For many years all research on the topic of Human Capital Management has shown that good Human Capital Management leads directly to improved top and bottom line results as well as “market value” of organisations. The “smart” investor community have known for years that good Human Capital Management is a lead indicator of organisational performance, and have based their investment choices, in part, on this.
Furthermore, a recent study of 704 CEOs by the Conference Board as reported by the Wall Street Journal confirms what we’ve known for a while – CEO’s rank “Talent” as the number 2 priority behind “Growth”.
So, I suppose, it should come as no surprise that the American National Standards Institute (ANSI) together with the Society for Human Resource Management (SHRM) are in the process of developing standards for Human Capital financial reporting. The recommendations for public comment will, evidently, be available early in 2012 and, should ANSI certify the standards, we can expect a strong marketing campaign aimed at the investor community. If the uptake is significant enough, as is expected, other standards bodies, such as accounting standards bodies, will be under some pressure to get involved.
The newer Human Capital Management (HCM) systems enable organisations to understand and manage their Human Capital in a much more analytic, metrics-driven way than was possible in the past. So, for organisations that have adopted Human Capital Management principles and technology, the move will not be that onerous.
From executive management perspective, if you know that what you are showing in your financial statements will bring investors, then surely it makes sense to include the information. Much of the investment marketplace today is based on metrics and ratios derived from traditional financial statements. The potential of Human Capital Financial Statements as a tool for measuring and identifying the long-term potential of an organisation can only improve investor decisions.
So, how could it possibly work? Jeff Higgins, CEO of the Human Capital Management Institute, has created a detailed set of statements equivalent to the (financial) Income Statement, Balance Sheet, and Cash Flow statements. These measure the “impact” that investment and good Human Capital practice has on the financial returns of the organisation, and the financial value of the workforce at a point in time. Metrics include a “Human Capital ROI ratio” and a “return on Human Capital Investment” that measure the Total Cost of Workforce (TCOW) with revenue and operating profit respectively.
The set of Human Capital financial statements provide the answers to the following questions:
- How do we quantify the impact human capital has on financial performance?
- How do human capital metrics integrate with commonly accepted financial metrics?
- How do we measure total workforce costs to drive workforce effectiveness and efficiency?
- How do we quantify value creation in the organisation across the talent management life cycle?
- What is the impact of training on profit, productivity and total human capital value?
- What is the differential human capital value creation of different job roles?
- How do you measure workforce flow, changes, and growth like a cash flow statement?
TalentAlign is introducing these new concepts in Human Capital Management at the TalentAlign / CSSA Human Capital Management Seminar scheduled for late February 2012. So look out for the notices. This is going to make a huge difference in the lives and methods of management in the future.
If you would like information in the meanwhile, please contact us.
Gail, Thank you for putting together and posting such a well written argument for the inclusion of human capital information in public company financial statements. And thank you for the kind words about the work we are doing at HCMI. Please let me know how I can help with the uipcoming TalentAlign seminar in February.
Its a great and informative report. Hopefully, most companies will use the basic concepts of Human Capital for development reasons.
I have no further words, but just to appreciate the move.
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