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HUMAN CAPITAL REPORTING

1.0 WHAT IS HUMAN CAPITAL?


The term human capital is widely used in HR to describe people at work and their collective knowledge, skills, abilities and capacity to develop and innovate. Human capital reporting aims to provide quantitative, as well as qualitative, data on a range of measures (such as labor turnover or employee engagement levels) to help identify which sort of HR or management interventions will drive business performance.

It is now commonly accepted that the value of organizations is drawn from a mixture of tangible assets in the form of equipment, money, land or other physical objects together with intangibles in the form of brand, reputation, knowledge and, of course, people critically important in an increasingly knowledge-based economy.

However, the evaluation of human capital remains difficult for most companies. There are a number of reasons for this:

The contribution of people is difficult to isolate from other factors such as the economic situation, market forces and fashion.

The value of people is often expressed in qualitative rather than quantitative terms that make it difficult to represent in traditional accountancy models.

HR data has traditionally been collected for administrative rather than evaluation purposes.

HR people do not always have the skills or resources to interpret data to evaluate the contribution of people to business performance.

Human capital information which is vital for effective management of resources is usually only accessible internally within an organization. However, information regarding human capital or human resource investments and the return on these investments are currently not presented in the annual reports systematically and consistently.

Human Capital Management (HCM) is critical in order to create a highperforming work environment. Companies need to manage HC through all the phases of an employees work life - from recruitment to development to retention.

HCM involves getting the right people, with the right skills, in the right position, at the right time, rewarding them with the right incentives to perform the right function in the right environment, to most effectively perform the work of the organization. It also involves training/developing the capital, improving their output/productivity. It is to maximize the organizations HC (i.e. the accumulation of all the individual HC in the organization).

Strategic HCM is the transformation of how we employ, deploy, develop and evaluate the workforce. It focuses on results, not processes. The term HC was first used by Nobel Laureate, Theodore W. Schultz, in the 1961 American Economic Review Article, Investment in HC. The term is now most frequently used to refer to a combination of skills, experience and knowledge. HC is an all-encompassing term for the knowledge, skills, competencies and other attributes embodied in individuals or groups of individuals acquired during their life and used to produce goods, services or ideas in market circumstances. HC makes an individual potentially productive and thus equips him or her to earn income in exchange for labour.

2.0 WHAT IS HUMAN CAPITAL MANAGEMENT?


With signs indicating the gradual end to the recession, its likely that well start to see organizations injecting capital back into their companies. Typically, when I think of capital, I think of monies being put into infrastructure improvements, equipment, or other assets in order to build and grow the business. Based on the drastic workforce reductions weve seen in recent months though, I think a new paradigm will emerge. I believe we will start to see organizations looking to first invest in their talent inventory and strategies to rebuild the workforces.

This development illustrates the continuing maturation of Human Resources (HR) as an incredibly strategic discipline for firms to achieve growth objectives. Already a key member of the executive team, HR is being looked upon to evaluate every area of the workforce, and now is being pressured to offer up much more than ever before. Theyre looking at labor-related expenses against operational realities, with the objective of increasing cost efficiencies and developing an honest-to-goodness talent supply chain. And so, the term Human Capital Management (HCM) comes into play. The concept of HCM has been around for years, but its meaning remains ambiguous, and the term is often interchanged with others, such as organization management, human resource management, and personnel change management.

Further adding to the ambiguity is the number and complexity of the processes which comprise HCM, including: -Workforce planning -Candidate attraction and searching -Selection -On-boarding/off boarding (orientation/termination) -Skills management -Training and development -Personnel administration -Compensation -Time management -Payroll -Benefits administration -Personnel cost planning -Performance appraisal -Travel management

So what is HCM?
A very simplistic definition is: the development of all labor-related issues that impact a firms strategic and operational objectives, including: the employment of people; the development of resources; and the utilization, maintenance, and compensation of their services aligned with the job and organizational requirements. Today, the HCM discipline is more critical than perhaps ever before. Adequately managing every facet of talent and labor requires a detailed examination of all segments of the workforce against every area of operational detail.

3.0 WHAT IS HUMAN CAPITAL REPORTING?


Human Capital Reporting can be divided into 2: a) External Reporting b) Internal Reporting

Different types of information will be of value to different audiences within the business:

Shareholders seek information on the employee attributes or behaviours that are likely to influence short- or long-term financial performance. Customers wish to know if they will get good service and after sales support. Employees want to know their jobs are secure and how they can develop themselves and their skills. Managers require information on which actions they can take to improve the performance of their business units.

