PERSPECTIVE3-5 min to read

Podcast: Should investors view human capital as an asset or expense?

For years investors have looked at employees as a cost on a balance sheet. However, new research and better data have started to shift that view.



Angus Bauer
Head of Sustainable Research
Nicholette MacDonald-Brown
Head of European Blend Equities
Vicki Owen
Senior Content Strategist
Vijay Anand
Analyst, European Equities

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You can read the full transcript of the podcast below:

[00:00:07.930] - Announcer

Welcome to The Investor Download, the podcast about the themes driving markets and the economy now and in the future.

[00:00:25.290] - Vicki Owen

Welcome to the Investor Download we're here today to talk about why investors should care about people and culture and how people management can be assessed and what all this means for investment decisions. We're also going to look at some of the trends in the tech sector in a bit more detail, including what we found out from companies themselves. Here today to explain about some new research on this topic, we have Angus Bauer, Head of Sustainable Investment Research. Welcome. Angus. How are you?

[00:00:54.230] - Angus Bauer

Hi. Very well, thank you.

[00:00:55.830] - Vicki Owen

And we also have Nicholette MacDonald-Brown, Portfolio Manager and Head of European Blend. Hi

[00:01:01.130] - Nicholette MacDonald-Brown


[00:01:02.780] - Vicki Owen

And we have Vijay Anand, who is an analyst focused on European tech. Hi.

[00:01:09.060] - Vijay Anand


[00:01:10.630] - Vicki Owen

So we're going to go into the research first of all and why investors cannot ignore this topic and how we can assess it and what we've found. Angus, could you just tell us a bit about why this topic is so important at this moment in particular?

[00:01:26.670] - Angus Bauer

Yeah, sure. So, there are a variety of structural and cyclical reasons that really emphasise the importance of analysing Human Capital and Human Capital Management today. But if we just step back for a second, every single company pretty much has claimed forever that its people are its greatest asset. And the investment gurus of times gone past Ben Graham, Warren Buffett, Charlie Munger et cetera, Nicholette MacDonald-Brown have all recognised the importance of company culture, of the way, you know, the qualitative strengths of organisations. And so, you know, above all else, really, what we are trying to do in the human capital research work streams that we've been developing is introduce quantitative and qualitative ways using novel data sets and using metrics that have been honed in academic circles and in the HR industry to ameliorate and really empower our analysis and understanding of these topics. So that's the background. Cyclically speaking, we came through the pandemic, we had the great resignation, the pendulum swung ever so slightly back from capital towards labour. And whilst central banks, the Federal Reserve and so on have been putting up interest rates, they have not yet broken labour markets. Labour markets are still very tight.

[00:02:57.750] - Angus Bauer

Labour has a certain degree of bargaining power today that it has not had in the past. And whether or not we're going into a recession. The reality is that as we look forward from today, the importance of the relationship between employees and their workers is incredibly relevant in understanding the persistence of company business models, the ability of companies to withstand cyclical dynamics and changes in those dynamics going forward and really understand the sustainability of the returns profiles because people are such an important asset within the productive capabilities of an organisation.

[00:03:35.990] - Vicki Owen

Great, thanks. That's a bit about why it's such an important focus and then how actually can we assess that?

[00:03:43.510] - Angus Bauer

Well, it's a difficult one to answer because people are complex, right? If we start with some definitions, human capital in inverted commas effectively refers to the capabilities, the networks, the relationships that are built up and that exist within an organisation. So human capital itself is a very rich but complex topic. Human capital management by definition is the optimization of the management of that resource, the maximisation of the potential and the value within that resource. And so whilst we have made some progress in being able to introduce quantitative metrics to assess this kind of stuff, to improve or enrich the qualitative analysis that we can do, we have to sort of reflect on the reality that because of the complexity involved in human relationships human relationship, people's relationships with their companies, with their bosses and so on, what we're doing here is helping ourselves ask better questions of the sources of value creation and the sustainability of those sources. But I mentioned in my first response the work that has been done in academic circles and in the HR industry. What we have effectively done in our research is tried to think from first principles about this point that if the management of culture, if the management of people if incentivisation of people, the performance management of people is material if it has material consequences or implications on the financial returns of a business, we should see it in outcomes metrics that reflect the leverage that a company might generate on its total investment in people.

