Stakeholders increasingly want to know the value that people bring to organisations, so knowing how to capture those metrics is important. Here’s how integrated reporting can help.
Financial reporting has not kept pace with changes in business. Today, businesses routinely report on environmental, social and governance (ESG) risks which aim to assist investors in understanding a listed company’s exposure and approach to mitigating these risks. However, this does not extend to risks related to intangibles, including an organisation’s people.
As evidence of this phenomenon, Standard & Poor’s found that in 1975, 83 per cent of value, as measured by market capitalisation, was captured on corporate balance sheets. Intangibles were far less important then.
That situation has changed. By 2015, the ‘off-balance sheet’ proportion of value, as measured by market capitalisation, the intangible assets – including the value of an organisation’s people in creating value – had grown to 87 per cent.
Investors want and need the critical information which integrated reporting (IR) is designed to provide about an organisation’s strategy, business model, governance, performance and prospects. But also, how people are aligned with the strategy. So how do investors and securities analysts get the information if it is not held in corporate reports? And what are the business productivity benefits that arise from adoption of IR?
First, let’s look at the reasons to do it. What IR offers is consistent understanding of the strategy and business model partly by breaking down organisational silos. An understanding of IR creates better strategic alignment and more effective and efficient reporting processes as well as improved internal reporting. GE and NAB, have achieved good practice in the ‘readability’ of their integrated reports, and have seen steep changes in employee engagement as a result.
The world’s largest investors are speaking up about IR. Larry Fink, CEO of investment management company BlackRock, is calling for more strategic reports from the companies in which it invests. CalPERS, an agency that manages pension and health benefits for the state of California, is calling for IR as a matter of good corporate governance. Widespread best practice and investor-led adoption is being achieved in the UK, South Africa, Japan, Brazil and Sri Lanka. Australia has fallen behind.
Challenge for the HR profession
People don’t only provide human capital to their organisation, they bring and build intellectual capital, and contribute to the delivery of an organisation’s ouputs (products and services). Employees contribute to the outcomes from the organisation’s activities in creating value in the longer term for investors and other key stakeholders.
While some good material already exists in relation to measuring the contribution of an organisation’s people, much less guidance is available on how to report it.
David Ulrich, in his 2015 book, The Leadership Capital Index – Realising the Market Value of Leadership, analyses two broad domains: the individual domain (e.g. personal qualities, fit between the leader’s style and the organisation’s market promises) and the organisational domain (a leader’s ability to create customer-focused cultures). He details rigorous metrics and methods for evaluating leaders on each of these factors. But how to incorporate this data in integrated reports?
“Traditional financial [KPIs] aren’t much help when it comes to measuring the worth of, say, customer satisfaction or employee engagement. But by partnering with HR leaders, CFOs can identify workforce KPIs and, together, help drive the company’s differentiated strategy,” said Robert Landon from Oracle in his article posted on the Forbes website in March.
The next step is to determine how to incorporate such KPIs into integrated reports. A good way to start is by looking at following companies’ IR reporting.
What can HR do?
Integrated reporting, and the benefits of its successful adoption, bring great opportunities for the HR profession to make a significant strategic and commercial contribution.
In The Market
A number of challenges to widespread adoption of IR exist in Australia, including director liability for forward-looking and risk-oriented statements.
HR can assist by discussing the benefits to human capital management of effective integrated reporting with the directors of their organisations. Professionals may get directly involved by joining the Australian Business Reporting Leaders Forum.
Within Your Organisation
HR can participate in determining the metrics that matter to value creation (the strategy), the value creation process (business model and governance) and the six capitals, particularly human capital. Also HR can show how people contribute to the outcomes for the other capitals – for example, by using Ulrich’s Leadership Capital Index. They can then participate in developing the human capital aspects of the IR.
They can also contribute to improving remuneration reports, improving their link to strategy, the business model, governance and risk management.
A framework for reporting on human capital and intellectual capital is a missing link in corporate reporting, and the least developed in the IR Framework.
The World Intellectual Capital Initiative has done good work on developing intellectual capital reporting in the context of integrated reporting.
An opportunity lies for AHRI, in partnership with industry bodies such as the AICD, to work with the International Integrated Reporting Council in building a simple human capital reporting framework, possibly working with the Maturity Institute, a body devoted to improving professionalism within organisations.
Michael Bray is director, better business reporting and Susan Ferrier is national managing partner, people, performance and culture both at KPMG Australia.
This feature originally appeared in the August 2017 edition of HRM magazine.