3.1 External reporting


Regulatory background
The extent of external reporting on human capital remains limited. There are two main sections where such data may be published within companies annual reports:

Business review - quoted companies are required to include information on employees (as well as other issues) within the business review section of the annual report. Operating and financial review - with the growth of interest in the idea of human capital reporting during the early years of this century, culminating in the publication of the Kingsmill report (mentioned above), government proposals were developed to introduce mandatory compliance with best practice principles on narrative reporting in the operating and financial review section of annual reports. However, these plans for compulsion were abandoned in 2005, although some companies follow such principles on a voluntary basis, though only among in a minority of cases, according to the latest analysis of the content of annual reports from Deloitte2.

3.2 Internal reporting


Internal reporting is a business practice which involves collecting information for internal use. Big firms rely on internal reporting to make a variety of management decisions and small companies can also benefit from internal reports. In some companies, a specific staff member is charged with internal reporting, while in others, people complete internal reports as part of their jobs. These reports are not designed to be made public and may include confidential or proprietary information.

One important area of internal reporting is financial reporting. Financial reports are used to monitor a company's financial health and can inform decisions which need to be made about the direction in which a company will be taken. For example, an internal report could reveal that one division spends a lot of money without generating very much revenue and managers could discuss how to make that division more efficient or consider the possibility of closing that division altogether.

Internal reporting can also include reports on employees. These reports can discuss efficiency, job performance, and other aspects of employee activity which may be of concern. Many companies also support whistle blowing activity, encouraging employees to file reports if they suspect that activities may be violating the law or company policy. For instance, a bookkeeper could express concern about the financial reports of another branch of a company or an employee could report a manager who was behaving inappropriately. A basic internal report may simply provide factual information which has been collated into a single document for convenience. Others may offer commentary and insight. Companies with specific managerial approaches may generate internal reports which reflect not only factual information about the company, but provide an assessment which is designed to determine how well the company is following through on its managerial approach and stated policies. These reports can also include things like the results of employee surveys, business studies conducted by third parties asked for evaluations, and other data which might be deemed relevant to management.

When a specific employee is tasked with gathering information for internal reporting purposes, this employee is usually given free run of a company to collect information. She or he may have support staff who can perform tasks related to internal reports such as budget analysis and employee interviews. This employee must have full access in order to generate accurate and helpful internal reports for use by management. This employee is also held to a confidentiality agreement because of the sensitive nature of the materials he or she handles.
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Internal reporting is far more prevalent than external reporting, as this is important in the evaluation of the effectiveness of HR interventions and guiding future HR strategy, while also protecting business confidentiality where desired. It takes a number of forms. Generally any human capital data reported internally should be:

reliable and open to scrutiny accompanied by adequate explanation presented in a manner that is easily understandable for the audience related to business needs enable managers to identify appropriate actions that will improve business performance.

3.3 Why Is Human Capital Reporting Important ?


"The fundamental objective of corporate reports is to communicate economic measurements of and information about the resources and performance of the reporting entity useful to those having reasonable rights to such information".

In more recent times the Accounting Standards Board published its Statement of Principles for Financial Reporting (Dec 1999) and the concept of usefulness was a significant feature in this publication. As it is undeniable that human issues are useful for stakeholders to evaluate companies, they should be reported.

The accounting standards setting authority have published standards relating to the operating and financial review (OFR) of a company. As the profit and loss statement, balance sheet and cash flow statement are a historical account of a companys performance, the OFR provides information that stakeholders can use to project the historical figures into the future. These usually include the companys vision and strategy, but should also include information on human capital, and how it is being developed. After all, given the same physical assets, human capital and other intangibles are what makes a company perform better or worse.

Another consideration when evaluating the need for improving the level of HC reporting in the UK is the current trend in the nature of the businesses. Given that UK
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businesses are increasingly becoming more service-based it is more important that the human resource is adequately managed as the performance of the company relies even more on the employee performance. This is explained in the Service Profit Chain based on research by Heskett, Sasser, and Schlesinger where greater employee satisfaction leads to customer satisfaction, which increases sales.

People are the true agents in business. All assets and structures, whether tangible or intangible, are the result of human actions. All depend ultimately on people for their continued existence. Annual reports should include the usual visible assets and an invisible part that consists of employee competence, internal and external structures. These invisible assets on an organizations balance sheet consists of employee competence, internal structure, and external structure. Employee competence involves the capacity to act in a wide variety of situations to create both tangible and intangible assets. Some may not agree that employee competence is an intangible asset. It is true that individual competence cannot be owned by anyone or anything except the person who possesses it: employees are voluntary members of an organization.