[00:05:34.720] - Angus Bauer

So with that as our starting point, which is quite a different starting point to what has been done elsewhere, where people have looked, for example, at standard setters and what is expected in terms of disclosures and then sought to sort of unpick those elements. We've started from the perspective if any of this matters, we should see it in the leverage that companies are generating on their investment in people. And so what we then did was we went to academics in the HR industry and said well, how do HR practitioners measure this? We didn't invent metrics ourselves, we took metrics that exist over here in the HR industry. We took metrics that have been developed and honed and stress tested in academia. And we said well, let's see if they work in investing. And let's see if we can integrate some of these metrics. For example, returns on investment in human capital. Let's see if we can integrate them into traditional definitions of company return on capital such that we can then articulate well, okay, in a company's value creation model, if we define value creation financially as the returns on capital employed, what proportion of that return is being driven by balance sheets or physical assets or tangible, traditional tangible assets?

[00:06:45.230] - Angus Bauer

And what proportion of that value creation is being driven by the intangibles and the investment in those people? And once we then start to ask that question, the next question then becomes, well, how much of that investment is cash going out the door directly from one year to the next? How much of that investment is investment in tomorrow's capabilities? I.e. investment that would be similar in nature to investment capex in plant and equipment, as it were. And how much of that investment actually perhaps is indirect? I.e. its investment in training or its investment in the culture of the business that ultimately can be a very powerful incentiviser and motivator of discretionary effort over and above the financial incentive that is represented by how much you get paid at the end of each month. So in terms of the stepping stones of our research process we sort of started by asking the question if this is material, where should we see it? How might we then assess the materiality of these consequences? Can we build outcomes metrics that we can run regression analyses on, that we can actually sort of back test in the traditional sense to sort of build an implied sense of the materiality of these consequences and then actually what does investment in people look like practically?

[00:07:58.870] - Angus Bauer

What does Human Capital Management look like practically? Is it dollars paid in salaries? Is it benefit packages? Is it nice holiday perks? Or is it like teamwork culture, strength of leadership purpose and so on? We haven't been able to answer all of the questions on the latter sort of collection of softer features if you will. They're harder to dollarise. In fact we're not trying to dollarise them. But where we've got to so far is we've been able to articulate what portion of the investment in people really can be sort of considered direct cash based investment. How the leverage on that investment drives returns on capital and then where the residual i.e. the collective sort of the collective power of management of culture, management of trust and performance management processes, innovation processes and so on. Where that then flows into the excess returns on investment in people is really where we then sort of stop in terms of the research that we are shortly publishing and then begin to ask questions of how companies can better drive that to extract higher returns going forward.

[00:09:19.360] - Vicki Owen

Thank you. So it's very in depth research and how would you sum up the main finding from that?

[00:09:25.910] - Angus Bauer

Well, it's really exciting. So a number of sort of conclusions that our research is pointing to that are pretty material for investors. So number one, companies that are better human capital managers create more value through the cycle. Now that to me is really exciting because one of the core tenets of sustainable investing is that more sustainable companies and more sustainable business models persist through time or have more persistent returns. What we've seen in the research is that companies that have better human capital management specifically hold on to their returns through the cycle better than companies that do not when we sector adjust and industry adjust and so on. So that speaks to one of these wonderful intangibles, which would be the institutional nature of culture, for example. We've also found that a number of the quantitative human capital metrics that we have been developing are additive to investor returns when we look at them in our back testing and our regression analyses. So human capital return on investment, for example, has a high degree of incremental explanatory power when we integrate that into a multifactor quantitative framework. So we have found that markets tend to reward companies that are better human capital managers when we look across multiple industries, across multiple time horizons, controlling for multiple traditional quantitative factors.

[00:10:56.530] - Angus Bauer

The final thing I would say is that we have found that it is really important when we think about the drivers of human capital returns that companies address human capital or address the management of their people holistically. And by that I really mean that because of the complexity of an organisation, it's not really optimal just to focus on pay and nothing else. Because if you skew your incentive structure, if you skew the way you manage your human capital asset one way at the expense of another, for example, you create an imbalance in the outcome, you can create an imbalance in the incentive structure. And we see that actually, companies that are not taking a sort of whole systems approach to managing their human capital asset. So perhaps are not planning workforce capabilities effectively, or perhaps not incentivising effectively, or not managing their culture or inclusion effectively, for example. The companies that fall short on one of these elements generally are appearing to be a little bit weaker in the outcomes, either financial or employee centric outcomes, satisfaction or turnover, for example, than companies that manage the whole suite of human capital systems more effectively.

