2005 - Management imperatives of human capital
While the clock has started ticking
for public companies to begin working on their
new style Operating and Financial Reviews, we
are still awaiting a final reporting standard
from the Accounting Standards Board.
The requirement for an OFR came
in to effect on April 1 but, since it covers the
financial years starting on or after that date,
there is adequate time for companies to prepare
themselves. Nevertheless, companies need to know
what will be expected of them.
One controversial area of the
OFR regulations has been a requirement for companies
to publish information about employees. This requirement
was significantly watered down from the expectations
arising from previous reports such as Accounting
for People that set out a series of recommendations
covering the type of human capital measuring that
might be used for such reports.
The Chartered Institute of Personnel
and Development has criticised these changes,
believing that many companies needed to be led
in to the undertaking of workforce measuring by
a greater degree of compliance. Any company that
takes the performance of its workforce seriously,
however, would be unwise to ignore the debate
on workforce measuring and reporting. Whatever
the final wording of the reporting standard, companies
should take the opportunity to review their approaches
to the use of workforce metrics well ahead of
publication of the OFR reports.
But when, and if, they undertake
their reviews, just what kind of changes should
they think of making to their existing practices?
What is a good measure and what is going to be
a waste of time and effort?
I have no doubt that some companies
will be seeking to undertake as little work as
possible. These will be the companies that view
an expansive OFR as unnecessary pandering to existing
and potential shareholders. The most worrying
aspect of any such view is that external practices
may turn out to be a reflection of internal approaches
and too often such approaches lack any sense of
cohesion or integration with the overall aims
of the business.
In one sense this could be seen
as a good thing. The competitive nature of business
means that some once proud industries and companies
decline as others emerge. In the UK we are coming
to terms with the demise of MG Rover that was
put in to administration last week.
It is part of human nature that
we bemoan the passing of a former giant more than
we celebrate the appearance of a vibrant new sector
or business. The same happened when the Strategic
Defence Review recommended an amalgamation of
some famous regiments as part of the modernisation
of the armed forces. Nostalgia is a powerful restraining
force. But we should not allow it to shape retrogressive
To support a capitalist system
is to accept Joseph Schumpeter’s principles
of creative disruption that describe what he held
were necessary cycles of decline, renewal and
rebirth. Some may argue that regulation –
even where it is designed to improve the running
of a business – is interfering with that
If companies do not appreciate
the need to measure aspects of their workforces
it means they are not yet convinced of the benefits
of doing so. For those companies it would be wrong
to impose a regime of human capital measurement
if the board simply doesn’t “get it”.
Who knows, the board might decide to create a
lean environment where it owns little more than
its intellectual capital? But in doing so it should
not expect to develop any sense of permanency.
Atilla the Hun once conquered
most of Europe and part of Asia without any concrete
structures of administration. He commanded on
the hoof and slept in a tent. But his empire died
with him. Attila’s “stakeholders”
– the warriors who followed him, and the
people who came under his influence, suffered
a precarious existence.
The structure of a modern business
demands some rationale to keep the various stakeholders
in place. It is reasonable that shareholders should
expect some information about succession planning,
the training of employees and workforce expertise.
Employees are the biggest cost for many emerging
industries. Shareholders need to be convinced
that the cost is an investment rather than the
drain on resources that is sometimes implied in
This is why providing employee
information needs to be perceived as something
rather more than a sop to the regulators. If I
was investing in a company I would be looking
for evidence that employees are regarded as the
investment capital of the business, tied in to
its overall approach to management.
I would like to think that the
board would have a good idea of what kind of return
it was getting on its employee investment –
revenues or profit per head, say. I would want
to know how much it cost to recruit people and
how those costs were being managed. I would want
to know something about training costs and where
that investment was being directed.
The publication of bald statistics,
however, would be insufficient. Knowing the percentage
of employee turnover, for example, is meaningless
if you have no idea about the people who are leaving
and of those who are replacing them. If you are
losing your best people then even a relatively
small turnover in staff is going to prove damaging.
The Royal Bank of Scotland has
decided that, beyond its employees, it wants information
on the people who do not come to work there, particularly
those who reject the bank after making an application.
This so-called “turn down” information
can inform managers about the bank’s image
At the same time, where it does
consult its own employees it gives them feedback
about the actions it instigates as a result of
their responses. Any board looking at the type
of indicators it might include in its OFR should
look no further than the measuring and reporting
undertaken by the RBS.
But the RBS is one of the world’s
largest banks. It can afford the comprehensive
investment it has made in human capital measuring.
Smaller companies may not have the means to undertake
anything so broad. But the extent of any measuring
is less important than understanding the way that
findings should feed back in to management action.
I know of one government body
that could produce scores of employee measures
but which never did anything with them. This fits
with the findings of a guide published last week
by the Chartered Management Institute. The guide,
Getting the basics right: a guide to measuring
the value of your workforce, found that as many
as nine of 10 UK companies were claiming to measure
the value of their workforce. But no more than
one in five believed that the information they
gathered was of any use.
Its most pertinent recommendations
are to measure those areas where good management
can make a difference, link the measures to strategy,
keep them simple and keep them focused on the
aims and direction of the business. This makes
so much sense. Some companies, of course, will
do what they always do – use some grand-sounding
expressions and copy the practices of others.
That, as Schumpeter recognised, is their prerogative.
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