Rob Swystun, Pristine Advisers
It’s the people who make the company, right? The managers, the shareholders, the board, but mostly the employees. That is, perhaps, the thinking behind a new movement in the business world to have more substantive reporting on human capital.
Both the Sustainability Accounting Standard Board (SASB) in the United States and the International Integrated Reporting Council (IIRC) in the United Kingdom are pushing for more robust reporting of human capital information according to a collaborative article on CFO.com by Laurie Bassi, David Creelman and Andrew Lambert.
This is a good thing for Chief Financial Officers who want their organizations to have a better understanding of human capital assets and how they affect company strategy, growth and value for shareholders.
Rather than just reporting on basic human capital information like employee turnover, which really doesn’t reveal much, it’s better to dig deeper and report something like “regrettable turnover,” the trio says. Regrettable turnover is the act of losing people you don’t want to lose. These losses of people who add value to the organization and leave of their own accord can cause material risks like a drop off in sales, delayed projects and poor cost control measures.
By monitoring this regrettable turnover, a CFO is taking this raw human capital information and using it to help quantify the material risks it can cause, which in turn impacts strategy and growth of the organization.
How it’s done
Bassi, Creelman and Lambert identify two main approaches to this more substantive human capital reporting. One way is to start with strategic issues and dig out the human capital factors that underlie it.
As an example, the trio points to Deutsche Bank, which used this approach and outlined it in its Human Resources Report 2013.
“The financial crisis eroded people’s trust in the banking industry,” the Bank wrote in its report. “To regain this trust, it is up to every Deutsche Bank employee to prove to our clients, investors, legislators, regulators and the general public that we are a trustworthy partner determined to bring about cultural change.”
The report shows how human capital initiatives underlie this strategic change and how the bank measures their success with things like improved governance of compensation and a survey to measure employee understanding of what they need to do to reach this goal of regaining the public trust.
Approach number two is to report on human capital metrics that are expected to have a material impact on a specific sector. This time, the example is from SASB, which suggests that electronic manufacturing companies report the “number and total duration of work stoppages. Disclosure shall include a description of the reason for the work stoppage, the impact on production, and any corrective actions taken.”
The first step for a CFO to enacting this more robust human capital reporting within an organization, is to get integrated reporting on the agenda, create a working committee and work with the HR department to develop analytics, insights and reports that will matter most to the business. It should be a truly collaborative effort between HR and finance.
Bassi, Creelman and Lambert say the new focus on human capital reporting of the SASB and IIRC is something CFOs should have already been doing. It’s a chance to switch their own focus from the cost of human capital to instead spotlighting how human capital can be harnessed by an organization to drive growth.