Magazine article People & Strategy

Human Capital Management: The Central Element of All Risk

Magazine article People & Strategy

Human Capital Management: The Central Element of All Risk

Article excerpt

There are myriad risks that every company must contend with each day. HR helps recognize, manage, and respond to such risks. As you look across the different types of exposure facing your firm, how well can you identify and measure the potential strategic impact if these risks are not attended to?

HR can ensure a resilient enterprise by using human resource data and techniques characteristic of business strategy, finance, and enterprise risk management. We'll examine the issue of employee retention, specifically talent critical to achieving strategic priorities, and then illustrate how traditional strategy maps can be enhanced with a human capital perspective and explain how this enables us to recognize and measure a variety of people-related risks to strategic priorities and enterprise viability.

The Strategic Impact of Pivotal Employees

It is reasonable to ask, "When does underperformance of not engaging and retaining employees become a risk to the enterprise?" It happens when you lose sight of who your pivotal employees are and can no longer see the consequences of their disengagement or potential exit.

HR has many tools at its disposal, including those used for the attraction and retention of key employees--we refer to them as "pivotal employees." HR also has command of data and information needed to identify such employees and plays a significant role in training and compensation to enhance alignment.

Research on high-performing companies highlights the importance of employee engagement and human capital as a key driver for superior business performance. It also shows the value of disciplined performance measures that link with long-term shareholder value creation and the stewardship of capital (for more information see Driven: Business Strategy, Human Action and the Creation of Wealth, Frigo & Litman, 2008). So how can companies develop human capital metrics that can link with business financial results?

The "Moneyball" of Human Capital

Marketing and sales functions have long demonstrated the power of using big data for decision making. The book-turned-movie Moneyball revealed how a general manager of a baseball team could use data on individual and collective performance to predict outcomes and guide decisions in Major League Baseball for optimal player acquisition and utilization.

HR already makes use of its wealth of data in employee engagement assessments and more than 600 HR metrics now featured in the Human Capital Management Institute's (HCMI) Human Capital Management Handbook. Using internal financial information, some companies connect their own HR metrics to business results. Yet they stop short of linking human capital metrics to comparative financial results--that is, winning the ball game against other companies. This is attributable to the lack of commonly accepted and reported HR metrics.

There is evidence-based research that this hurdle can and, to some extent, has already been overcome. An April 2015 study, "The Materiality of Human Capital to Corporate Financial Performance," by Aaron Bernstein and Larry Befferman of Harvard Law School found "the evidence for human capital sufficiently compelling to warrant investor requests for companies to report systematically" and "one way to start thinking about desired reporting [at least internally to the board] is to draw upon policies found to be linked to financial results."

HR already does benchmarking for executive compensation and benefit programs. In 2009, AON Hewitt (then Hewitt Associates) demonstrated that the disproportionate loss of pivotal employees could be quantified in subsequent poorer financial results ("An Economic View of the Impact of Human Capital on Firm Performance and Valuation" in The Valuation Handbook, Valuation Techniques from Today's Top Practitioners). The study found a 10 percent loss predicted a 0.7 percent to 1.6 percent of investment ($70 million to $160 million for a $10 billion corporation)--a Moneyball result. …

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