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© 2015 Wiley Periodicals, Inc. Published online in Wiley Online Library (wileyonlinelibrary.com). DOI 10.1002/ert.21519

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practitioner studies that has examined the operational and financial benefits to compa- nies adopting various HR policies. In a recent paper titled “The Materiality of Human Capital to Corporate Financial Performance,” we sorted through hundreds of these studies to identify those that focused specifically on conventional investment metrics conforming to SEC standards of materiality, such as prof- itability, return on investment, and returns to shareholders.1

In total, we identified 92 papers linking financial outcomes to HR policies such as training, compensation, and job design. Most of these studies used standard regression analysis to search for connections between both individual and clusters of HR policies and corporate performance. Others looked for direct correlations between policies and stock prices and other metrics. Nearly three- quarters of the studies found positive links. Another 17 found a mix of positive correla- tions and either no relationship or negative ones.2 Seven discovered no links at all, while just one reported only negative outcomes. A summary of our findings is shown in Exhibit 1.

These results offer empirical evidence that HR policies can be material to corporate financial performance. Their comprehen- sive nature adds to this view. The 92 studies stretched back decades, covering both large and small firms, in dozens of countries and representing virtually every industry.

Human resource professionals should be aware of the growing scrutiny they face from institutional investors. Corporate executives and management consultants have acknowledged for decades the importance of HR policies, or human-capital manage- ment. Indeed, the refrain “People are our most important asset” has been repeated so often it has become a cliché. But investors have only recently begun to turn their atten- tion to the issue. A key factor has been the emergence of organizations and initiatives aimed at helping the investment community recognize the impact of so-called nonfinancial considerations on corporate financial perfor- mance, including HR policies. Among these are the United Nations (UN)-sponsored Prin- ciples for Responsible Investment initiative, the UN Global Compact, the Global Report- ing Initiative, and the Sustainable Accounting Standards Board.

The organizations that have been involved in these international initiatives have been advising institutional investors that HR poli- cies need to be seen as “material” to invest- ment outcomes. In this context, the word material has both practical and legal mean- ings. It indicates that something should be considered a standard investment risk as defined by the US Securities and Exchange Commission’s (SEC’s) corporate reporting requirements.

Backing up such advice on HR disclo- sure is a rich literature of academic and

Investor Perspectives on Human-Capital Management

Aaron Bernstein and Larry Beeferman

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Employment Relations Today

CONCERNS ABOUT REPORTING HR DATA

Global investors’ mounting awareness of human-capital materiality presents an oppor- tunity for companies to offer a compelling story about the nature of their HR policies and how they fit into their business strategy. Many corporations, including most global ones, already collect reams of data on how their HR policies are carried out and the impact they have on a wide variety of busi- ness outcomes. But such data often are not reported publicly. There are a number of good reasons why this has been the practice.

For example, some companies consider at least some HR data to be confidential or com- mercially sensitive. They may also see little value in preparing it for public consumption, particularly because there has not yet been widespread demand from investors. But even if these concerns are set aside, there remains the question of what companies should report

and how to do that. Although investors increasingly perceive a need for public HR reporting, there are no uniformly accepted guidelines for presenting such data, either in the United States or in other countries.

Our review of the literature turned up a number of studies that attempted to address this concern. Corporate training is one area to which the standardized approach to report- ing value can be applied. A synthesis of what we found offers a broad-gauge set of guide- lines companies can use:

❏ A description of the company’s training policy.

❏ How that policy relates to the fi rm’s over- all HR and business strategies.

❏ The kinds of employees trained, such as managerial, technical, production, and so on.

❏ Whether the training is formal or infor- mal, and whether it is provided inside or outside the company.

❏ Whether and how the company measures the direct and indirect costs of the train- ing, and what they are.

❏ Outcomes that characterize successful implementation of the policy and how they are measured, such as through key performance indicators. These might be

Global investors’ mounting awareness of human- capital materiality presents an opportunity for companies to offer a compelling story about the nature of their HR policies and how they fit into their business strategy.

Topic Financial Effect Positive Mixed None Negative

Training (36 studies) 22 8 5 1 HR Policy (56 studies) 45 9 2 0 Total number of studies 67 17 7 1 Note: The simple count of studies presented here does not take into consideration the quality of the studies’ research methodology or the robustness of their fi ndings. Many studies also present multiple fi ndings; when possible, we focused on those fi ndings the authors of those studies presented as their primary ones.

