HR Investor Metrics: Already Here! Lets not have our Head in the Sand!

The is the second blog in a series that covers the recent "Kerfuffle" (love that word) where the HR community stopped itself on producing HR Investor metrics. This particular article is to cover how most of the controversy was over nothing - as most of the metrics were out there! (but maybe HR didn't know?)

First of all, Does HR matter to investors?

In a quick answer - yes! We will get into the detail of it below - but here are the two major things to be aware of. The services portion of the US GDP has been trending up since 1920 - and is now at 76%. So years ago, the people were the "cog" and what provided the capital return was the industrial innovation (e.g. the Model T). Now that the economy has switched from a Goods economy to a Service economy - it is the people who come up with the ideas that make the capital value (think Google, Facebook, etc.). Thus it is now the People that make the value of the organization. 

What investors also understand is the Public Financial Accounting has not kept up - as what is on the public balance sheets, income statements, etc are mainly in regards to the raw materials to make product. Think about the balance sheet - it has raw materials, real estate on it - but nothing about the people. 

Price versus Book Value: 

One of the challenges economists and investors have been having is that they know a company is worth more than what is on the company's "Books". So the investor world started to track this and now they call it the Price to Book Ratio - so for instance with Google. Their book value of stock is ~ $207 per share - based on the cash on hand, their assets, long term revenue commitments, etc. But their ratio is 3 times that- and the stock is trading in the $600's. What is that? Intangibles.

Intangibles:

Investors and researchers have been studying the gap which has continued to grow between book value and stock price. More importantly, this is not a NEW concept. The below is a quote from a 1961scholarly article title "The Valuation of Human Capital" 

The market mechanism places a value on those assets to which title can be transferred, and thus the market does evaluate land and capital goods in our economy. The market also provides rental values (wage rates) for labor but not capitalized values, and these are frequently essential for rational decision-making.2I t would be useful if we could develop a substitute for the market evaluation of labor resources. 

There have been numerous studies on intangibles, and there is growing concensus that there are two big buckets of spend that make up the stock value - R&D spend and Human Capital Spend (e.g. training, salary etc.). In 2008, a great study was released titled, " What is a company really worth? Intangible Capital and the "Market to Book" value puzzle." I will warn you it is a bit of a read, but the conclusion is basically proved that if you take a company's known book assets, add in R&D spend and the Human Capital spend - the regression is almost perfect to the stock price.

What is key to note is that the investor and economist world is working on it not whether Human Capital metrics have value - but they are past that. They are focused on how the numbers should be reported and getting into the intricacies of is labor spend part of SG&A or is it a capital spend that should be amortized? If you search on Google Scholar - there are over 92,000 papers that are in regards to Human Capital and Stock Valuation. Since 2012, there are over 7,000 papers written on the topic. 

Investors are using the numbers:

There are a recent study showing that investment analysts are absolutely using human capital reasons for both target price movements up and down. 

Investors are going around HR! Corporate Sustainability Reports and Foreign Exchanges.

Quietly, the investor community and financial parts of corporations have been working on Corporate Sustainability Reports (CSR) and fleshing out the detail of what should be in them. In the US, we often think of these as the reports that have carbon footprint information etc. This movement has gotten so strong that the Exchanges, the UN, the EU, developed the Global Reporting Intiative (GRI) to make sure the effort didn't fracture or splinter apart. There are over 4,000 Companies filing CSR reports annually and over 77% of them are using the GRI standard. To the point that the EU has suggested to it's member states to mandate this disclosure. 

Here is what is already covered in the GRI 3.1 standard (They are working on version 4 now). 

1. Total workforce breakdown by employment type, region, and by gender

2. Employee Turnover by Age, Region and Gender

3. Benefits provided to full time employees that are not provided to part-time or contract employees

4. Return to Work and Retention rates after parental leave by gender

5. Percentage of Employees in collective agreements

6. Minimum notice required by those collective agreements for operational changes

7. % of workforce covered by safety committees

8. Rates of injury, disease, absenteeism by operational area and region and gender

9. Health Care training 

10. Average hours of training by employee type and gender

11. Programs for lifelong skills development for the employees

12. Percentage of employees receiving regular performance reviews by region and gender

13. Ratio of pay by gender

14. Employee Engagement Scores. 

If you want to really dig into this topic - here is a great study that talks about the current state of CSR. 

So here is the Good News: HR Investor Metrics are out there:

Aside from going to companies' websites to see if they file a CSR, you can go to the Corporateregister and see the filings there. So this is a bit of a generalization, but you will find that over 50% of CSR reports are filed from European owned companies, and my perception is that the US companies that file CSR's are companies that are multi-national in nature. For instance, Coca-Cola follows the GRI standard and publishes all of the above. Want to know their turnover by location or age - go here.

I encourage, go look at some of the US filings and/or look at some foreign annual reports - and you will quickly come to the conclusion that HR Investor Metrics are being published- but maybe we didn't know about it? 

Do the Investors Care? Voting with their money:

Over 11% of the market capitlization in the United States has shfited to companies with CSR approach. This new invester trend is called Socially Responsible Investing (SRI), and the results are strong. Continued studies have shown that SRI has "abnormally higher returns" then normal market returns. Additionally, within the CSR framework - the Social Pillar (The one that contains employee practices) has the highest correlation (.89) to portfolio returns. 

So Bottom Line!
HR Does have an impact on a Company and it's stock price! Lets be proud of what we do! Lets also be prepared to take accountability for what we do. The next blog will dig more into connecting HR practices to Company Valuations!