Human Capital Gains Traction in the Accounting Field
Now that over $16 trillion of investment capital and more than 60 ISO (International Organization for Standardization) standards call for a CEO-led strategic and systematic approach to addressing the needs of all stakeholders, the increasing focus on human capital by the accounting profession only adds to the chorus of voices telling CEOs it’s time for change.
According to the CFO.com article, “Human Capital’s Big Reveal,” by David McCann, “Disclosing vital data about a company’s workforce will soon be the norm. Will US businesses fall in line? This is one genie that’s not going to be stuffed back into its bottle. A climate ripe for extensive disclosure of human capital data is blanketing the corporate world, with European companies taking the initial lead. The United States has been lagging well behind, but in August the Securities and Exchange Commission proposed that companies be required to report on human capital ‘to the extent such disclosures would be material to an understanding of the registrant’s business.’” He adds, “Over the past two years, a litany of events has combined to create a groundswell of momentum for such disclosure.”
The Role of ISO 30414
He explains, “Propelling the idea is the ever-broadening consensus among stakeholders that effective assessments of a company’s performance and prospects require solid information on workforce costs, productivity, and how employees are hired, developed, and managed. Most notably, ISO 30414 disclosure guidelines issued last December by the International Organization for Standardization are expected to have a powerful impact.”
McCann notes that ‘Companies in Europe generally take standard-setting organizations more seriously than do US companies. ‘Given that many [European] companies are talking about implementing the standard as soon as possible, it will soon be possible to incorporate human capital issues into fair value analysis,’ noted a recent research report by Deutsche Bank.” The author believes that in the US, “especially considering the SEC’s recent proposal, an eventual, similar move to transparency appears likely—even if it takes some time—as global investors grow accustomed to having human capital information at their disposal when investing in Europe-based companies.”
A key driver for change, the author contents, will occur when human capital management is viewed as a market differentiator, a means to reduce material risks and the ability benefit from having clear corporate values. On the other hand, “Concern over industry-to-industry variables was one reason for the commission’s delay in taking action on human capital disclosures.” McCann notes that, “even given the intensifying climate of demand for such data, US companies are unlikely to make such detailed disclosures unless forced to, but therein lies a contradiction,” he writes.
“Human capital disclosure isn’t just good for investors. There’s pretty convincing evidence that companies that disclose more of such information perform better. That conclusion came out of a separate effort to define standards for human capital reporting that was a key aspect of the early activities of the Embankment Project for Inclusive Capitalism (EPIC),” a global project spearheaded by Ernst & Young and involving large corporations, asset managers, and asset owners aimed at establishing metrics that measure long-term value creation.” See ESM: EPIC Coalition Demonstrates CEO-Investor Commitment to an Enterprise Approach to Human Capital.
The Impact of Engagement on Business Valuations
The issue of employee engagement recently came up in a webinar held by Business Valuation Resources. As reported in the Business Valuation Update article, “Factoring Workforce Engagement
,” a panel of experts predicted that “Someday, a workforce engagement adjustment will be made to the calculation of the value of an assembled workforce…In the meantime, all valuation experts should be taking this factor into account for any business valuation when assessing specific company risk.”
The article, available only to subscribers, argues that the evidence indicating the connection between engagement and performance will require the industry to develop a means of objectively factoring workforce engagement into the valuations of organizations in asset sales.
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For more information, contact Bruce Bolger at Bolger@TheEEA.org, 914-591-7600, ext. 230.
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