$2.6 Trillion Investor Coalition Sees Link Between Human Capital Management and Shareholder Return
With an increasing volume of research demonstrating the link between levels of employee engagement and share-price performance of public companies, it was only a matter of time before investors began to take note. Enter the Human Capital Management Coalition (HCM Coalition), a consortium of 25 diverse global institutional investors representing $2.6 trillion in assets that was “formed to increase disclosure on human capital management metrics that are important to companies’ performance,” according to a statement from the UAW Retiree Medical Benefits Trust, which leads the coalition.
“Human Capital Management is an important indicator for long-term investors of a company’s value. The HCM Coalition engages companies with the aim of understanding and improving how human capital management contributes to the creation of long-term shareholder value,” the group states. “Our coalition engages companies on business practices relative to HCM, as HCM makes for good business and provides long-term value.”
The UAW Retiree Medical Benefits Trust is reportedly the largest non-governmental purchaser of retiree healthcare in the U.S. The Trust provides access to health benefits for approximately 720,000 eligible retirees from GM, Ford and Chrysler. Separate and distinct from the UAW, the Trust is governed by an 11-member committee.
Formed in 2013, the HCM Coalition initially focused on the retail sector. “The retail sector has a high number of employees creating exposure to reputational risk – either directly or through supply chains such as experienced in Bangladesh and Pakistan – that can adversely affect shareholder value,” says a Coalition spokesperson. “Conversely, there is a great opportunity for the retail sector to invest in human capital and thereby increase company value. Costco, for example, has made large investments in human capital with positive results for the company and investors.” The Coalition cites MIT Professor Zeynep Ton’s book, The Good Jobs Strategy, and a long list of other sources, many familiar to ESM readers, that show companies that invest in human capital as a value proposition outperform their competitors financially.
The initiative is focused only on the issues that affect return to shareholders, according to the spokesperson. In that vein, the Coalition prefers to work behind the scenes in meetings with corporations rather than publicize their efforts. “Since we are dealing with leaders at some of the world’s largest companies, we believe that quiet diplomacy is the best approach,” notes the spokesperson, adding that while the “more voices that are heard on the importance of human capital management as a value-builder can only help,” the Coalition itself is closed to other pension funds; it is “at capacity,” she says.
“The HCM Coalition is comprised of long-term shareholders that are seeking disclosure and analyses of human capital management in order to evaluate a company’s ability to deliver long-term value,” the Coalition’s statement explains. “The Coalition looks at human capital management through an investor’s lens,” the spokesperson explains, emphasizing that the they are only concerned with long-term return to shareholders.
In addition to meeting periodically and sharing information through various forums, the Coalition has contacted senior executives at leading public companies to, as they note, “request a dialogue regarding the company’s oversight of the financial, legal and reputational risks inherent in human capital management. The Coalition is engaging with these companies and others through a variety of approaches, from letter-writing to direct conversations and meetings. Overall, companies have been receptive to engaging with the Coalition on, for example, board oversight and performance metrics. The HCM Coalition has a long-term commitment to the issue of transparency on corporate practices related to human capital management. The coalition is global and diverse and sees disclosure on human capital management metrics as an important corporate governance issue. The goal is to have robust information on human capital management available to long-term investors. The engagement work of the Coalition is done by its members’ corporate governance staffs.”
As explained in a letter to corporate executives, the goal is to create an “efficient mechanism for engagement by allowing companies to reach out to a large and diverse group of investors to discuss corporate governance issues without holding numerous calls with similarly-interested shareholders throughout the proxy season.”
The following is a transcript of the questions asked of the companies with which the Coalition engages, providing an early insight into the types of questions more and more investors will be asking of public companies, and which many will be asking of themselves, to determine if they are optimizing their human capital across the organization.
This is only a summary of a more detailed document requesting information on all aspects of human capital management disclosure affecting almost every practice related to employees.
- How does the company’s board exercise oversight over the Human Capital Management throughout the organization? Is oversight designated to a board committee, and if so, which one?
- What categories of information related to Human Capital Management oversight, if any, are received from management and reviewed by the board and/or applicable board committees? If applicable, how often is this information reviewed?
- What resources has the company committed to implement the company’s Human Capital Management efforts, both in the short-term and as a vehicle for long-term growth?
- What departments and/or business units are tasked with Human Capital Management and development?
- Has the company identified any Human Capital Management “best practices,” and if so, what are they?
Data Collection, Risk Management, and Accountability
- What are the major challenges or risks for Human Capital management (e.g., turnover, compensation, skills development, benefits, etc.) that the company has identified? What metrics are measured for each and who is responsible for monitoring these risks?
- What data does the company collect related to Human Capital Development and Management and how are these data integrated into the company’s operations?
- What data collected by the company related to Human Capital Development and Management is disclosed to employees and how?
- What avenues do employees have available to provide feedback to the company on Human Capital Management policies and processes, and their own experiences as employees of the company in general, both while these individuals are employed by the company as well as after their employment with the company has ended? Are employees afforded opportunities to provide such input anonymously, and if so, what are they?
- What information is collected through employee outreach and engagement, and how is this information used by management to improve operational performance?
- Are there any additional metrics the company does not currently measure that it is considering measuring in the future, and if so, why does the company view these metrics as useful for value-creation?
Incentives and Compensation Structure
- Overall, what incentives do managers have throughout your company to implement best practices in the area of Human Capital Management? Conversely, has the company and/or the board established any disincentives to prevent or mitigate the potential financial, regulatory, legal and reputational impact of poor Human Capital Management practices?
- How does the company’s pay structure encourage the execution of the company’s Human Capital Management priorities and “best practices”? What variables does the company measure to ensure these “best practices” are being implemented satisfactorily throughout the organization?
- More specifically, what proportion of the company’s global workforce is eligible for incentive-based compensation? For those employees receiving incentive-based pay, how is incentive pay structured to reward Human Capital Management “best practices” and mitigate the risks of poor Human Capital Management? If Human Capital Management incentives are included in the company’s incentive pay structure, what variables are measured?
Investor Engagement and Disclosure
- What data, if any, is disclosed to investors pertaining to the company’s Human Capital Management? Where is the information available and how often is it reported?