Date: 2024-12-30 Page is: DBtxt003.php txt00016442
Corporate Management Metrics
Human Capital
Why Human Capital Metrics Could Be Just As Important As Financial Returns
This piece could have been written 30 years ago. The sad reality is that the capitalist architecture has not changed in a constructive way for a very long time, and I don't believe the author realizes that is thinking is making it even more difficult to address the major issues. Simply put, this articulation of the importance of human capital is that investors will benefit even more if human capital ... from the perepctive of the company ... is improved. The real challenge that needs to be addressed is what does a company have to do so that the human capital from the perepctvie of people is improved ... and the core reality is that this cannot be achieved at the same time that profit performance is substantially improved.
It will help when the work of Milton Friedman is fully discredited. The damage that his ideas have caused is substantial, and ongoing.
Peter Burgess
John Schwarz, the Co-Founder and CEO of Visier, is responsible for the company’s overall strategy, culture and organization development.
When it comes to the growth of your business, keeping your investors happy can often be a challenge. The landscape for what constitutes a “healthy” business has changed dramatically, and if your organization can’t adapt, it will struggle to compete with those that can. So what exactly do you need to do to stay ahead?
American economist Milton Friedman argued in his 1962 book Capitalism and Freedom, “There is one and only one social responsibility of business -- to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.”
This spearheaded an atmosphere of growth driven solely by fiscal responsibility, one that was sustained for decades. As long as a company was profitable, shareholders were happy. This is an outdated philosophy, one that has always caused tensions with employees and, increasingly, with investors as well.
If Friedman’s point provided the basis for the idea that a public company’s only social responsibility was to increase its profits, then the seismic shift toward a new era of responsible culture can be summed up with last year’s letter to CEOs penned by BlackRock’s Larry Fink, whose $6 trillion of managed assets make him the world’s largest investor. In the letter, Fink argues:
“Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance but also show how it makes a positive contribution to society.”
Fink is not a lone voice. Assets in U.S. funds aiming to support social or environmental benefits grew to over $12 trillion in the past decade, in part due to the socially conscious minds of millennial investors who are far more conscientious when it comes to employment and investment. As these investors mature, the pressure is going to be on organizations to demonstrate how they are acting in an ethical manner -- both externally and internally.
Fast-forward to today, where the International Organization for Standardization (ISO), the world’s largest non-government organization for developing voluntary international business standards, recently released new guidelines (paywall) regarding human capital management. In the ISO report, 23 core metrics are laid out that organizations should be capturing and reporting. These metrics range from simple workforce diversity measures such as age or gender to slightly more complex metrics like the ratio of income to human capital.
While compliance is voluntary, CEOs should not take these ISO recommendations lightly; I’d argue these recommendations are critical as a baseline understanding of your organizational health. It's critical to review these recommendations and take action now to future-proof your business to the reporting demands that will certainly be required by investors. The importance of a set standardized global metrics for human capital measurement cannot be understated.
To be clear, this is not an "ethical" argument to invest in aspects such as diversity and inclusion or gender pay ratio. The ethical argument has already been made by many. What I’m outlining here is the direct financial incentive for acting in this manner.
Studies have shown there is a direct correlation between the measurement of human capital and the financial health of an organization. One joint study conducted by the Investor Responsibility Research Center Institute and Harvard Law School found 92 other studies related to the relationship between HR policies and the financial outcomes of an organization. Their conclusions show a direct correlation between human capital performance and financial performance, leading to them recommending HR be included in standard investment reviews and metrics.
This is more than just minor improvements in financial performance. A report conducted by Bersin by Deloitte (via the Wall Street Journal) found companies with well-performing talent analytics financially exceeded their competitors by 30% over a three-year period. Likewise, a CEB analytics survey found organizations could increase gross profit margin by 4% by moving into a leadership position in workforce analytics, which also resulted in a savings of roughly $12.8 million for every $1 billion in revenue.
How To Prepare Now
However, it’s not enough to simply collect data -- you need to know how to analyze it and use it across the enterprise in shaping business strategy to satisfy employees and investors. It’s critical that organizations focus on building the proper infrastructure for people analytics, partner with the C-suite, and develop a culture where privacy, security and data accuracy are of the utmost importance.
For technology companies, this is of particular importance, as the critical lens of diversity, inclusion and gender have been especially spotlighted. A quick Google search brings up a wealth of subject matter discussing tech's problem of gender equality, racial bias, disability exclusion and more. Google has seen walkouts over worker rights and sexual misconduct in the past year alone, with the board being asked to review new metrics into gender and racial diversity. The majority of today's modern technology companies rely on data-driven decision making for a number of components within their organizations. In fact, it would seem odd not to -- so why, then, is HR being left out of the conversation?
There is a significant need to go beyond the ISO-recommended reporting metrics and apply strategic insights to deliver a sound people strategy that moves the business in the right direction. Organizations need to effectively answer strategic workforce questions, connect workforce decisions to business outcomes, and use future modeling and projections to select the optimum course of action. For instance, organizations should be able to see the cause-effect relationships that drive improved revenue or customer satisfaction and be able to explore those insights in real time to understand the levers that will improve overall business results.