Nevertheless, they should be included in the balance sheet of intangible assets because it is impossible to conceive an organization without people and people tend to be loyal if they are treated fairly and feel a sense of shared responsibility. Internal structure (e.g. patents, concepts, models) is created by the employees and is generally owned by the organization. External structure includes relationships with customers and suppliers. It also encompasses brand names, trademarks and the companys reputation or image.

Companies may see HC reporting as both a positive opportunity and a negative risk. Although it is beneficiary and professional to do so, generating information for better management, it also threatens to expose activities that may be ineffective or counterproductive. Information may even be considered sensitive when reporting externally. However, some leading human resources professionals and academic researchers will coincide in that the value that can be added in this field is enormous and deserves to be documented and demonstrated through reporting to make it more effective and better known.

4.0 HUMAN RESOURSE INFORMATION SYSTEM ( HRIS )


A Human Resource Management System (HRMS) or Human Resource Information System (HRIS), refers to the systems and processes at the intersection between human resource management (HRM) and information technology. It merges HRM as a discipline and in particular its basic HR activities and processes with the information technology field, whereas the programming of data processing systems evolved into standardized routines and packages of enterprise resource planning (ERP) software. On the whole, these ERP systems have their origin on software that integrates information from different applications into one universal database. The linkage of its financial and human resource modules through one database is the most important distinction to the individually and proprietary developed predecessors, which makes this software application both rigid and flexible. The function of Human Resources departments is generally administrative and common to all organizations. Organizations may have formalized selection, evaluation, and payroll processes. Efficient and effective management of "Human Capital" progressed to an increasingly imperative and complex process. The HR function consists of tracking existing employee data which traditionally includes personal histories, skills, capabilities, accomplishments and salary. To reduce the manual workload of these administrative activities, organizations began to electronically automate many of these processes by introducing specialized Human Resource Management Systems. HR executives rely on internal or external IT professionals to develop and maintain an integrated HRMS. Before the clientserver architecture evolved in the late 1980s, many HR automation processes were relegated to mainframe computers that could handle large amounts of data transactions. In consequence of the high capital investment necessary to buy or program proprietary software, these internallydeveloped HRMS were limited to organizations that possessed a large amount of capital. The advent of clientserver, Application Service Provider, and Software as a Service SaaS or Human Resource Management Systems enabled increasingly higher administrative control of such systems. Currently Human Resource Management Systems encompass: 1. 2. 3. 4. 5. 6. 7. 8. Payroll Time and Attendance Appraisal performance Benefits Administration HR management Information system Recruiting Performance Record Employee Self-Service
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9. Scheduling 10. Absence Management

The payroll module automates the pay process by gathering data on employee time and attendance, calculating various deductions and taxes, and generating periodic pay cheques and employee tax reports. Data is generally fed from the human resources and time keeping modules to calculate automatic deposit and manual cheque writing capabilities. This module can encompass all employee-related transactions as well as integrate with existing financial management systems. The time and attendance module gathers standardized time and work related efforts. The most advanced modules provide broad flexibility in data collection methods, labor distribution capabilities and data analysis features. Cost analysis and efficiency metrics are the primary functions. The benefits administration module provides a system for organizations to administer and track employee participation in benefits programs. These typically encompass insurance, compensation, profit sharing and retirement. The HR management module is a component covering many other HR aspects from application to retirement. The system records basic demographic and address data, selection, training and development, capabilities and skills management, compensation planning records and other related activities. Leading edge systems provide the ability to "read" applications and enter relevant data to applicable database fields, notify employers and provide position management and position control. Human resource management function involves the recruitment, placement, evaluation, compensation and development of the employees of an organization. Initially, businesses used computer based information systems to:

produce pay checks and payroll reports; maintain personnel records; pursue Talent Management.

Online recruiting has become one of the primary methods employed by HR departments to garner potential candidates for available positions within an organization. Talent Management systems typically encompass:

analyzing personnel usage within an organization; identifying potential applicants; recruiting through company-facing listings;
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recruiting through online recruiting sites or publications that market to both recruiters and applicants.

