Schroders has today released a new framework to assess human capital value creation. This includes a simple set of quantitative accounting metrics which can be used alongside qualitative techniques to enable investors to refine their understanding of human capital management’s contribution to a firm’s returns and productivity.
Created with academic support from the Oxford Rethinking Performance Initiative at Saïd Business School, University of Oxford and California Public Employees’ Retirement System (CalPERS), the analysis confirms that human capital is a clear driver of company productivity and profitability and that companies with durable management frameworks create stronger returns and value for investors.
Angus Bauer, Head of Sustainable Research, Schroders, said:
“This research tells us that investors cannot ignore human capital management in evaluating investee companies. As we approach continued economic volatility, our analysis shows that companies with strong human capital management are likely to be more capable of navigating the future effectively. Even as the integration of artificial intelligence across industries evolves, the relevance of people as the stewards of value creation will remain high.”
Mervyn Tang, Head of Sustainability Strategy, Asia Pacific, Schroders, said:
“People are important assets for companies, and the value of these assets can be unlocked through strong human capital management and even enhanced through training and development. At Schroders, we believe assessing human capital can help us better understand the value of companies we invest in. This framework allows us to gain greater insights into companies within our investment universe. Our investment teams can identify those which are leaders and laggards in human capital management to make informed allocation and engagement decisions.”
Top-line findings from the research include:
- We can define and measure what the outcomes of good human capital management look like, and why we see structural and cyclical reasons to focus on this currently.
- Human capital returns are positively correlated with forward excess returns (those exceeding a relevant benchmark or index) over multiple time horizons and across a majority of sectors, even after controlling for Return on Capital Employed and adjusting for a variety of factors.
- There are multiple paths to human capital management affecting balance sheets and profit and loss.
- This being said, there is risk associated with focusing too much on an objective measure for human capital. Human capital analysis must combine qualitative and quantitative assessment. With KPIs to identify good human capital management, we can consider the drivers of change, and show how to optimize human capital productivity.
This framework is additive to Schroders’ Engagement Blueprint, which outlines priorities and approaches for engaging with companies.
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