Human Capital (1)

6 metrics to measure human capital

The U.S. Securities and Exchange Commission has proposed amendments to corporate disclosures to include tangible measures human capital objectives
Oct 25 2019

Human Capital (1)

Sound decision-making relies on sound data. This is especially true for institutional investors who evaluate investment opportunities to create long-term value for clients and beneficiaries.  Typically, these decisions rely on metrics tied to the financial drivers of the business, such as sales growth, overdistribution of capital, or fixed investments. In addition, organizations create, or sometimes diminish, value in a range of ways that are not reflected in corporate financial statements. Because of this, they are not usually factor into quantitatively-driven investment decisions.– ccess to clear, measurable data on these pre-financial factors could improve the quality of investor decisions.

In addition to the needs of investors, companies are often overwhelmed by requests for pre-financial, intangible, or ESG information. Agreeing on standard “pre-financial”, decision-relevant metrics for investors would cut across an investment landscape that is currently cluttered with alternative and competing frameworks.

As such, the U.S. Securities and Exchange Commission (SEC) is proposing amendments to corporate disclosures to include, among other things, “human capital measures or objectives that management focuses on in managing the business.” Not having undergone changes in more than three decades, the amendments could improve disclosures for investors and simplify compliance efforts for companies. In our comment to the SEC, FCLTGlobal has suggested four criteria that, when applied to the myriad of pre-financial figures, would identify a shortlist of key metrics to measure human capital:

  • The metrics are material to investors interested in a company’s long-term success;
  • The metrics can be assured by auditors or other independent third parties;
  • The metrics can be defined and consistently calculated to ensure comparability; and
  • The metrics are universally applicable across countries, sectors, and contexts.

Human capital can be described as the economic value of a workforce. It includes education, training, intelligence, skills, health, and other things that employers—and potentially investors—would value. Using the above criteria, our research has identified six metrics specific to human capital measurement:

Personnel turnover

Calculated by all terminations from the organization over the total employee base at the beginning of the period. Terminations would include both part- and full-time staff and exclude intra-company transfers, role changes, or leaves of absence.

Leadership diversity

Calculated as percentage of named executive officers in the proxy statements by gender.

Gender pay gap

Calculated via six separate metrics: (1) mean and median gender pay gap in hourly pay, (2) mean and median bonus gender pay gap, (3) percentage of (a) men and (b) women receiving bonus payment, and (4) the proportion of (a) men and (b) women in each pay quartile.

Employee health and safety

Calculated as the total recordable incident rate and fatality rate for both full-time and contract employees. This measure would conform to the employee health and safety standards for numerous industries, as laid out by the Sustainability Accounting Standards Board.

Employee training

Calculated as the total amount spent on training, either per employee or per hour.

Monetary losses from legal proceedings

Calculated as the total monetary losses from legal proceedings and the total settlement payments to employees.

We are pleased to once again contribute to lend some of our latest research to this important dialogue around corporate reporting and disclosures. We look forward to seeing the impact the SEC’s next steps will have on the long-term dynamic between American companies and investors. To read our full letter to the SEC, click here. If you’d like to discuss our comments in greater detail, please contact us at [email protected].