April 2005 - Management imperatives of human capital reporting

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 policies.

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 cycle.

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 the accounts.

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 to outsiders.

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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