From Platitudes to Useful Information

As part of our R&D effort, Douglas D. Dwyer conducted powerful research on productivity and shareholder value. That research revealed that there are substantial and often persistent differences in the productivity of manufacturing plants in the United States. Further, it was found that investors place a premium on firms with highly productive plants. In fact, on average a 10 percent gain in plant productivity that persists over time translates into roughly a 5 percent gain in market value. This suggests that persistent productivity advantages are in themselves a form of intangible assets.

This relationship between plant productivity and market value holds even after one accounts for other known drivers of a firm’s market value, such as its physical and financial assets and its investments in R&D and advertising. This indicates that there are other reasons for differences in plant productivity, one of them being human capital management. That is, systematic differences between plants in their human capital and the way they manage it contribute to productivity and shareholder value. ^[15]

Another highly regarded bank, First Tennessee National Corporation, briefs financial analysts about human capital issues. Believing that its people practices are a source of competitive advantage, First Tennessee shares detailed human capital data with analysts, including the linkage between the retention of high-performing employees and business results. ^[14]

Third-party information vendors have begun to supplement the trickle of human capital data released by corporations. That information is narrowly focused, however, on corporate governance and the management of high-level employees. Interest in that information has risen dramatically in the wake of the heavily publicized scandals at Enron and WorldCom. These vendors , such as Standard & Poor’s, GovernanceMetrics International, and The Corporate Library, rate companies in terms of executive compensation, information disclosure, board structure and process, acquisition strategy, and related factors. The idea behind these rating systems is that nontraditional performance data, including information on how companies manage, organize, reward, and offer the right incentives to management, are important factors in investment analysis. At a minimum, the ratings indicate the likelihood that a company will experience a governance-based meltdown that could cost investors their entire stakes.

Although substantive reporting of human capital practices remains more the exception than the rule in U.S. companies, in Europe the reporting of human capital indicators is becoming required, often as part of a broader obligation to report social, ethical, and environmental indicators. France currently requires such reporting, Denmark will implement similar requirements in 2005, and the United Kingdom has the matter under consideration.

Although no similar legislation is on the horizon for U.S. companies, it is worth noting that some U.S. regulatory and governing bodies already require certain types of human capital reporting. The Joint Commission on Accreditation of Healthcare Organizations, for example, is implementing a requirement that hospitals report a minimum of two HR utilization indicators that have been judged to be relevant to the quality of patient care. The short list of potential indicators includes turnover , overtime, sick time, nursing care hours per patient day, and staff satisfaction. Other health-care providers soon may face similar reporting requirements.

^[15] Human Capital Management: The CFO’s Perspective. Boston: CFO Publishing Corp., 2003, 13.