Reporting HR to Investors

If a new working group has its way, investors may become better informed about the impact of human capital on a company's value. While there are some companies that are widely known for managing their employees well, there may be many others -- but it's hard to get that information without it being included in SEC forms.

By Jared Shelly

What makes someone a good HR executive? How does an organization know when the HR function is performing as well as possible?

Perhaps even more importantly, how does that information get relayed to investors?

A working group set up by the Society for Human Resource Management is attempting to answer those questions by developing a standard to report human-capital value on the Securities and Exchange Commission's Form 10-K.

"There are no performance standards for how we do our jobs ... ," says Lee Webster, director of HR standards at SHRM. "There's no expectations and no accountability, unlike other professions or functions like finance and operations."

The group is one of 12 planned groups creating standards in areas such as job listings, performance management and diversity. Alexandria, Va.-based SHRM recently became a standards-developing body with the American National Standards Institute.

Investors want more information about HR in their 10-Ks because there simply isn't a good way to account for the value that human capital brings to an organization, says Webster. He estimates HR performance accounts for roughly 40 percent to 60 percent of the value of an organization.

Although the task force just began monthly meetings in January and hasn't yet released any findings, Webster says, he believes the investor community will place great value on the standards.

"I predict that when the business community begins to embrace this, CHROs will be on investor calls and will be just as responsible on those calls as CFOs ... ," he says. "We'll know we're there when an HR executive leaves a company and the stock price changes. We'll know we're there when CEOs are selected out of the HR group."

Laurie Bassi, CEO and co-founder of Golden, Colo.-based consultancy McBassi & Co., who leads the SHRM working group, says the project could raise the profile of HR -- but that's not its intent. She says it's focused on providing investors with important information they aren't getting right now.

"People are a big source of value creation but investors have little information about the people side of the business," says Bassi. "Therefore, the function that is responsible for it doesn't receive a lot of visibility."

Even without a reporting standard in place, investors have been examining the way companies treat their employees.

A 2008 paper by Wharton School Finance Professor Alex Edmans, entitled Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices, found that companies cited as good places to work earn returns that are more than double those of the overall market.

There's also a mutual fund, Parnassus Workplace Fund, that has been investing in companies since 2005 based on their commitment to employees and quality of workplaces.

Companies such as Google and Zappos attract investors based in part on how well they treat their employees, Bassi says -- and the same could be true for other companies if reporting standards become adopted on a widespread basis.

"It's all anecdotal and there are no comparable measures available for other firms," says Bassi. "There may be other firms that are doing a really good job [at managing human capital], but it's not known simply because they don't have the type of press coverage those big names have."

Dave Ulrich, co-founder of the RBL Group consultancy in Provo, Utah, and professor of business at the University of Michigan's Ross School of Business, says reporting standards will allow companies to show the value that the HR function creates.

"We don't have a scorecard, we don't have a way to track that in a rigorous way and I think that's what we're all trying to figure out," he says. "In some ways it's the Holy Grail."

Ulrich says he'd like to see many talent management items included in the new 10-K standard.

"Can they integrate after mergers? How quickly do they move? How well do they manage knowledge and learning? How well do they innovate?" are items that should be included, says Ulrich.

But it's also important, he says, to combine those with other intangibles such as consistency and predictability of earnings, confidence in growth strategy, core competencies and leadership.

"Human capital is one piece of it," says Ulrich. "One of my fears is that we don't just get into how many hours did people go to training, how many people got promoted from within; I don't think we want to get into one myopic piece. I hope it's not just 'What do they do in HR practices?' "