[00:12:08.510] - Vicki Owen

Interesting. Thank you very much for summing up your research and why investors should care about this topic.

[00:12:13.630] - Announcer

On Apple podcasts, Spotify, or wherever you get your podcasts. You're listening to the Investor Download.

[00:12:22.590] - Vicki Owen

Nicholette, I'm going to come to you now because we definitely want to hear about what this means for investment decisions. I wonder if you could just tell me a bit about why this research and research like it matters to you and your team.

[00:12:37.570] - Nicholette MacDonald-Brown

Thank you very much. Tough to follow that very technical explanation. So I guess when we think about it, when we think about investment decisions that Vijay and I make on the active sort of equity side, what we're trying to do, to echo Angus's language, is find persistent businesses. Find companies where we think the market is mispricing the potential of businesses. And what we're aware is that when we think about sustainability analysis, if I wind the clock back, everyone thinks about the environment, everyone thinks that's the most important stakeholder and that's where everyone starts. But it was very clear to us, particularly when we were looking at some sectors, and particularly Vijay's specialty tech, that actually people were what really mattered. And what we needed was a toolkit to help us blend the quant that Angus has spoken about. And then the qualitative, which is the bit that Vijay and I do, which is, like, practically, how do these companies implement what they're doing? Because, very simply, talent is what drives growth, and you want to understand how people are being attracted, trained, and retained, and that is what this analysis helps us do.

[00:13:44.550] - Vicki Owen

And how do you assess at a portfolio level the kind of potential impacts from good or bad people, management or culture?

[00:13:52.650] - Nicholette MacDonald-Brown

So I think we'd probably start at kind of that, like, stock by stock level, and we would think about those businesses where their talent, their IP, their kind of added extra is people. And that that's hard for us to capture from outside. So when we think about what it adds to us is when we're looking at that mosaic of things that we look at from an investment perspective, whether it's valuation, financial forecasts, all of that, it's like, how does this analysis about people help us gain conviction around our forecasts? It could be businesses recovering from difficult times. It could be businesses where we've seen underinvestment mismanagement crises. It could be about, okay, well, what signs do we see that that's improving, and that, in turn, should see, like, a multi year improvement of growth? Or it could be, okay, when we look at businesses that have done very well for a very long period of time, what is the footprint of what has caused that? What's the good? And then what, when we're talking to other businesses, could be replicated elsewhere? So think of it as part of a mosaic of things that help us make an investment decision.

[00:15:05.850] - Nicholette MacDonald-Brown

But particularly when we're talking about people heavy businesses, it helps us talk about the most material stakeholder.

[00:15:14.290] - Vicki Owen

And has this sort of analysis been done before? I wonder if you could talk to me a bit about what's changing and what's new, both in kind of your way of working and just in trends in this space at a high level.

[00:15:26.950] - Nicholette MacDonald-Brown

So I'm definitely willing to say, by us, we haven't done it before, and we've tried, and we haven't quite got it right. We have kind of looked at kind of obvious things. We've looked at glass door surveys. We've looked at turnover data. And that tends to give you a snapshot of what's happening in a business today. It doesn't necessarily help you think about why it's happening or how that could be changed. And so, really, what this analysis helps us and to echo Angus's language, helps us think about persistence, right? It helps us think about things that are driving change and improvement within a business. So for us, it's definitely something different. And certainly when I look at our peers as well, I think it's something that we are sort of uniquely well placed to do. I look at the people sat on their sofa. I have a tech expert and I have an HCM expert and that's pretty rare. And perhaps even rarer is they talk the same language. We can sit on company meetings together and that is so vital because we want to take Angus's very sophisticated work and bring it down to what Vijay and I do on a day to day basis.

[00:16:38.760] - Nicholette MacDonald-Brown

And so we think we're very unusual in that position.

[00:16:43.330] - Announcer

Get in touch with us by email at or visit our website Download.

