Corporate Responsibility in a Global World: Marrying Investment in Human Capital with Focus on Costs

Executive Summary

• A human capital approach to the management of people shifts the emphasis of people management from minimization of cost to maximization of return on investment.

• Human capital is an important element of intellectual capital, and hence the market value of an organization.

• The importance of human capital has increased as the shift to knowledge-based work and a knowledge-based economy has accelerated.

• Human capital management combines information on the value and contribution of people with management processes, to direct their efforts and behavior.

• Human capital information can be collected on a number of levels, all of which have value to the organization.

• At its highest level, human capital information can produce meaningful insights to enhance business decision-making, or assist the achievement of strategic objectives.

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Introduction

Love it or loathe it, the term human capital has entered the HR vocabulary for keeps. The term is much criticized for implying that people can be subjected to the same rules as more traditional forms of capital, regardless of personal aspirations and objectives. Yet the same grounds for criticism are also the impetus for a fundamental shift in organizational thinking in terms of the people employed. Organizations that adopt a human capital approach to the management of their workforce immediately shift that workforce from the cost to the asset side of the balance sheet. People become assets to be invested in, and from which a return that can be maximized is expected, as opposed to a set of costs to be kept to a minimum.

Immediately the focus of people is asset-based, the organization needs to rethink a whole set of assumptions and people-management actions. When organizations treat people as costs, they assume:

• that people need to be incentivized to work harder;

• that people should be bought in with the highest possible value for the lowest possible cost;

• that it is only worth investing in training if there is an immediate need;

• that the removal of people from the organization is primarily a cost decision.

When people are assets, organizations assume:

• people will work better when they have interesting and challenging work to do;

• people work harder when they are motivated and committed to their work, experiencing high levels of satisfaction;

• people should be brought into the organization on the basis of their potential to develop and grow;

• investment in training and skills is worthwhile, if there is likely to be a return on that investment in the medium to long term;

• when people leave the organization, there are knowledge retention and capacity issues to be considered and managed.

This, therefore, has given rise to a whole new set of rules about how we recruit, develop, and finally exit people from the organization.

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A Definition of Human Capital

There have been many definitions of human capital over the years. However, there now seems to be general agreement that human capital is the knowledge, skills, abilities, and capacity to develop and innovate possessed by people in an organization. It is an aspect of intellectual capital—the stocks and flows of knowledge available to an organization—and is associated with the concepts of social capital—the knowledge derived from relationships within and outside the organization—and organizational capital, the institutionalized knowledge possessed by an organization which is stored in databases, manuals, etc. It hence contributes to the market value of an organization through its contribution to intellectual value, which also accounts for the value of brand and reputation. Our research at the Chartered Institute & Personnel (and Development) (CIPD) has resulted in the following definition of human capital (Figure 1), viewed as an element of intangible value, and it is this definition that has shaped our work to date.

Figure 1. Human capital as an intangible asset

Human capital management is important because it enables organizations to make more productive use of people through measurements, analysis, and evaluation rather than guesswork. It provides guidance on the development of HR and business strategies which enable improvements in levels of business performance, and higher levels of engagement to be achieved by such means as better selection, training, and leadership. It encourages the initiation of processes for the assessment and satisfaction of future people requirements. It provides the basis for developing policies and practices which enhance the inherent capacities of people—their contributions, potential, and employability—by providing learning, and continuous development opportunities. It also shapes the way in which people share and apply their knowledge. Therefore, if human capital management processes are aligned with business processes, it can ensure that the effort and behavior of people are focused on the things that are important for the business, and the achievement of strategic objectives.

The impact human capital can have on markets is huge. In advanced economies, the only distinctive asset which cannot be imitated easily is the skills, talent, and know-how of people. The 1999 Competitiveness White Paper, “Building the Knowledge-Driven Economy,” published by Peter Mandelson while UK Secretary of State for Trade and Industry, argued that “…we will only compete successfully in the future if we create an economy that is genuinely knowledge-driven.” It is no accident, therefore, that interest in human capital, how to measure it, and how to manage it has increased as the knowledge-intensive sector of the economy has expanded.

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What Information Should be Collected to Inform Human Capital Management?

Effective human capital management relies on credible and appropriate data, which informs managers of the drivers of individual performance, and enables informed business decision-making on the people capacity available to implement strategy, and achieve strategic objectives. There are several levels at which data can be collected, which are described in Table 1 below.

The collection, development, and analysis of human capital data is still a relatively new process for the majority of organizations. Most of those making systematic efforts to collect information to describe the contribution of people are using existing data, often collected for another purpose. So, for example, most organizations collect data on absence, retention, training provision, pay, health, and safety (i.e. the number of accidents). This is the basic level of data, and can be very useful in terms of identifying patterns, or trends, and informing management action. It can also be important for informing external stakeholders about their commitment and understanding of factors which might impact on future performance, such as retention of key staff, and management of risk.

However, higher levels of data are more likely to be of use to the investment community, particularly data likely to provide insight into the drivers of business performance. It is these factors which can enable informed decision-making, both assessing the impact of cost, and the return on investment in people. Although many organizations are making huge progress in this area, it represents a significant investment in terms of time and effort.

Table 1. Levels of human capital data collection and analysis

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Case Study

Nationwide Building Society

Nationwide has been investigating the links between employee commitment, customer commitment, and business performance for some years. Its objectives were to:

• establish the key drivers of customer commitment;

• measure the impact of improved employee commitment on customer commitment, and business performance;

• identify activities that can be undertaken, at corporate and local levels, to leverage this knowledge, and bring about business improvements.

It collected data from four main sources:

• HR data: from PeopleSoft;

• employee opinion data: from the “Viewpoint” survey;

• customer satisfaction and commitment data: from the “Member Perception” questionnaire;

• business performance data: from the Operational Sales database.

Analysis revealed that employee commitment and length of service were the most critical factors driving customer commitment and sales. Further modeling demonstrated that areas generating the best performance were also those with the highest average length of service.

It was then possible to investigate further the drivers of employee commitment, and means of increasing employee tenure. Five key drivers were found to have the most effect on employee retention, which in turn affect positively customer satisfaction and business performance, as follows:

• employees’ perceptions of pay levels;

• average age of employees;

• levels of resource during peak times;

• understanding and promoting the values of Nationwide;

• management behaviors emphasized in Nationwide’s organizational development program, PRIDE.

(Note: The full version of this case study is available in the CIPD guide, “Human capital reporting: An internal perspective,” which can be downloaded from www.cipd.co.uk/humancapital.)

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Conclusion

Good managers have always known instinctively that better managed people perform better and contribute to high performance outcomes. However, human capital literature now contains both theory and evidence to prove this, as well as a number of frameworks which can assist managers in developing information and insight to inform their business decision-making. This does not mean ignoring the cost implications of employing people. It does, however, mean that these cost implications can be considered and assessed in the context of the investment opportunities that people present and the role they play in achieving strategic business objectives.

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