Human Capital Management Remains a Largely Overlooked Business Asset: Schroders Report

Human capital has a material impact on organizational performance with metrics predictable of future performance; yet, this connection remains largely undervalued. These are some of the conclusions of a report recently published by a leading UK investment management firm that focuses on sustainability. This analysis is notable because investment firms involved in sustainability traditionally focus on the role of the environment and not that of stakeholders. This report focuses on employees but does not include the role of customers, supply chain and distribution partners, communities, and the environment.

Key human capital metrics can help predict financial outcomes, according to the recent report “Human Capital Management: How People Are Our Greatest Asset.” The report, published by Schroders, the UK-based investment firm, was authored by Angus Bauer, Head of Sustainable Investment Research in collaboration with Saïd Business School, University of Oxford, and the California Public Employees’ Retirement System (CalPERS).

“Companies with strong human capital management are likely to be more capable of navigating the future effectively,” concludes Bauer.

Schroders is considered one of the UK's largest investment managers focused on sustainable investing, working with pension funds and insurance companies across public and private markets.

The Schroders report “crunches significant data to arrive at numbers it then uses to assess how investment returns are affected. Factors measured include salaries, benefits, stock compensation, lost days, turnover and training. Other things go into the mix, too, such as 1) the difference between a company’s employee average pay and that of other companies elsewhere, and 2) net operating profit after tax, divided by fixed assets and net working capital.”

Angus Bauer

Bauer writes that “There have already been many studies gauging human capital in terms of training, spending on employees and expected company earnings. These different approaches are often at odds with each other...The Schroders study aims to tie these together and thereby track their impact on investment returns.”

Companies, he writes, “interact with a diverse set of capitals to create value – financial and physical and human. The latter is increasingly talked about but rarely analyzed in detail. There are multiple structural and cyclical factors underpinning the materiality of human capital.”

Schroders conducted detailed research into human capital in collaboration with the California Public Employees' Retirement System (CalPERS) and Saïd Business School, University of Oxford. Key conclusions include:

“Human capital is a critical source of competitive advantage and fundamental resilience.
Effective human capital management requires the stewardship of a variety of systems, including operating models, culture and inclusion, incentives, talent and learning, and innovation.
Qualitative and quantitative analysis of human capital management allows for asking different questions about the drivers and sustainability of value creation.
Human Capital Return on Investment (HCROI) is an accounting-based quantitative measure that can be used alongside employee economic value-added Employee Economic Value Added (EEVA) and other metrics to assess the effectiveness of human capital management.
HCROI is positively correlated with forward excess returns over multiple time horizons and across sectors, even after controlling for a variety of factors.
Companies with stronger HCROI create more value through the cycle; HCROI analysis can be used as part of a broader investment and engagement process, helping us interrogate why companies with similar levels of labor investment can achieve different fundamental outcomes.
Corporate disclosure of human capital-related data remains poor; richer and more pervasive disclosure would benefit market participants and asset owners.”

The chart above highlights what the study finds to be the management features that help enhance human capital returns.

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