How Effective are Your Human Capability Investments and Disclosures?

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

Human capability (talent + leadership + organization + HR) facilitates every company’s success and represents a significant component of its market value. Intangible assets explain an increasing percent of market value (see figure 1), and human capability represents about 25 percent of overall intangibles—which is why the U.S. Securities and Exchange Commission (SEC) requires reporting companies to disclose material human capital agendas to shareholders.

To respond to these changing market conditions, we have drawn on extensive theory and research to develop and test ideas using AI-powered tools to help analyze companies’ reporting and commentary about human capability so that each company can:

• Score key elements of the organization’s human capability against a specific set of industry peers or other benchmarks.
• Correlate human capability scores with inside measures of productivity, profitability, intangible value, and social citizenship.
• Identify how the company’s human capability disclosures have evolved over time and gain insights about improving disclosures to increase investor confidence.
• Determine the efficacy of various disclosures: 10-K, annual report, ESG, compensation discussion and analysis (CDA), earnings calls, or others.
• Identify where to target human capability investments so that they have the greatest impact on desired business outcomes.

We have called this work Governance and Guidance for Growth through Human Capability (G3HC). The conceptual foundation of this work is the human capability framework, which classifies 38 people and organization initiatives into four pathways (see figure 2).

Using the human capability framework in figure 2, companies can make intentional choices about where to invest and what to disclose about human capability initiatives based on how much they create value for multiple stakeholders: employees, investors, customers, strategy, and community (see this logic in figure 3).

Based on innovative research from over 5700 organizations and an in-depth partnership with twenty-eight clients engaged in G3HC work, we suggest eight criteria for better disclosures that will lead to more value.

1) Access required expertise. Form a cross functional team (with finance, HR, communication, legal, and marketing expertise) to prepare disclosure documents. This human capability team, often co-chaired by a CFO and CHRO, integrates various viewpoints to oversee the annual disclosure process and reports to senior executive leadership and boards.

2) Establish an annual disclosure process. Since required SEC disclosures occur annually (starting in 2021), the team should institute a regular process for reviewing human capability investments and preparing disclosures. See figure 4 for steps in this process. This annual human capability process would parallel and integrate with other annual organization processes such as strategic planning, key account management, risk management, budgeting, succession review, product innovation, and technology.

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3) Use an integrated framework. Rather than report on one or two of the 38 human capability initiatives in figure 2, consider a comprehensive overview of all initiatives, programs, and activities in progress within the reporting time frame.? The framework helps define where investments are being made.

4) Prioritize opportunity. Companies do not have to report on all 38 initiatives but should include disclosures on activities in each of the four pathways based on the opportunities the initiatives have for delivering stakeholder results. Go beyond merely reporting numbers that are readily available (number of employees, training budget, CEO pay) to report on investments in initiatives that have proven impact on stakeholder value.

5) Be intentional about disclosures. Human capability investments are often the “secret sauce” for competitive differentiation, so balance disclosing more information that increases investor confidence by reducing risk with not giving away proprietary and differentiating investments to competitors.

6) Communicate and act. Based on the assessments and insights, create an action plan that will improve human capability investments each year. This action plan should include communication with investors (investor meetings, earnings calls), customers (marketing materials, customer forums), communities (media reports), boards of directors (quarterly meetings), senior executive teams (leadership forums, strategic plans), and employees (town hall meetings). In addition to sharing information, the HR function can architect staffing, training, compensation, organization design, policies, and other HR initiatives to improve human capability scores.

7) Ensure accountability. Since human capability disclosures require teamwork, accountability is often diffused. Ultimate accountability rests with the senior business leaders (C-suite) with functional responsibility (finance, HR, law), but the human capability disclosures should be translated into indicators for business leaders at all levels. When business leaders at all levels have their personal effectiveness tied to human capability indicators that culminate to overall company disclosure, human capability becomes embedded into the organization culture.

8) Renew and improve. Human capability initiatives and impact constantly evolve so continually assessing, innovating, and improving is important. Disclosures should reflect emerging trends and change as quickly as external conditions and the business strategy.

These eight criteria can be used as a diagnostic to track your organization disclosure efforts today and to know where to focus going forward (see figure 5).

Next Steps

As recognition of human capability materiality increases with the impact on all stakeholders (with a focus on investor intangible value), the SEC rule on human capability disclosures will continue to evolve in response to calls for more transparency and uniformity across all public companies. In addition, all organizations (private companies, not-for-profit enterprises, government agencies) will increasingly rely on human capability insights for success.

The work we (and others) have done offers a foundation for improving human capability investments and disclosures (see www.g3humancapabilty.com).

In our work, we are adding future insights because we now have the ability to:

• Analyze, through machine learning / AI, many forms of disclosure. The 10-K is a regulatory commitment that will have comparable annual results over time, but we can also analyze ESG statements, CDA, investor call transcripts, board minutes, and so forth. This disclosure data complements traditional information sources (interviews, surveys).
• Provide direct comparisons of admired companies or industry peers so that current status can be determined.
• Identify which human capability initiatives have the most impact on desired stakeholder outcomes. Today, companies generally spend 2 to 3 percent of their revenue on human capability initiatives, often based on the perception of what matters most. Our work offers empirical rigor to know which selected human capability initiatives to invest in for the most impact.
• Offer longitudinal information that shows how investments in priority human capability initiatives deliver desired stakeholder outcomes over time.
• Access actionable insights on improvements and metrics for each of the 38 initiatives in the human capability framework.?

We are excited to partner with leading organizations to make progress about how human capability will deliver stakeholder value. This work will inform human capability investments and improve disclosures that give investors more confidence in their valuations.?

If you are interested in joining us in this effort, please contact Norm Smallwood or Mike Panowyk .

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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.