandates as compliance requirements, rather than strategic imperatives, you will have missed the boat.  A check-the-box approach will do you, your business(es) and your employees more harm than good.  Use this as an opportunity to invest in yourself and the businesses you support – you’ve worked hard to achieve your dreams, don’t risk it.  If you’re not sure where to begin, bring in an expert to guide you.

If you’re interested in ways to measure and benchmark finance and human capital performance in your own organization or one of your investments, click here.

We’re always here to talk.  Call or write – we’d love to hear from you.  If you found this article interesting, provocative or informative, please share it with others.

‍