The significant cost incurred in maintaining an organized recruitment effort, cross-posting within and across general or industry-specific job boards and maintaining a competitive exposure of availabilities has given rise to the development of a dedicated Applicant Tracking System, or 'ATS', module. The training module provides a system for organizations to administer and track employee training and development efforts. The system, normally called a Learning Management System if a stand alone product, allows HR to track education, qualifications and skills of the employees, as well as outlining what training courses, books, CDs, web based learning or materials are available to develop which skills. Courses can then be offered in date specific sessions, with delegates and training resources being mapped and managed within the same system. Sophisticated LMS allow managers to approve training, budgets and calendars alongside performance management and appraisal metrics. The Employee Self-Service module allows employees to query HR related data and perform some HR transactions over the system. Employees may query their attendance record from the system without asking the information from HR personnel. The module also lets supervisors approve O.T. requests from their subordinates through the system without overloading the task on HR department. Many organizations have gone beyond the traditional functions and developed human resource management information systems, which support recruitment, selection, hiring, job placement, performance appraisals, employee benefit analysis, health, safety and security, while others integrate an outsourced Applicant Tracking System that encompasses a subset of the above.

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5.0 HUMAN CAPITAL MANAGEMENT REPORTING ( HCM Reporting )


The concept of human capital is not a particularly new one: the term was first coined in the 1960s by the economist Theodore Schultz and was centred on the division of labour and how one could compartmentalize employees into specific categories of seniority. Employees were primarily seen as being a cost, rather than a form of capital and contributor of value to the organizations financial and non-financial performance.

The 1980s saw a rise in the human resources function within business, which recognized the importance of employee management in improving operational efficiencies via training and development and job satisfaction. Fast forward to the 2000s, and people are officially recognized as adding value to the business from more than just an efficiency perspective they constitute an intangible asset in terms of reputation, intellectual capital, expertise and knowledge and innovation, as well as contributing to strategy achievement.

An official definition of human capital management from the Investors in People program is: The term Human Capital points to the benefits of regarding people as capital, ie: a source of investment whose value to an enterprise can appreciate with relevant and aligned development, recruitment and management interventions. Although it is now acknowledged that human capital is of real value to business and should be managed accordingly, there is still little credible information communicating this view of HCM in annual reports and sustainability reports along with other quantitative and narrative disclosures.

Reporting is still largely voluntary in the UK, aside from the clause in the updated Companies Act (passed November 2006) that asks for narrative disclosures, in the annual business review, on non-financial issues such as environment, community and employees. Nonetheless, it is ultimately left to directors discretion to decide whether this information is material to the business and therefore should be included in disclosures, and as a result many organizations disclose the bare minimum or simply state that it is not considered sufficiently important.

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In response to this lack of transparency on HCM issues, in 2003 the UK government set up the Accounting for People Task Force, whose aims were to look at performance measures used to assess human capital and best practice in subsequent reporting. The Task Force stated that HCM should be treated as a strategic issue and the project sought to analyze measure and evaluate how employee policies create value. Business strategy should be directly aligned with the management of human capital, and this alignment should be clearly stated within company reporting. The advantages of doing so are numerous. It demonstrates externally that the organization takes HCM seriously, and could therefore help attract new talent to the business. It responds to any stakeholder concerns there may be on employee issues.

The data collection and internal engagement involved in preparing a report can assist in identifying risks that may have otherwise been left unaddressed. It can increase the trust of existing employees, who may not be aware of how their organization perceives human capital and how it is managed. It can improve internal management systems through data and information collection, trend analysis and target setting. It provides investors, especially sustainable and responsible investment (SRI) analysts, with the information they require to make their decisions. (A piece of CIPD research found that investors currently take little notice of workplace metrics because of low comparability and consistency in the way they are presented.)

Examples of issues that should be managed internally and reported on include the incorporation of HCM into strategy setting, employee engagement (both on strategic issues and regular, everyday management issues), individual employee KPIs on diversity, equal opportunities, training and development, health and safety and wellbeing, and employee absences and turnover. It is important to note that providing quantitative data on these issues is not sufficient as the data are meaningless without an explanation of any observed trends, what they mean for the business and how HCM is being used to exploit opportunities and manage risks within the business both an account of past performance and forward-looking narrative information.

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The key questions and discussion points of the event are summarized below. How Does The Credit Crunch Fit Into The Issue Of HCM Reporting or Reporting In General? Those organizations that manage human capital and disclose approaches and performance to interested stakeholders are more likely than those that do not to be able to deal with and adapt to current market changes due to the economic downturn. Key employee issues such as turnover, retention, redundancies and maintaining a dedicated, hardworking workforce are all the more challenging in the face of financial difficulties, and the better prepared an organization is, the more likely it is to emerge in one piece when the economy starts to recover.

Another point organizations should be considering on a continuing basis is the selection of material HCM issues for inclusion in a sustainability/annual report. The economic downturn will see the refocusing of issues that are of most concern to organizations (for example, there may be a change from attracting to retaining talent if redundancies are taking place). Disclosures and internal management will have to balance now with future in terms of approach and the identification of focus areas.

