Human capital reporting: What 4 questions should HR answer?

Savvy investors want to know how human capital strategies and investments manage people risk, build capability and foster innovation

Annual reports should include a dedicated people section which describes how an organisation is acting to support and improve core human foundations for sustainable profitability, according to a HR analytics expert.

Savvy investors want to know how human capital strategies and investments manage people risk, build capability and foster innovation, said Laurie Bassi, CEO of McBassi & Company.

This is part of a broader shift towards increased transparency and accountability for companies, and Bassi observed that boards of directors are subsequently demanding better, more insightful information from HR.

“You really have to be able to answer bigger, deeper, more important questions about the relationship between people and business results than has been expected before,” said Bassi, who recently co-authored a report on this topic: The Smarter Annual Report: How companies are integrating financial and human capital reporting.

She analysed how companies report on a range of human capital metrics through their annual report, and found this process offers HR an opportunity to play a key role in shaping conversations around value creation.

6 key dimensions of people management
While HR has made significant gains around operational reporting and metrics over the past few years, she said this still falls well short of the true analytic insights sought by the likes of institutional investors.

Bassi said an annual report’s narrative should describe how an organisation is acting to support and improve these core human foundations for sustainable profitability.

“Tell that story, in the light of the overall business strategy, and you have taken a significant stride towards effective performance reporting,” said the report.

Bassi noted that three broad human capital outcomes of risk, capability and innovation are achieved by managing six dimensions of people management: health and safety; skills; leadership; alignment; engagement; and talent pipelines.

An integrated annual report should address these six HR dimensions, and the key to doing this well – both from a management and reporting perspective – is to do the ‘analytics homework’ which clearly identifies the human drivers (and impediments to) creating value within the organisation.

There are a number of standard metrics that should be reported, and Bassi recommended looking at the Global Reporting Initiative as a starting point, as well as the Sustainability Accounting Standards Board.

4 questions HR needs to address
The first challenge to address in the people analytics journey is asking the right questions, according to Bassi.

“The big challenge is in getting organisations focused on asking the right questions, because more and more they do have the data to do the analysis,” she said.

“Five years ago, it was very, very hard to get the data necessary to do real powerful analysis. We find that’s becoming less and less of a constraint.

“It’s certainly not perfect, but what we now keep bumping up against is an inability to ask powerful questions.”

Rather than looking at what has been reported on historically, she recommended turning the question around and first asking: “if I were an investor or owner of this company, what is it that I would want to know about the people side of the business?”

“Second, follow up with ‘what are the implications for our board of directors (or equivalent), and what should they be demanding of us, if not now, then in the future?’

“And third comes the senior executive team, who need to know everything that both investors and the board need to know from a people side of the business, plus a lot more.

“Fourth, HR needs to know everything that the senior executives need to know, plus more, such as workforce efficiency and effective metrics.”

Bassi said HR leaders should also focus on any information the board of directors or senior executive team have been asking for, or potentially any information outside the organisation (such as on Glassdoor, for example), that increases transparency or represents risks the organisation needs to monitor, manage and respond to.

“Think from an outsider’s perspective, and then think through what the implications are for the HR function and analytics,” she said.

A checklist for developing smarter reports
Here is a checklist to assist in smarter reporting on human capital in annual reports:

  • Assemble the right team to work on the report, reflecting the different types of non-financial as well as financial performance; the CHRO should certainly be involved.
  • Create a rough narrative about how the organisation creates value. This can include a strategy map, a list of key strategic issues, a list of key risks, a materiality map, or some combination thereof. The point is to develop a clear story before diving into the (supportive) numbers.
  • Have a candid discussion on how you present exceptional results, good and poor, highlighting genuine achievements but also facing up to bad news such as falling scores on an important metric.
  • Let the value creation narrative guide the selection of human capital and other factors to focus on. Be sure to always combine evidence (such as metrics) with insight – “this is what the evidence indicates”.
  • Include the standard metrics that are expected (eg by Global Reporting Initiative) even if they are not part of your particular story. For these it is not essential to interpret the data.
  • As you move forward be realistic about whether the metrics you want are available.
  • Work to improve your internal human capital reporting in anticipation of increasing pressure to improve your external reporting.

Source: The Smarter Annual Report: How companies are integrating financial and human capital reporting. Image source: iStock