Human Capability Improvement and Reporting: How to Make Dramatic Progress

By Dave Ulrich, Rensis Likert Professor, Ross School of Business, University of Michigan, Partner, The RBL Group ([email protected]) with Norm Smallwood, Mike Panowyk, Joe Grochowski - The RBL Group

If you are a senior business, finance, or HR leader, you are likely to be asked to share your organization’s commitment to and investment in human capability (talent + leadership + organization + HR) (see figure 1 for definition).

What will you say and to whom will you say it differently than you have in the past?

Human Capability Matters

The conversation about your organization’s human capability is becoming increasingly important to an expanding set of stakeholders:

• Investors?worry more than ever about intangible value, which represents up to 80 percent of your company’s market value (and reduction of risk). Our research shows that about 25–30 percent of that 80 percent is tied to human capability.

• Customers?select products and services based about equally among price, product features, and service culture. Service that comes from relationships between employees and customers is a major differentiator when competitors can match price and features.
• Communities—broadly defined as regulators, citizens, education, media—assess organization reputations for the environment (climate change), philanthropy (donations), and social agenda (DEI) that are often embedded in people and organization practices.
• Boards of directors?traditionally examine financial performance and strategic investments in every meeting. Increasingly, people and organization issues are not just annual succession planning or compensation reviews but part of every discussion.?
• Senior executives?increasingly recognize that?talent determines long-term success ?and assume the role of human capability champions.?
• Employees?want to work for a company where leaders care, where they have more control over their work setting, and where they are proud of the reputation and results the organization delivers to all stakeholders.?
• HR professionals?find meaning in their work as architects that design and deliver a human capability agenda that creates value for all stakeholders.

Current State of Human Capability Investment and Reporting

We have recently interviewed a number of CHROs, CFOs, and business executives about how they determine and communicate confidence in the future through human capability. We have received a range of responses from indifferent to impactful.

• “I’m not sure how we create our human capital disclosures.”
• “We don’t spend much time with investors (or others) on our human capability issues.”
• “We don’t often report data, but we share our public commitment to improving human capability.”
• “We believe in people analytics and share data about our people practices (e.g., retention of key executives, pay ratio of CEO to average employee, diversity ratio among top team, and employee engagement surveys).”?
• “We continually look to innovate and differentiate ourselves in terms of human capability.”

We have also scored the human capital reporting required by the Securities Exchange Commission (SEC) for 7,000 firms using 2020 and 2021 data. We created scores for each of the four human capability pathways. For a review of this methodology, see:?https://www.amazon.science/publications/a-system-for-analyzing-human-capability-at-scale-using-ai

Table 2 shows the remarkable finding that the “human capital” information reported in 2021 and 2022 have exactly the same scores. This means that the messages being reported about human capability have not changed. We assume that the processes and roles used to craft these messages are not evolving either. Even though stakeholders want more and better information, they are not (yet) receiving it. This consistency represents an enormous opportunity for differentiation if a firm can offer a more thorough and rigorous report on human capability.

With this large data base and AI methodology, we also found that the total human capability score explained 26 percent of cash flow and 25 percent of future investor confidence, which is remarkably consistent with the findings in table 1 from a survey of investors.?

Diagnose Your Human Capability Efforts

To improve building and reporting better human capability, we have used the diagnostic in table 3 to help focus attention on steps to improve human capability efforts. The line in the scoring box is the common pattern in answers we receive, with higher importance being rated higher than effectiveness, effectiveness than clarity, and so on.

Actions for Improving Human Capability Investments and Reporting

To respond to requests by all stakeholders for more information on human capability, let us suggest actions for each of the five diagnostic questions (see table 4).

Conclusion

Rather than be afraid of, hesitant about, or offering piecemeal information on human capability reporting, we encourage business, finance, and HR leaders to broadcast their human capability efforts.?

You will likely be asked; what will you say?

..………

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.