How Can An Organization Communicate On How It Is Adding Value To The Business By Investing In Human Capital? SRI analysts are particularly interested in the real value added by human capital investment (rather than the individual statistics for different KPIs) and therefore in the results of this performance and forward-looking analysis of how it will bring business benefits. For example, if an organization has focused much of its disclosure efforts on diversity and equal opportunities, analysts are not interested in the raw data but want an explanation of how any performance improvements or strategic developments are being used to leverage opportunities in new markets or keep up with competitors. Too many organizations provide the raw data and a small amount of commentary without giving any explanation as to why this has been collected and what value it brings.

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How Can Organizations Ensure That Their Disclosures On HCM Are Balanced And Credible?
This is often an issue when reporting across different sustainability areas, not just HCM. Organizations tend to focus on the positive elements of performance in their reporting and steer away from describing any poorer areas or dilemmas faced during the course of the reporting period. Reporting professionals often identify this as a problem area that needs to be addressed if HCM disclosures are to be taken seriously by analysts and other stakeholder groups. Independent assurance of reporting on specific areas is one way of ensuring that a balanced account is given, as the assurance provider can give readers some confidence that any negative performance areas or dilemmas would be picked up and indicated clearly in the resulting statement.

6.0 Conclusion
Although Human Capital is widely considered one of the most critical inputs in a company, and the effective management of this resource has a positive impact on competitiveness and profitability, very few British companies are actively measuring and reporting Human Capital. It is common for HR departments to be engaged in more administrative tasks such as hiring or downsizing and managing employee relations to some extent, while accounting departments are not trained and do not have the experience to measure and report on Human Capital.

During periods of boom and recession these tasks seem to take up more time, leaving little time for more proactive management. Academic research and managers intuitive knowledge coincide in that effective HC management leads to improved profitability and competitiveness. Measuring and reporting on HC is however less of a unanimous contemplation. Some companies have taken the initiative to measure different aspects of their HC management, usually choosing popular indicators such as turnover, employee satisfaction through surveys, absentee statistics and profit per employee. Although for other companies currently not measuring, this kind of exercise is not the first priority, there is a group going through the initial stages of defining their measurement system. Currently, although indicators are used internally there is very little practice in reporting indicators externally. Only a few respondents mentioned that they did this
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and these are usually targeted at external consultants, employees and prospective applicants. There are a number of obstacles cited for not reporting, such as information too delicate to share externally, company has set other priorities for HR, lack of time and resources, unawareness of value in reporting and lack of clear guidance and universal practice, among others.

The benchmarks used for indicators vary across industry sectors. Employee turnover, for example, can have higher rates in some sectors than in others. Clearly, there are certain measures that are more appropriate for some sectors and some that are not. According to most respondents, it would help to have a standard in place that would help kick-off the initial practice of reporting and guide all companies into reporting a common set of metrics that would be then worth comparing. Unless measures are made compulsory, companies will continue to follow their own initiatives and criteria, generating a whole variety of incomparable indicators. Whatever the measures are, there is a consensus that these standards be kept simple.

Having too many measures can confuse and deter users. Also, indicators should measure what is strategically important. The indicators should be linked to a key performance driver that is linked to both the HR and business strategy and ultimately, shareholder value. Lead and not Lag indicators tend to be the most helpful ones in this sense.

As benchmarks can vary across industries it may be preferable to define different groups of HCM measurement. Then companies can be broken down by industry or similar sectors (e.g. Metals/Mining, Chemical/Plastics, Oil/Gas/Power, Pharmaceuticals, Engineering services, etc.) and assigned to a group. Common metrics could then be assigned to each group.

The idea of implementing a single index such as the Watson Wyatt HC Index or something similar may be an interesting alternative. It may be preferred to indicators as it preserves confidentiality and is of easy interpretation, like the ranking in Fortune or like Credit Ratings. As investors grow more interested in the HC and Corporate Social Responsibility issues and research continues globally to assess the value of reporting, it seems there should be some convergence soon towards a natural need for standard Human Capital indicators on the companies reports.
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REFERENCES

Becker, G.S., Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education, 1993

Davenport, Thomas, Human Capital: What It Is and Why People Invest In It, 1999

Economist Research Retrieved From: http://www.economist.com/research/Economics/alphabetic.cf m?TERM=HUMAN% 20CAPITAL

Watson Wyatt, The HC Index: Linking Human Capital And Shareholder Value, Survey Report 1999, 2000, 2002

Watson Wyatts The Human Capital Index European Survey Report 2002

Westphalia, Sven-Age Reporting on HC; Objectives and Trends, 1999

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