Human capital standard making waves

Concerns around confidentiality, context on proposed U.S. reporting standard
By Sarah Dobson
|Canadian HR Reporter|Last Updated: 10/23/2012

A proposed new standard around human capital reporting in the United States is causing waves in the HR industry.

The Society for Human Resource Management (SHRM), based in Alexandria, Va., is overseeing the development of the voluntary standard, which would require companies to report on six areas: spending on human capital, ability to retain talent, leadership depth, leadership quality, employee engagement and human capital discussion and analysis.

“In some cases, the metrics will simply confirm what investors already know about a company. In other cases, they will provide an early warning sign of trouble or evidence of underlying strength that might otherwise be overlooked due to a short-term dip in financials,” said the first draft of the Guidelines for Reporting Human Capital Metrics to Investors.

“Over time, as investors gain experience interpreting the data, and a historical track record is created, the metrics will become increasingly useful.”

SHRM is the standards developing organization for the American National Standards Institute (ANSI), which would have to approve the new standard before it was submitted to the Financial Accounting Standards Board for consideration.

Much of the value that’s created in an organization comes from human capital, but much of that is not shown in financial reporting, said David Creelman, CEO of Creelman Research in Toronto who jointly led the SHRM workgroup that created the voluntary standard.

“Right now, if you look at the Fortune 500, there actually is a fair bit of reporting on human capital. But it’s completely inconsistent and hence not very useful to anyone, so the belief is that some voluntary guidelines would help make this reporting more useful.”

The new standards would also give a better perspective on an employer’s long-term health, he said.

“To me, the most important human capital information is one that gives indications of how well the company is going to do in the next three to five years, as opposed to the next couple of quarters.”

In terms of the practicality of reporting, the guidelines are relatively easy for most organizations, said Creelman.

“In most cases, they’ll already have all the data. They’ll just have to pull out some reports and basically they’re done.”

However, the HR Policy Association in Washington, D.C., is alarmed as to the way the standards are framed, according to Tim Bartl, vice-president. While its members, made up of CHROs, find HR metrics extremely useful, that’s for internal management purposes.

“The standard being proposed is the external disclosure of what, in many cases, is confidential and proprietary information that could be used for competitive advantage by rivals.”

In particular, the information required around leadership development and succession planning is a concern, he said, such as the titles of employees in critical leadership positions.

“It’s effectively a road map to the company’s top talent, and they even suggest disclosure of those titles at lower levels of that organization. That’s information that can be used to competitive advantage.”

And while turnover data may seem innocuous, if a company happens to be undergoing organizational change, that data may telegraph exactly what the strategy is, said Bartl.

“It’s not the issue of metrics that’s concerning, it’s the way they’re disclosed and the extent to which they’re disclosed that really gives us pause, rather than using the resources to develop meaningful, internal benchmarks.”

When Canada’s HR Metrics Service reports on succession planning rates, they’re done in aggregate, said Ian Cook, director of research and learning at the British Columbia Human Resources Management Association (BC HRMA) in Vancouver and lead of the metrics service.

“I would not want to have to compulsorily report talent management statistics and have them attached to my business.”

And while it’s true some HR-related metrics are already reported, such as compensation, that’s different, he said.

“On the executive compensation piece, there’s an ethical standpoint and transparency to the shareholder piece that probably trumps the advantage you’re giving away by making it public,” said Cook. “I can’t see succession planning yet being an area where you’re covering up bad practice. The strategic context is slightly different.”

But some of the concerns should be cleared up with the new draft of the standard, expected to be released any day, said Creelman.

“What we intended was that you disclose essentially the per cent of leadership jobs you expect to fill internally. What people thought was required was giving a detailed list on who your successors were... All we want is an aggregate number, we’re not interested in any details at all,” he said.

In developing the guidelines, the working group didn’t want to put employers off so it made the tough decision not to make them too detailed, said Creelman. For example, it didn’t want to tell people how to measure employee engagement.

“We thought it was more important we say, ‘Look, as long as you have a reasonable way of approaching this and you explain what your approach is, then that’s a big step in the right direction.’ Who knows, maybe sometime in the future we’ll get to a stage where we can get greater consistency. But let’s walk before we run.”

But being open like that has its perils, according to Cook. For example, if the standard around consultation says the start date can be when a contract is signed or when a person actually starts working, there could be a difference of several weeks.

“To me that’s not a standard... you can’t do an apples-to-apples comparison,” he said. “It doesn’t really move us forward... They need to be tight or else it’s not effective.”

And some of the metrics are debatable, said Cook.

“I would sorely question anybody creating a standardized model around engagement — the concept is not firmly grounded, there’s as many different versions of it as there are consulting firms.”

It’s questionable whether this kind of information would even be material to investors, said Bartl.

“We certainly haven’t seen a large cry for this kind of information,” he said. “It’s hard to believe this information would be used, first of all, so there’s a question of the utility. And then, if it’s used, how it’s perceived and how it’s interpreted.”

But the standards are meant for a section of investors who are really in it for the long term, said Creelman. And they’d be relevant to Canada too, he said, adding he hopes other bodies involved in standards setting will take a look at this and say, “Oh great, we don’t have to work on the human capital component of our standards because we have something here that’s done 90 per cent of the work for us.”

But SHRM runs its own benchmarking service and it’s questionable whether companies involved with that, with 20 years of data, would want to throw that away, said Cook, adding he doesn’t see where the drive for adoption is coming from, especially when the standard is “so poorly formed.”

While boards are interested in more data, that’s more of an internal pull around metrics such as business succession and internal mobility, he said.

“There are a bunch of organizations that can help you do that, they’ve already got standards. Why do we need some other recognized standards? It won’t make that process move any faster in any different way,” he said. “Should businesses spend money buying these standards? I’m not sure that’s necessary.”

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