How Can the Human Capability Agenda Make More Progress?

By Dave Ulrich, Rensis Likert Professor, Ross School of Business, University of Michigan, Partner, The RBL Group and Co-founder, G3HC ([email protected]), Norm Smallwood, Partner, The RBL Group and Co-founder, G3HC & Mike Panowyk, The RBL Group and G3HC Principal

Most accept the increased relevance of people and organization for stakeholder value.

• COVID focused attention on employee physical health and emotional well-being.
• Technology affects where and how work is done and requires leadership and culture change.
• Intangibles have become the primary driver of market value, and 25 percent of intangibles relate to people and organization factors.
• Economic conditions create uncertainty that people and organization must respond to with agility.
• Surveys of CEOs and senior business leader conferences (Davos, WOBI) focus on technology, uncertainty, and talent as their primary concerns.
• Boards have added human capability to their strategy and financial oversight responsibility.
• Social citizenship (ESG, CSR, SDGs, conscious capitalism) places values at the heart of a sustainable business agenda.
• Regulators in the U.S.A. (SEC) and Europe have required human capital reporting to help investors access more information.

With all of this increased attention, investment and research on people and organization factors has increased.

• Organizations are spending 1 to 3 percent of their annual revenue to improve talent and culture.
• Volumes of research are being summarized and reported daily, weekly, and monthly by thoughtful colleagues: David Green, Brian Hackett, Nicolas Behbahani, David McLean, and many others.
• The world’s largest advisory firms are growing their talent and organization businesses faster than other segments.

Given this increased attention and investment, we must ask a critical question: “How can the human capability agenda make more progress?” Progress starts by recognizing the need for improvement and continues with lots of activity—both of which are occurring. Continued progress impacts both the overall people and organization agenda and priorities within individual organizations. Let us suggest four steps to make more progress in the overall human capability agenda.

Four Steps to Make Progress on the Overall Human Capability Agenda

1.??? Integrate the numerous piecemeal and isolated initiatives into a shared human capability framework. Progress requires classification so that actions cumulate and build on each other. The human capability framework we have proposed offers four pathways and 38 initiatives that create an integrated system to categorize the myriad of people and organization actions. With this framework, we can integrate isolated actions and research studies into a holistic approach that improves human capability (figure 1).

2.???Assess investments in human capability using the common framework. We used AI/machine learning and NLP (natural language processing) to apply this framework, assessing the 10-K reports of 5700 U.S. firms for 2021 and 2022 (as required by SEC). Organizations have high discretion on what they share. Despite this, the regulatory disclosures offer a solid baseline for how organizations choose to report investments in human capability.

3.?? Examine overall human capability progress in annual reporting. Our research yielded scores for measuring the progress of the 5700 companies in the framework across the two years. Notice that the scores from year to year are exactly the same for the total sample of 5700. And the top 10 percent of these companies only saw small variances across the two years (figure 2). Although containing only two years of data, this comparison indicates a plateauing of what is getting disclosed about human capability initiatives.

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3.???Show impact of the human capability scores on stakeholder outcomes. Using the 2021 database, we have been able to show the following statistical results. As this annual reporting continues, progress can be monitored, and investments in each of the four areas can be linked to business outcomes (figure 3).

Current Status on the Overall Human Capability Agenda

Is progress currently being made on the overall human capability agenda? Yes. But not yet enough.

Yes.

1. Relevance and materiality of human capability is high.
2. Awareness and priorities are evolving and can be categorized into talent, leadership, organization, and HR domains.
3. Innovative investments to improve human capability are occurring, being studied, and getting publicized.
4. Using a consistent and mandated database, assessments can be made to determine attention to and impact of human capability initiatives.

Not yet enough. The journey ahead is further than the journey so far.

1. Update the human capability framework to incorporate latest insights (ideas, studies, and practices) into the framework.
2. Apply the updated framework to more than mandated 10-K reports to ensure that the information scraped through AI/machine learning and NLP encompasses an organization’s overall efforts as reported in various documents—this might include ESG reports, annual reports, earnings calls, compensation discussion and analysis, and board minutes.
3. Analyze the impact of human capability scores over time to show the impact on business outcomes. In the two-year timeframe reported, overall human capability scores have not increased. Defining and implementing human capability initiatives takes time so that they have impact on business outcomes. This research offers a baseline that can be evaluated over time.
4. Enhance disclosure rules to create even greater transparency and material information.

Suggestions for Individual Organizations to Make More Progress

Progress on the overall human capability efforts above can be used to guide any organization to define and tailor the human capability initiatives that impact their desired business results.

To do so, we have worked with 28 pilot companies to prepare a custom report on how that organization might use human capability to deliver more value. In this customized report, a number of data points can be used to influence which intentional human capability investments an organization should make (figure 4).

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For example, for one company, we compared 10-K data to annual report to ESG reports to show how the company scored relative to peers. What is interesting is that for a specific company, disclosures on ESG, 10-K, and annual reports produce similar results, thus confirming the logic.

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Over time, each company can use this information for specific improvements to:

1. Influence investor confidence by having a way to measure the human capability element of intangible value. In investor presentations, organizations can report their human capability initiatives with more rigor to increase confidence in the future and to overcome risk.
2. Deliver on strategic reinventions. As organizations adapt their strategies about where to play and how to win in their markets, human capability information helps them make talent, leadership, organization, and HR investments that better deliver strategic value.
3. Improve M&A success. Most recognize that M&A success is more than financial reengineering or strategic reinvention. Human capability information shapes valuation and implementation of M&A activity.
4. Prioritize human capability investments both annually and over time to ensure a diverse portfolio of initiatives that are integrated and work as a single system. We have deployed a methodology to prioritize opportunities from human capability initiatives.
5. Reinvent the HR function. We have shared ten dimensions of reinventing the HR function, and this information can further this work.

We recognize our grand aspirations for human capability efforts. We also know that these aspirations require more work, but we are pleased with the conceptual, empirical, and application progress to date.?

We invite you to apply these ideas and tools in your business. For more information go to www.g3humancapability.com

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Dave Ulrich?is the Rensis Likert Professor at the Ross School of Business, University of Michigan, and a partner at The RBL Group, a consulting firm focused on helping organizations and leaders deliver value.