The Accounting for People Task Force is consulting on a set of best practice guidelines for including human capital in the annual report and accounts. By Denise Kingsmill, deputy chair, Competition Commission and chair, Accounting for People Task Force.
By this autumn, the Accounting for People Task Force will have delivered best practice guidelines that can be used to create a statement on human capital management (HCM) for inclusion in the annual report and accounts. In May, the task force issued a consultation paper setting out its initial thinking and the areas where further work is needed. The consultation will involve industry, the accounting profession, trade bodies and the investment community.
The paper does not propose that companies should put people in the balance sheet but that they should at least make a proper assessment of the success of HCM by looking at, for example, number of employees, staff turnover, commitment to staff development and employee satisfaction. This can then be compared year on year. It would be a demonstration of the quality of management, which is too often neglected.
If you look at any big organisation's annual report and accounts, the chances are that it will include a phrase along the lines of "people are our greatest asset". You might see lots of pictures of happy, smiling people but you are unlikely to read anything about them. Such platitudes are, for many organisations, the extent of their reporting on people in an annual report and accounts. There may be another paragraph on staff costs and the way the workforce has been downsized over the past year. But more than that is unlikely.
As shareholders leaf through pages of minute detail on a senior executive's remuneration package and potential earnings pot, they might like to stop and think. While that sort of information is interesting, is it really helping them to understand how effectively the business is being run? Is it as significant as hearing how the human capital assets that drive the business are being managed?
I regard human capital management as a mix of the way that organisations manage, recruit, retain, train and develop employees. It is about looking at people as a valuable business asset, not just a cost. It is about making sure that you have people with the right skills and experience to deliver your business strategy.
While external measurement of the people effect is limited, there is widespread and growing acceptance from within organisations and from investors that the way in which people are managed is a key source of competitive advantage and, ultimately, profitability. I believe that all companies in the UK realise that the performance of their people affects the performance of their organisation.
Businesses in industries from service to manufacturing admit there is a causal link between good HCM and strong fiscal performance. They know that they are in a bidding war for talent and if they do not employ, nurture, develop and retain the best people, then their competitive edge will be blunted. The reason that we cannot show the strong causal link is because we have not yet begun to measure it, but when we do, we will see that it exists.
If talented workers, on whom a company spends time and money, are not managed properly, they will leave, often into the welcoming arms of the competition. Organisations then have to spend further time and money on recruiting replacements.
If you are an investor, the chances are you will not be aware that this has happened. You won't be able to judge the impact, good or bad, that the business's HCM has had on performance.
While it may appear to be common sense to look at such factors, why are organisations so loath to tell people about the measures they use to track their management of human capital? Some might argue that to do so would give away competitive advantage and yet they, relatively freely, disclose a mass of financial data that is just as sensitive. Others might claim it is too heavy a burden to undertake. And yet many organisations keep human capital information internally, so why not share that with other people?
A reticence to commit to a proper assessment of human capital management could be influenced by other factors. To some extent, keepers of human capital information are still regarded as administrators and are rarely invited to sit at the boardroom table.
Other anecdotal evidence suggests that organisations do not have the systems or wherewithal to measure the effects of the way in which they manage people. How many organisations have at their fingertips simple, accurate information about the number of people they employ? Or have key performance indicators that tell them whether they are doing a good job or not? If management collected hard data, they would be in a position to manage what they measured.
Information on HCM will only be useful to stakeholders if it is reliable and gives a balanced and objective view of the organisation's practices and performance. We want to create a flexible approach which means that organisations will report primarily in terms of their own assessment of HCM issues. In view of their role in relation to shareholders we believe such reporting should be a matter for the company board.
Our initial discussions concerned the need for organisations to consider including information on HCM in their report and accounts on the basis of minimum reporting standards. We would welcome views on this: we are not aiming to provide a prescriptive solution but rather best practice guidelines.
This might be seen as an issue of good corporate governance (particularly in view of the importance of HCM to most organisations) and provisions could be added to the Combined Code on Corporate Governance alongside those on the reporting of risks to the business.
The code currently recommends that the board should present a balanced and understandable assessment of the company's position and prospects. If provisions on HCM were introduced, then all listed companies would be required under the listing rules to report on whether they had complied with the provisions, with confirmation from the audit committee - or another body reporting to the board - that the report was balanced and objective.
It has been suggested that HCM information might be included in company operating and financial reviews (OFRs). In July 2001, the Company Law Review Steering Group recommended that all companies of significant economic size should be required to produce an OFR that would contain certain compulsory items (for example, business objectives and strategy) and some that directors identified in good faith as material to the business. This could include an account of the relationship with employees, customers, suppliers and others.
An OFR working group was set up in December 2002 to develop broad principles and practical guidance on how directors can assess whether an item is material and should be included. This is expected to report shortly. We are working independently of that group, but our findings might fit with the OFR report.
We need to develop a business culture that recognises that a company's investment in human capital is at least as important as its investment in plant and machinery. This means finding ways in which it can be measured and reported for the benefit of all the company's stakeholders. By doing this we may finally give "our greatest assets" the prominence they deserve and begin to reward organisations that recognise the significance of well-managed people.
