When it comes to what CEOs want from HR to help drive business value, one of their main demands is that HR help communicate the value of talent to investors, whether that means Wall Street or a lone philanthropist. At a breakout session at last week’s ReimagineHR event in London, Brian Kropp, HR Practice Leader at CEB, now Gartner, explained that the reason CEOs want this help is not because investors believe in making employees happy for its own sake, but because they are increasingly acknowledging that talent is a leading indicator of business performance and growth. Below is an overview of some ideas HR leaders should think about when approaching this opportunity:
The Growing Value of Talent
According to PwC’s annual CEO survey, the percentage of CEOs concerned about the availability of key skills as a business threat to organizational growth has risen from 46 percent in 2009 to 77 percent in 2017. This year, CEOs identified “human capital” as the second most important investment to make to capitalize on new business opportunities, ahead of “digital and technology capabilities.” Various trends, from new technologies to demographic shifts, are uprooting the core assumptions of how companies and industries operate. In our analysis of earnings calls from 1,600 of the world’s largest publicly traded companies, we found that words like “change,” “transformation,” and “disruption” have become commonplace. (CEB Corporate Leadership Council members can see the full range of insights from our Investor Talent Monitor here.)
In a recent earnings call with Volkswagen, Chairman and CEO Matthias Mueller said that “Volkswagen needs to transform. Not because everything in the past was bad, but because our industry will see more fundamental changes in the coming 10 years than we have experienced over the past 100 years.” Highlighting the value of talent is becoming one way in which organizations can gain the trust of their investors that their business still has what it takes to outperform a rapidly changing, volatile market. Jean-Paul Agon, CEO of L’Oreal, mentioned in their earnings call that they were going through a “digital transformation” whose success “stems from our very decentralized agile approach in execution with a significant investment in talent.” Conversations like these are only growing, and investors are pushing for more. Private equity firms are even taking matters into their own hands, appointing executives to oversee the talent strategies of their portfolio companies.
As we’ve observed in our Investor Talent Monitor, 46 percent of the largest public companies talked about issues related to talent during their earnings calls in 2010, but by 2016, this number had topped 60 percent. This should not be surprising: Investment firms and activists have been making the news recently for taking an active interest in companies’ talent strategies, pushing firms for greater gender diversity on boards of directors as well as for firms to publish employee compensation and pay gaps.
The Human Capital Management Coalition (HCMC), a group of 25 institutional investors with more than $2.8 trillion in assets under management, has petitioned the US Securities and Exchange Commission to enact a rule that would require companies to disclose details about their human capital management in their reports to shareholders, David McCann reports at CFO:
The group did not define any specific metrics that it wants to be reported, instead offering nine broad categories of information deemed fundamental to human capital analysis as a starting point for dialogue:
- Workforce demographics
- Workforce stability
- Workforce composition
- Workforce skills and capabilities
- Workforce culture and empowerment
- Workforce health and safety
- Workforce productivity
- Human rights
- Workforce compensation and incentives
At present, public companies are not required to disclose anything about their human capital other than their number of employees, unless you count the requirement to reveal the compensation paid to top executives. Investors don’t even know how much money a company spends on its workforce each year.
The HCMC’s proposal is in keeping with a trend we’ve observed in our recent research at CEB (now Gartner) of investors taking an increasing interest in talent issues: Earlier this year, we released our Investor Talent Monitor (which CEB Corporate Leadership Council members can read in full here), showing that among the 900 largest companies in US equity markets, the percentage of organizations talking about talent on investor calls increased from 55 percent to 70 percent from 2010 to 2016. Culture and recruiting were the most common talent topics brought up on these calls, but other issues, like diversity and inclusion, are also subject to growing attention from investors.
David McCann at CFO Magazine takes a look at two groups—Principles for Responsible Investment and the Human Capital Management Coalition—that are working to encourage more organizations to publicly disclose human capital metrics like turnover, absenteeism, and employee engagement. It’s an uphill battle for these advocates, McCann writes, as not everyone is convinced that these metrics are worth using or disclosing:
[A] former finance and marketing executive waves off the notion that such data is a good barometer of management quality. Tom McGuire, now talent strategy leader at Talent Growth Advisors, says: “Whether a company is well-run is a good question, but a more relevant one is, how do its people impact its value? To understand that, you need to look at the company’s intellectual capital—patents, brands, and proprietary technologies and methodologies. The only source of any of those things is people.”
For that reason, McGuire also quarrels with the idea that disclosure about a company’s entire workforce has much value. … Similarly, [Jeff Higgins, CEO of the Human Capital Management Institute,] points out, if you lose 20% of management in a year, that’s way too high. Losing 20% of your call-center workers is OK. It’s also fine if 20% of a retailer’s customer-facing staff is lost. But it’s disastrous if a professional services firm has 20% turnover among customer-facing professionals. The metrics that come out of the investor groups’ engagements with retailers may be used to compare the companies with one another, but it’s unknown how granular the information is, so therefore it’s unknown how useful such comparisons will be.
This discussion shows that investors are starting to understand the importance of human capital when looking at the value of a company and looking for ways to get data and information related to that. But actually understanding what the metrics are saying and how to interpret them is harder than it may seem. This might be a place where talent analytics professionals and HR leaders more broadly can step in and educate their peers in corporate leadership about not only which metrics to share but also how to think about them. People data is only going to be as strong as the story built around it.