[00:16:57.170] - Vicki Owen

And Vijay, we're going to talk to you now about in a bit more detail about the tech sector and conversations you've been having with companies and how this works in practice. So I just wonder if you could tell me a bit about the contact that you do have with companies, and particularly in this area, what you've been talking to them about lately.

[00:17:20.350] - Vijay Anand

Of course, to start off, the reason we decided to do it for the tech sector is, as Nicolette mentioned, innovation is the heartbeat of these companies and innovation is, of course, dependent on people and we wanted to have a better toolkit to understand the sustainability of that innovation better. Having said that, I think everyone these days talks about artificial intelligence. We certainly spend a lot of time thinking about AI in terms of the impact that AI has on our companies and our potential investments. It could be argued that with the emergence of AI, the skill set required for a company to be successful in a decade is perhaps going to look very different to the skill set required to be successful today. And perhaps the companies who are better at Human Capital Management will do a better job in managing this transition than those who aren't, and hence prove to be more successful and sustainable investments from our perspective. Now, in terms of engaging with companies, as we talked about, it's a fairly opaque stakeholder, understanding employees in terms of lack of quantifiable KPIs certainly quantifiable metrics based on which companies report on a consistent basis.

[00:18:45.930] - Vijay Anand

So to understand better, I think the only way to do that was to directly engage with companies. So there are a few of us involved in this. So Isabel, Jake and I, we worked with Angus. Our job was first to identify a list of companies to go after, which is largely based on Angus's work.

[00:19:08.740] - Vicki Owen

And Isabel and Jake, they're analysts in your team as.

[00:19:14.110] - Vijay Anand

So once we identify the list of targets, so just speak to them and understand how they think about Human Capital Management. And typically we are speaking to fairly higher up in the HR department, often in almost all cases it's the head of talent and they've been very insightful conversations.

[00:19:35.670] - Vicki Owen

And what sort of things have you found from those conversations with companies?

[00:19:39.870] - Vijay Anand

I mean, they've been incredibly insightful in the sense that we've certainly questioned some of the common notions we had. When we worked with Angus on the output of his research, so the common notion might be that companies who have high turnover perhaps should be classified as high risk. But one would be surprised to see that some of those companies rank higher up in terms of the quartiles of companies who are good at human capital management versus those who aren't. And certainly when we engage with companies, we've come to the realisation that looking just at that turnover data which Nicholette alluded to is perhaps not helpful at all because they have a much more sophisticated way of how they look at churn, how they measure it. And we've certainly been encouraging them to perhaps expand their disclosure because that disclosure will be very helpful for us in making the differentiation from a leader to a laggard. Generally speaking, human capital is not a one size fits all type of approach. It's been quite insightful learning how some companies have adopted the way they manage their employees based on their business model.

[00:21:03.760] - Vicki Owen

It's very much a two way conversation then. And how do you think the kind of learnings from these conversations could impact investment decisions?

[00:21:13.190] - Vijay Anand

Well, we are halfway through the process in terms of on our engagements. So hopefully by the end of the process, our ambition is to have a framework in place which helps us perhaps identify the right questions that we need to be asking these companies and ultimately help us differentiate between what a leader might look like or what a laggard might look like. Or as Nicholette said, some companies who have had probably historically some issues in terms of how they manage their employees but are perhaps improving and hence that could represent investment opportunities for us. So overall, as Nicholette mentioned, we are hopeful that it probably adds another dimension to how we look for sustainable investments.

[00:22:03.190] - Vicki Owen

Great, thanks very much for bringing that to life and thank you Nicholette and Angus as well.

[00:22:10.410] - Announcer

Well, that was the show. We very much hope you enjoyed it. If you want to find out more, please head to and we're endeavouring to record as many of these shows in the studio, on video. And if you want to watch them in their full unabridged version, then go to Schroder's YouTube channel. If you want to get in touch with us, it's And remember, you can listen, subscribe and review the investor download wherever you get your podcasts. New shows drop every Thursday at 05:00 p.m. UK time. But above all, keep safe and go well. Cheers.


The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Past performance is not guide to future performance. Information is not an offer, solicitation or recommendation of any funds, services or products, or to adopt any investment strategy.


Angus Bauer
Head of Sustainable Research
Nicholette MacDonald-Brown
Head of European Blend Equities
Vicki Owen
Senior Content Strategist
Vijay Anand
Analyst, European Equities


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