Exhibit 1. Studies of Human Capital Materiality

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immediate in terms of increased worker knowledge and skills for greater produc- tivity in the case of manufacturing, greater customer satisfaction for higher sales in the case of retail stores, and so on. Or they might be aimed at lower turnover with associated cost savings.

❏ Any impact the implementation has had on company profi ts and other measures of fi nancial or other kinds of performance.

Other kinds of HR policies present signifi- cantly greater challenges for companies that want to report on them publicly. As every HR expert knows, and the scholarly literature shows, such policies do not operate in isola- tion. Instead, they typically function as part of what researchers describe as bundles of policies designed to complement and rein- force each other. For example, teamwork systems may be set up in tandem with com- pensation and other reward policies intended to stimulate employee motivation and job satisfaction.

Just as with training, investors need an overview of a firm’s HR strategy that explains which bundle of policies it employs and why (for each policy and in relation to one another), and how they fit into the over- all HR and business strategy. The research has found that complementary bundles of policies can lead to superior investment outcomes. But which specific bundles work best can vary by country, by industry, and by each company’s broader competitive strategy. While this makes it difficult for investors to

identify superior HR strategies, it also gives companies a chance to explain why they have chosen their specific set of HR policies and how they fit into the company’s strategy.

PROPOSED GUIDELINES FOR REPORTING HR DATA

Useful guidance can be found in a 2003 report by a Task Force on Human Capital Management (HCM) established by the Brit- ish Secretary of State for Trade and Industry, which included several high-level execu- tives of prominent British companies.3 It concluded:

HCM should not be regarded solely as an internal matter for management. For most organisations the link between HCM policies and practices and performance is sufficiently central to be a mate- rial factor whose disclosure might reasonably be expected to influence assessments of their value and effective stewardship by management. In such cases disclosure increases the value of financial reports and will be important for the effective operation of capital markets.

Ideally, companies might complement broad-brush HR reporting with key perfor- mance indicators (KPIs) of their HR policies and their specific connections with company financial performance. Some organizations already publish such indicators, mostly for internal management rather than for public reporting. The Boston Consulting Group has conducted surveys of corporate HR policies since 2007. The most recent as of the date of our study, in 2014, received responses from 3,500-plus companies in 101 countries.4 It found that firms with higher operating mar- gins or sales growth were more likely to use HR KPIs, although it also concluded that

Just as with training, investors need an overview of a firm’s HR strategy that explains which bun- dle of policies it employs and why (for each pol- icy and in relation to one another), and how they fit into the overall HR and business strategy.

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those that do so only occasionally use them to track workforce productivity or personnel costs.

Similar findings emerged from a 2013 Harvard Business Review survey of 498 senior executives and board directors from around the world, most of them at large companies. Those who said their firms used sophisticated workforce analytics were far more likely to state that their organization was effective at leveraging their workforce and had engaged employees. Two-thirds of those surveyed also reported that their company’s profitability was “extremely strong” relative to that of competitors, when compared with 27 percent of those not using workforce analytics. Still, overall some 61 percent of those surveyed described their use of such data as “tactical, ad hoc, and disconnected from other key sys- tems and processes.” More than one-fourth revealed that their firms made little or no use of it at all.5 Offering such information pub- licly could help meet investor demand and spur companies to put such data to better use in their day-to-day operations.

Ensuring Objectivity

Companies that choose to report on HR face other challenges that have been the subject of scholarly research as well. One issue is who at the firm does the actual reporting. The production of corporate financial reports is typically undertaken by a dedicated staff using well-established protocols and operat- ing within an established control system. Nothing like that exists for HR reporting. Many of the surveys used in the research we reviewed sought responses from a single manager, executive, or HR specialist. A 2013 paper that explored the measurement ques- tions such surveys pose has argued that this

raises concerns about “low reliability and consistency.” The paper pointed out that “while HR managers may be most knowl- edgeable about the general existence of cer- tain HR practices within their organization (HR policy), they may be less able to provide accurate information concerning their actual implementation or use (actual HR practice).”6 The authors of the study also said that HR managers may have “potential vested inter- est in HR practices” or may not have a suf- ficient appreciation “for their staff’s skills and abilities” with regard to implementation. The paper suggested that line managers are in principle better positioned to report on how HR policies actually are implemented on the job, as they manage employees day to day.