This is a new reality that will quickly begin to shape the way organizations are viewed as successes or failures. Merely turning a profit is a philosophy that does not work anymore, and without a dedicated look at how your organization can measure up to the complex set of employee and investor expectations of the future, you will be left behind.
Forbes Technology Council is an invitation-only community for world-class CIOs, CTOs and technology executives.
Do I qualify?
'>GettyGetty
When it comes to the growth of your business, keeping your investors happy can often be a challenge. The landscape for what constitutes a “healthy” business has changed dramatically, and if your organization can’t adapt, it will struggle to compete with those that can. So what exactly do you need to do to stay ahead?
American economist Milton Friedman argued in his 1962 book Capitalism and Freedom, “There is one and only one social responsibility of business -- to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.”
This spearheaded an atmosphere of growth driven solely by fiscal responsibility, one that was sustained for decades. As long as a company was profitable, shareholders were happy. This is an outdated philosophy, one that has always caused tensions with employees and, increasingly, with investors as well.
If Friedman’s point provided the basis for the idea that a public company’s only social responsibility was to increase its profits, then the seismic shift toward a new era of responsible culture can be summed up with last year’s letter to CEOs penned by BlackRock’s Larry Fink, whose $6 trillion of managed assets make him the world’s largest investor. In the letter, Fink argues:
“Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance but also show how it makes a positive contribution to society.”
Fink is not a lone voice. Assets in U.S. funds aiming to support social or environmental benefits grew to over $12 trillion in the past decade, in part due to the socially conscious minds of millennial investors who are far more conscientious when it comes to employment and investment. As these investors mature, the pressure is going to be on organizations to demonstrate how they are acting in an ethical manner -- both externally and internally.
Fast-forward to today, where the International Organization for Standardization (ISO), the world’s largest non-government organization for developing voluntary international business standards, recently released new guidelines (paywall) regarding human capital management. In the ISO report, 23 core metrics are laid out that organizations should be capturing and reporting. These metrics range from simple workforce diversity measures such as age or gender to slightly more complex metrics like the ratio of income to human capital.
While compliance is voluntary, CEOs should not take these ISO recommendations lightly; I’d argue these recommendations are critical as a baseline understanding of your organizational health. It's critical to review these recommendations and take action now to future-proof your business to the reporting demands that will certainly be required by investors. The importance of a set standardized global metrics for human capital measurement cannot be understated.
To be clear, this is not an 'ethical' argument to invest in aspects such as diversity and inclusion or gender pay ratio. The ethical argument has already been made by many. What I’m outlining here is the direct financial incentive for acting in this manner.
Studies have shown there is a direct correlation between the measurement of human capital and the financial health of an organization. One joint study conducted by the Investor Responsibility Research Center Institute and Harvard Law School found 92 other studies related to the relationship between HR policies and the financial outcomes of an organization. Their conclusions show a direct correlation between human capital performance and financial performance, leading to them recommending HR be included in standard investment reviews and metrics.
This is more than just minor improvements in financial performance. A report conducted by Bersin by Deloitte (via the Wall Street Journal) found companies with well-performing talent analytics financially exceeded their competitors by 30% over a three-year period. Likewise, a CEB analytics survey found organizations could increase gross profit margin by 4% by moving into a leadership position in workforce analytics, which also resulted in a savings of roughly $12.8 million for every $1 billion in revenue.
How To Prepare Now
However, it’s not enough to simply collect data -- you need to know how to analyze it and use it across the enterprise in shaping business strategy to satisfy employees and investors. It’s critical that organizations focus on building the proper infrastructure for people analytics, partner with the C-suite, and develop a culture where privacy, security and data accuracy are of the utmost importance.
For technology companies, this is of particular importance, as the critical lens of diversity, inclusion and gender have been especially spotlighted. A quick Google search brings up a wealth of subject matter discussing tech's problem of gender equality, racial bias, disability exclusion and more. Google has seen walkouts over worker rights and sexual misconduct in the past year alone, with the board being asked to review new metrics into gender and racial diversity. The majority of today's modern technology companies rely on data-driven decision making for a number of components within their organizations. In fact, it would seem odd not to -- so why, then, is HR being left out of the conversation?
There is a significant need to go beyond the ISO-recommended reporting metrics and apply strategic insights to deliver a sound people strategy that moves the business in the right direction. Organizations need to effectively answer strategic workforce questions, connect workforce decisions to business outcomes, and use future modeling and projections to select the optimum course of action. For instance, organizations should be able to see the cause-effect relationships that drive improved revenue or customer satisfaction and be able to explore those insights in real time to understand the levers that will improve overall business results.
This is a new reality that will quickly begin to shape the way organizations are viewed as successes or failures. Merely turning a profit is a philosophy that does not work anymore, and without a dedicated look at how your organization can measure up to the complex set of employee and investor expectations of the future, you will be left behind.
Forbes Technology Council is an invitation-only community for world-class CIOs, CTOs and technology executives.
Do I qualify?