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Reporting on Human Capital Management: What the Fortune 50 tell Wall Street

Summary

This article reviews a report that studies the practices of Fortune 50 companies in reporting to the investment community their performance in the area of human capital management.

Successful strategy execution and financial results depend on the components that make up the non-financial performance parameters, such as human capital. Given its origin as a framework that was designed to help businesses look beyond financial performance, the Balanced Scorecard is seen as a powerful tool for communicating to the investment community how non-financial performance impacts financial results and the likelihood of successful strategy execution. Since the concept is in infancy, the use of the Balanced Scorecard for this purpose has thus far been an exception rather than the norm. Hence, one sees that components such as human capital development are poorly represented in external reporting.

Interestingly, there is evidence that organizations are waking up to the value of communicating non-financial performance drivers and indicators. In this report, the author, David Creelman, presents the results of an in-depth analysis into the human capital reporting practices of the US’s biggest listed companies. The author finds that organizations are increasingly reporting more about human capital in their annual reports. While they have a long way to go, a beginning has been made.

The report, which promises to be of use to both corporations and investors, analyses reporting practices within nine discrete human capital areas, such as diversity, reward, employee satisfaction/engagement and training and development. The analysis reveals that the gap between the top and bottom performers is very wide. Using excerpts from actual corporate reports and case examples like Citigroup, the author puts together a report makes a key contribution to understanding of how businesses can communicate the link between human capital, business strategy and financial results to stakeholders.

 

Reporting on Human Capital Management: What the Fortune 50 tell Wall Street about human-capital Management

Creelman Research/The RBL Group.

Since the launch of the Balanced Scorecard movement, there has been a growing belief that the scorecard might prove a powerful tool for communicating to the investment community how non-financial performance impacts financial results and the likelihood of successful strategy execution. However, this is still the exception rather than the norm. Ingersoll-Rand is one of the few to publish its Strategy Map in the annual report.

It should not be surprising, therefore, that components of non-financial performance, such as for human capital development, are poorly represented in external reporting.

But there is evidence that organizations are finally beginning to wake up to the stock-moving value of communicating non-financial performance drivers and indicators.

In his report, ‘Reporting on Human Capital Management: What the Fortune 50 tell Wall Street about human-capital management’, David Creelman has conducted painstaking analysis into the human capital reporting practices of the US’s biggest listed companies. He finds that although the field is still in its infancy, organizations are reporting more about human capital in their annual report and, where existing, corporate responsibility report, than had historically been the norm.

However, the gap between the top and worst performers (as measured by the human capital word count in the reports) is stunning. For instance the top performer IBM dedicates fully 15,000 words to the subject, while Sears Roebuck does not report a single word (the only company not to). The average word count is about 2,500. The top five human capital word-counts are 1) IBM, 2) Chevron, 3) General Electric, 4) Kroger and 5) Dow Chemical.

According to Creelman, this Report is of interest to two groups.

1. Corporations. “Study what others are doing, particularly those in your industry. Prepare to enhance your public reporting of human-capital information,” he says.

2. Investors. “Familiarize yourself with the human capital information corporations report and understand what it can tell you about the value of the company.”

Within the Report, Creelman analyses reporting practices within nine discrete human capital areas, such as diversity, reward, employee satisfaction/engagement and training and development. Excerpts from actual annual reports and corporate responsibility reports are used to illustrate present approaches, which provide useful insights into corporate practices.

As well as sometimes expressing his exasperation at the mind-numbing pointlessness of some of the reporting (for example stating that the company is committed to talent management is of zero value to investors without being supported by metrics). Creelman does highlight some impressive practices. For instance, he publishes this excerpt from Citigroup’s annual report regarding its work in discussing its values and how these should be the guides for future development and behavior.

“We reached about 35,000 of our employees ‘live’ and thousands of others through rebroadcasts. We talked about the great history created by our predecessors and the importance of living up to that legacy. We discussed the need to focus on the long-term success of franchise and not sacrifice our future for short-term profits. And we set forth our responsibilities we all share as employees of Citigroup – to our clients, to each other, and to our franchise.”

Creelman writes:

“Of all the reports on communications practices, Citigroup’s is the most interesting because it was clearly linked to a strategic issue: the reputation damaging scandals. The brand of Citigroup is a very important asset in the company’s valuation, and [demonstrating how it is protecting its brand and reputation] will be essential for investors looking to correctly value the firm,” he writes.

Creelman’s stressing the link with a strategic issue is particularly noteworthy. Indeed throughout the report he repeatedly stresses that performance to human capital in isolation, as with any other non-financial component, does not in itself give investors the full story. What’s important is how human capital performance is linked to business strategies. “A report that an organization has a compensation practice of paying above market rates would seem inconsistent if their strategy was to be a low-cost supplier,” he correctly warns.

And this brings us full-circle back to the Balanced Scorecard. The primary reason for assessing performance metrics is how well they indicate the likelihood of strategic success. Launching interventions to drive the organization toward being a benchmark against non-financial metrics should only be countenanced if they increase the probability of success. Non-financial metrics must be understood in the context of the organizations strategy and competitive positioning.

More, it is the inter-relationship of various non-financial metrics that give us the true measure of value creation. We are a long way from the empirically based reporting of the inter-relationships between non-financial metrics and accurately reporting their impact on financial performance (although we are gaining huge insights through the correlations on the scorecard). But Creelman’s report serves as an important step toward that goal. As he says:

“We expect that even a few years from now even the best of these reports [the human capital reporting by organizations] will look – in retrospect – terrible. No-one is doing a really great job of helping investors understand the value of human-capital intangibles. That will change.”

For further information on this report and how it can be purchased visit: www.creelmanresearch.com