Has Schroders Moved the Needle for Investors on Valuing Human Capital?

Mounting crises are threatening our very existence. Our collective response has been to recognise that we are the primary cause of our own dilemma. How we invest in our human capital has now become more critical than ever before. Can we convince investors to rethink how they approach this in practice?

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In very simple terms, change is going to involve a complete transition from short-sighted, shareholder perspectives to a new form of Stakeholder Capitalism that represents and promotes the very best, long-term interests of everyone.?

Key to this transition is redefining ‘success’. Specifically, in corporate and investment terms, this means redefining Value in composite terms of financial benefits while addressing Environmental, Social, and Governance (ESG) concerns. Boards and investors must wake up to the fact these are not mutually exclusive outcomes.?Their decision-making has to now integrate financial returns while improving impacts on people and the planet.

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Presumably, Schroders realises this because they have spent considerable time and effort considering the nature and impact of Human Capital Management. Their new report covers a lot of territory and provides an interesting narrative as to the importance of people being viewed as valuable capital that demands the best management methods. But does their research report take this critical subject forward, and is it heading in the right direction, showing how to integrate ESG and Impact?

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Schroders’ Human Capital Management report should be considered in the light of some fundamental questions:

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1. What kind of Value should companies be generating with their human capital and for whose benefit?
2. What are the quantifiable and qualitative links that provide convincing evidence of human capital being deployed as effectively as possible, to comprehensively reconcile and optimise all Value outcomes?
3. What measures can help firms and investors to better understand and manage these linkages?

Interestingly, Schroders' research paper makes no mention of ESG, so what type of Value are they pursuing today? Amidst the narrative, Schroders puts forward a set of different accounting metrics, including a particular research focus on what it calls “Human Capital Return On Investment (HCROI).” ?Should the world welcome this metric? Is it helpful in the wider debate on ESG and impact?

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Schroders' report claims that HCROI “Explains the fully costed return on monies spent investing in people.” Essentially, it measures conventional profit-seeking; integrating a profit and a workforce cost metric. This may appear at face value to be a simple and obvious equation. However, it fails to factor in other Total Stakeholder Value indicators; such as the quality of products and services, and importantly, ESG impact. Schroders' bottom line on human capital is still rooted in assessing conventional financial performance; that is, Shareholder, rather than Total Stakeholder, Value. ?

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Schroders’ human capital metrics are not their own invention. They have been borrowed from an HR analytics ‘guru’ called Jac Fitz-enz, from as long ago as the 1980s.?At that time, and for much of the period since, Fitz-enz’s body of work has been very narrowly framed. In the words of The Conference Board, as far back as 2007:

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“Since Fitz-enz introduced measurement to the HR function in the 1980’s most of the focus has been primarily on measuring the efficiency of HR functions. This focus?fails to address the more meaningful issues of how human capital creates value?and how HR interventions serve as catalysts for improving business outcomes.” Evidence Based Human Resources, The Conference Board (2007)

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Schroders’ metrics appear to reinforce this conventional but outmoded accounting practice. Using an existing human capital accounting metric such as HCROI, continues the tradition of accounting for human beings as a cost, rather than as a source of Value creation.

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Investors beware. Firms that drive out human cost, or who simply drive their people harder, can get a higher score on HCROI, even while Total Value is being eroded. If Schroders is using this metric to help pick companies, it reinforces the current shareholder value system that is predicated on shareholder return; one that has catalyzed the significant harms to people and the planet that we are trying to eradicate and prevent for our futures. There are, of course, myriad examples where cost-driven strategies have caused enormous damage - BP, PG&E and Boeing are some of the more high-profile. We also hear far too often of instances of workforce stress, poor mental health, burnout, and even forced labour being used by listed companies.

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Moreover, how will HCROI inform Schroders’ company engagement strategy that seeks to:

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“Clearly define the HCM factors and information that the company should measure, monitor, disclose, and set targets for”

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What message does HCROI send to companies if it is promoted by one of their most respected and influential investors?

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As we have, and continue to explain, to investment firms and pension funds, Organizational Maturity provides us with a framework to reconcile both business and investment performance with responsibility. Measured on OMINDEX?, Maturity is a unique methodology (tested by leading universities) that measures the extent to which firms are purpose-driven and able to fully realize their human potential, through mature management systems and a healthy corporate culture, that drives Total Stakeholder Value.

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We urge Schroders to embrace Mature thinking and standards in their own investment decisions, and how they engage with companies on this subject. Indeed, some of their own human capital used to have a very good understanding of it. In the words of their own author, who penned their Human Capital Management report:?

“OMINDEX? work…addresses the specific bottom-up drivers of ESG and financial outcomes in tandem…Specifically, [it] addresses the critical ‘intangibles’ such as leadership, human capital, corporate purpose, learning, and innovation…This analysis helps us to understand how companies navigate the major ESG risk factors, get the most from their human capital, create value for all stakeholders and sustain their competitive advantage.”

Our invitation to Schroders and other asset managers is therefore straightforward.

Come and work with us to help create a Total Stakeholder Value world that can generate benefits for you, your clients, and your own stakeholders (including the significant number of people whose pensions and investments you are managing).