Another recent paper offered similar advice, cautioning that HR managers may “have an incentive to overstate the quality of employment practices on the ground and/or underreport incidents of failure to comply with stated company policies or legally required employment standards.”7 Although there have been few studies relying on surveys of line managers, corporate HR officials nonetheless might consider including them in any public reporting effort.

Including Interviews of Other Managers and Employees

One 2004 study of UK manufacturers dealt with this issue by conducting what amounted

The production of corporate financial reports is typically undertaken by a dedicated staff using well-established protocols and operating within an established control system. Nothing like that exists for HR reporting.

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to something like an external audit to identify each firm’s HR policies:

The larger part of the data was collected through on-site, semi-structured interviews with senior managers and directors. The interviews were conducted with those primarily responsible for each of the practices in question (e.g., the quality manager for TQM, the HRM manager for skills enhancement) and involved checking and recheck- ing assessments of the use of each and every practice. On average, three different managers or directors were interviewed per company, and the total time spent interviewing was a minimum of three hours.

Two further types of evidence supported the inter- views. One was the collection and examination of relevant company documents. Thus if an inter- viewee indicated that they had systematic training schedules to enhance shop floor employee skills, then supporting documentation was requested and examined. The other type came from a tour of the production facility and discussion with shop floor personnel, where it was possible to see and hear about (or fail to observe) evidence of the practices reported (e.g., the amount of computer-controlled equipment, examples of statistical process con- trol charts, or lack of awareness by operators of claimed initiatives).8

Other researchers have gone further to argue that a full understanding of how a com- pany’s HR policies work requires interviews with employees. As one author put it, every HR system “works through its impact on the skills and knowledge of individual employ- ees, their willingness to exert effort, and their opportunities to express their talents in their work.”9 Another paper argued along similar lines that “when employees perceive that the intended goals of HR practices are

cost-driven, control focused and unlikely to enhance employee well-being, lower levels of satisfaction and commitment result.”10

A study published last year found that training enhances corporate performance only when it also improves employee com- mitment. The authors concluded: “This result suggests that organizations will not accom- plish the intended benefits of HRD (human resource development) unless they achieve employee buy-in of the HRD programs on the basis of employee perceptions of benefits or genuine care of the management.”11 Such findings suggest that corporate HR reporting should involve information gathering from sources such as employee evaluation reports and company assessment centers.12

THE WORLDWIDE MOVEMENT TOWARD GREATER TRANSPARENCY

Clearly, corporate HR reporting can be a complex undertaking if done well. Still, com- panies should expect to face growing requests for such information. One initial source may be the European Union. In 2014, the European Parliament passed legislation requir- ing companies with 500 or more employees to disclose nonfinancial information or explain why they do not.13 It instructed the European Commission to develop guidance on which indicators companies should use and consult

stakeholders during the process, which must be completed before the rules take effect in 2017. Some form of HR reporting is likely to be included, although the discussions are not

In 2014, the European Parliament passed legis- lation requiring companies with 500 or more employees to disclose nonfinancial information or explain why they do not.

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advanced enough to tell what that might look like. Those rules will not apply to compa- nies operating in the United States, but they will apply to all with 500-plus employees in Europe, including US-based firms.

Another effort that would relate directly to US corporations involves a 2014 petition asking stock exchanges around the world to adopt nonfinancial disclosure listing require- ments. It was drafted by the US-based Investor Network on Climate Risk and was submitted for comment to the World Fed- eration of Exchanges (WFE), an association of 64 stock exchanges.14 The WFE set up a Sustainability Working Group in part to consider the proposal.15 One potential out- come of the petition is a recommendation on ESG disclosure requirements to exchanges by the International Organization of Securities Commissions, an association of 120 regula- tors around the world that sets standards for the securities industry. Although any such standards probably would not be final- ized for several years, if they do materialize, they well could include HR policy in some fashion.

The conclusion: public HR reporting in some form is likely to emerge over the next few years. Companies should start preparing for that day.

