Human capital management research: how people are our greatest asset

Our new research, released today, suggests that effective human capital management can lead to improved outcomes for organisations and their stakeholders.

It argues that human capital can act as a clear driver of company productivity and profitability and that companies with durable management frameworks create stronger returns and value for investors.

From communication, networks, purpose, career development and inclusion, it has identified key human factors that can drive change.

It also highlights the importance of combining quantitative and qualitative assessment when analysing human capital.

- More information about the research and its findings can be found here. This supports Schroders’ Engagement Blueprint, which outlines priorities and approaches for engaging with companies.

Key findings on the importance of human capital

Companies interact with a diverse set of capitals to create value – financial, physical and human. The latter is increasingly talked about but rarely analysed in detail.

There are multiple structural and cyclical factors underpinning the materiality of human capital.

To further our understanding of the value of sustainable human capital management, we have conducted detailed research into this field in collaboration with CalPERS and the Oxford Rethinking Performance Initiative at Saïd Business School, University of Oxford.

Below are our core views and findings on this topic so far:

1. Human capital is a critical source of competitive advantage and fundamental resilience;

2. Effective human capital management requires the stewardship of a variety of systems, including operating models, culture and inclusion, incentives, talent and learning, and innovation;

3. Qualitative and quantitative analysis of human capital management allows us to ask different questions about the drivers and sustainability of value creation;

4. Human capital return on investment (HCROI) is an accounting-based quantitative measure that can be used alongside employee economic value added (EEVA) and other metrics to assess the effectiveness of human capital management;

5. HCROI is positively correlated with forward excess returns over multiple time horizons and across sectors, even after controlling for a variety of factors;

6. Companies with stronger HCROI create more value through the cycle;

7. HCROI analysis can be used as part of a broader investment and engagement process; helping us interrogate why companies with similar levels of labour investment can achieve different fundamental outcomes;

8. Corporate disclosure of human capital-related data remains poor; richer and more pervasive disclosure would benefit market participants and asset owners.

A new framework to assess human capital value creation

This research tells us that investors cannot ignore human capital management in evaluating investee companies. As we approach continued economic volatility, we expect 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.

Nicholette MacDonald-Brown, Portfolio Manager and Head of European Blend, has been incorporating the analysis into her investment process.

She says: “Unlike environmental factors which have transparent values, human capital has traditionally been difficult to quantify, especially when looking at the lower end of the market cap spectrum where data is extremely opaque. This framework allows active managers like us to gain greater insights into companies within our investment universe. We can identify those which are leaders and laggards in human capital management to make informed allocation and engagement decisions.”

Please see below for links to the research summary, and the five chapters covered in the research.

Human capital management research summary: people are our greatest asset

Part 1: Margin of safety

Part 2: Sustainable competitive advantage

Part 3: Performance levers

Part 4: Codifying best practice

Part 5: Investment applications - a user guide