Telling the Human Capital Management Story: Toward a Strategic Competitive Advantage

Insights for What’s Ahead

• Prepare for the external and internal forces that are likely to drive increased attention to human capital matters from the board and C-suite. These forces include not only current and potentially more prescriptive SEC disclosure rules on human capital management, but also increased regulation by other agencies and litigation relating to oversight of a firm’s workforce. Major institutional investors are looking for greater board engagement in human capital and seeking more data to establish and refine their investment and voting policies. Moreover, the internal pressures for a clear HCM strategy are mounting; not just at firms that are merging, launching a new business line, or revamping their business in light of competitive and technological changes, but at any firm seeking to attract and retain workers in a highly competitive environment. Still, only 3 percent of The Conference Board working group participants said they fully understand their major investors’ expectations regarding human capital, 47 percent said they are at the early stages of developing a human capital strategy, and only 21 percent said their HCM strategy is reviewed at the board level.
• Develop a compelling human capital strategy and narrative that goes beyond mandated reporting requirements to connect strategy to business and financial outcomes. As a company’s business model evolves, it should review and update its human capital strategy and supporting programs as appropriate. An effective human capital strategy should, at a minimum, address the firm’s talent, organization, structure, and culture necessary to carry out business strategy and achieve operational, financial, and relevant ESG goals. Ideally, the HCM strategy should be an integral part of the firm’s business strategy.
• Expect greater scrutiny of human capital strategy, its execution, and its linkage to business impact. While the board’s role with respect to HCM will vary by company, it should generally be responsible for approving an HCM strategy or, at a minimum, bring the same level of active oversight to the employee side of the business that it does to the customer side. For example, just as boards monitor customer satisfaction, they should attend to key metrics related to the workforce. Many companies are placing responsibility for HCM with the board’s compensation committee; in doing so, they should ensure the committee has the time, expertise, and support to attend to a broader HCM agenda.
• Quantify the impact of human capital performance to demonstrate how the firm’s HCM is driving financial performance and effectively and efficiently deploying the organization’s “greatest asset.” Recent research by The Conference Board shows that human capital return on investment (HCROI) is 3X higher in organizations employing human capital analytics in decision-making, driving 25 percent higher levels of profitability. To emphasize human capital performance, enable effective decision-making, optimize human capital investments, and demonstrate to stakeholders the increasing value of human capital, organizations should integrate productivity, talent acquisition, learning, attrition, and diversity, equity & inclusion (DEI) data into HCM strategy and narratives. Leaders should tie these descriptions to enterprise-level outcomes and financial impact quantitatively, through inclusion of HCROI and human capital value added (HCVA) reports.
• Communicating HCM information beyond mandated disclosures involves risk; it demands careful examination of what information, if reported, might benefit competitors. A good argument can be made for disclosing only the information that is legally required. In the US, board and management teams discuss HCM information that is important for managing the business but could carry considerable risks if disclosed publicly, such as regulatory fines and monetary losses tied to HCM, as well as information that could be competitively sensitive (including detailed data on productivity, turnover, and employee training.) Moreover, any mismatch between information disclosed publicly and corporate commitments, positions, etc., made publicly could attract negative media and/or stakeholder attention. However, expanded HCM disclosures can also provide a competitive advantage in attracting investors, retaining and recruiting workers, and winning customers who care about fair pay and labor conditions, access to health care, etc. Indeed, growing stakeholder demands for transparency suggest that leaders should calculate the risk/reward ratio carefully. Senior executives and the board should provide oversight, determining how to protect sensitive data while helping companies expand their public disclosures without revealing strategic insights that might benefit competitors.
• Frame the narrative for each stakeholder with an emphasis on building trust. The HCM story forms a more compelling narrative when framed and tailored to key audiences. Each version draws from the single source of truth about HCM performance yet emphasizes the main interests and concerns of each of the stakeholders, including regulators, investors, current and prospective employees, current and prospective customers, strategic partners, and the community at large. Participants in The Conference Board working group discussions emphasized the importance of maintaining and building trust across all HCM communications. This means the HCM story should survive scrutiny by all stakeholders; for example, the story customers hear should ring true to employees. It also means that if a company is not meeting its objectives in any area, it should be forthcoming about what it is doing to address the gap.