NOTES

1. Bernstein, A., & Beeferman, L. (2015, April). The materi- ality of human capital to corporate financial performance. Pensions and Capital Stewardship Project, Labor and Worklife Program, Harvard Law School. The paper was commissioned by the Investor Responsibility Research Center Institute. Retrieved from http://www.law.harvard. edu/programs/lwp/pensions/publications/FINAL%20 Human%20Capital%20Materiality%20April%2023%20 2015.pdf

2. Typically, findings are cast in terms of correlations. Although there are some complex and contested issues as to the causal connections between or among policies and financial outcomes, many authors infer from their findings that the correlations represent causality.

3. Task Force on Human Capital Management. (2003). Accounting for people report. UK Department for Trade and Industry. Retrieved from http://webarchive.nationalar- chives.gov.uk/20090609003228/http://www.berr.gov.uk/ files/file38839.pdf

4. Strack, R., Caye, J.-M., Gaissmaier, T., Orglmeister, C., Tamboto, E., von der Linden, C., Ulrich, S., Quirós, H., & Jauregui, J. (2014). Creating people advantage 2014–2015 (pp. 5, 19). Bethesda, MD: Boston Consulting Group.

5. Harvard Business Review. (2013). Connecting workforce analytics to better business results (pp. 1, 2). Retrieved from https://hbr.org/resources/pdfs/comm/sumtotal/ hbr-sumtotal-report-aug.pdf

6. Langevin Heavey, A., Beijer, S., Federman, J., Hermans, M., Klein, F., McClean, E., & Martinson, B. (2013, April). Measurement of human resource practices: Issues regarding scale, scope, source and substantive content. In J. Paauwe, D. E. Guest, & P. M. Wright (Eds.), HRM and performance: Achievements and challenges (pp. 129–148). Hoboken, NJ: Wiley.

7. Kochan, T., Appelbaum, E., Leana, C., & Gittell, J. H. (2013, June 7). The human capital dimensions of sustain- able investment: What investment analysts need to know. Working paper prepared for the Sustainable Investment Research Initiative Sustainability & Finance Symposium. Washington, DC: Center for Economic and Policy Research. Retrieved from http://www.cepr.net/documents/ publications/human-capital-investment-2013-03.pdf

8. Patterson, M. G., West, M. A., & Wall, T. D. (2004). Integrated manufacturing, empowerment, and company performance. Journal of Organizational Behavior, 25(5), 641–665.

9. Boxall, P. (2013, April). Building highly-performing work systems: Analysing HR systems and their contribution to performance. In J. Paauwe, D. Guest, & P. Wright (Eds.), HRM and performance: Achievements and challenges (pp. 47–60). Hoboken, NJ: Wiley.

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Larry Beeferman has directed the Pensions and Capital Stewardship Project, part of the Labor and Worklife Program at Harvard Law School from its inception in 2004. The Project’s work includes research and engagement with scholars and diverse prac- titioners on pension fund investment as it is aimed at affording financial security in retirement and in terms of the implications of that investment for portfolio compa- nies, their stakeholders, and the larger community. Beeferman has written numerous papers and articles on these topics. He may be contacted at [email protected]. Aaron Bernstein is a senior research fellow at the Pensions and Capital Stewardship Project and cofounded its investor initiative in 2008 to help pension funds and other investors analyze the long-term investment risks of social factors such as human capi- tal. His papers are available on the project’s publications page. He is also the editor of Global Proxy Watch, a corporate governance newsletter for institutional investors. Bernstein left BusinessWeek magazine in 2006 after a 23-year career as an editor and senior writer. He may be contacted at [email protected].

10. Guest, D., & Bos-Nehles, A. (2013). HRM and perfor- mance: The role of effective implementation. In Jaap Paauwe, David Guest, & Patrick Wright (Eds.), In J. Paauwe, D. Guest, & P. Wright (Eds.), HRM and perfor- mance: Achievements and challenges (pp. 79–96). Hoboken, NJ: Wiley.

11. Sung, S. Y., & Choi, J. N. (2014). Multiple dimensions of human resource development and organizational perfor- mance. Journal of Organizational Behavior, 35, 851–870.

12. Al Ariss, A., Cascio, W., & Paauwe, J. (2014). Talent  management: Current theories and future research directions. Journal of World Business, 49(2), 173–179.

13. The legislation is available at http://register.consilium. europa.eu/doc/srv?l=EN&f=PE%2047%202014%20INIT

14. See http://www.ceres.org/investor-network/incr/ sustainable-stock-exchanges

15. See http://www.world-exchanges.org/node/4893