The Next Agenda for Human Capability Improvement and Reporting

Suppose you are a senior business, finance, or HR leader. In that case, you have likely already been asked to share your organization’s commitment to and investment in human capability (talent + leadership + organization + HR) (see Figure 1 for definition).

Figure 1. Overview of Human Capability

What will you say, and to whom will you say it so that your response increases confidence in your organization?

Human Capability Matters

The conversation about human capability is becoming increasingly important to an expanding set of stakeholders:

  • Investors worry more than ever about intangible value, which represents up to 80 percent of your company’s market value (and reduction of risk). Our research shows that 25–30 percent of that 80 percent is tied to human capability.

 Table 1. Investor Criteria for and Assessment of Intangible Value

  • Customers select products and services based on price, product features, and service culture. Service that comes from relationships between employees and customers is a significant differentiator when competitors can match prices and features. Employee experience is often a leading indicator of customer experience.
  • Communities—broadly defined as regulators, citizens, education, and media—assess organization reputations for the environment (climate change), philanthropy (donations), and social agenda (DEI) that are often embedded in people and organization practices. These public reports include annual requirements to report human capital in SEC disclosures and increased social media platforms that share company ratings (e.g., Glassdoor, Most Admired, and Top Company lists).
  • Boards of directors traditionally examine financial performance and strategic investments in every meeting. Increasingly, human capability issues are not just annual succession planning or compensation reviews but part of every board meeting.
  • Senior executives increasingly recognize that talent determines long-term success and talent issues (workforce, retention, engagement). Top surveys of CEO concerns and conferences (World Economic Summit, WOBI, etc.)
  • Employees who feel they have more choice want to work for a company where leaders care, have more control over their work setting, and are proud of the reputation and results the organization delivers to all stakeholders.
  • HR professionals find meaning in their work as architects who design and deliver a human capability agenda that creates value for all stakeholders.

Because human capability investments and reporting create value for each stakeholder (see Figure 2), human capability reporting needs to improve.

Figure 2. What do stakeholders need that human capability offers?

Current and Future State of Human Capability Investment and Reporting

To respond to human capability requirements, we envision changes in the content of what is reported and the process for how information is accessed.

ContentContent is about what stakeholders pay attention to. However, often human capability discussions are based on analytics that is not integrated:

  • People look at isolated HR practices, e.g., time to hire, percent promoted from within, turnover/retention, or diversity indices.
  • Activity-focused. Analytics focuses on what is done, e.g., the number of employees, days of training or training budget, or CEO pay ratio.
  • Demographics. Reports are done on the distribution of age, education, race, gender, and other demographics.

Considering the impact of human capability on business results, we propose that stakeholders receive more rigorous content that is:

  • Rely on a typology of integrated HR initiatives using a theory of classification. The human capability logic in Figure 1 shows how 38 initiatives clustered into four categories of talent, leadership, organization, and HR.
  • Actionable. Instead of demographics and activities, offer stakeholders information that helps them make prescriptive investments in initiatives.
  • Impact follows a portfolio logic where initiatives impact stakeholder outcomes differently and prioritizes which of the 38 initiatives will deliver more value to stakeholders. Research without action is like reading how to do a hobby book but never doing it.

Process. Process refers to how information is collected. Trusting the data collected is necessary for stakeholders to have confidence in actionable insights. We see four common approaches to managing information:

  1. Leaders know something when they see and feel it. As ethnographers, leaders can learn to pay attention to their experiences. They can “feel” how an organization is or is not working within a short time.
  2. One-on-one (or team) interviews allow in-depth conversations to pursue and explore issues of interest. Interviews often uncover underlying problems that may be causing symptoms.
  3. The most common data tool is a survey where questions are crafted and asked of targeted respondents (e.g., engagement, 360, climate). Surveys help with statistics that discover cause and effect and define patterns.
  4. Scaling through AI/machine learning. Numerous documents exist within or about an organization (10K, training, social media, texts, emails, and so forth). Using modern AI technology, these existing documents can be scored.

The difference between surveys vs. scaling can be illustrated with nutrition. On a survey, someone may say they are an “8 out of 10” when questioned about healthy eating. But with AI data, one could track what and how often someone buys food (store data), eats at a restaurant (with QR code), and exercises (with health monitors). This AI-enabled data could lead to a behavior-based score (1 to 10) on healthy eating, which is more accurate than a perception of healthy eating.

When organizations have a comprehensive framework for human capability with scalable analytics, stakeholders have insights on the human capacity that lead to actionable insights.

Example of Emerging Human Capability Reporting

We have scored the human capital reporting required by the Securities Exchange Commission (SEC) for 7,000 US firms using 2021 and 2022 data. We scored each of the four human capability pathways. For a review of this methodology, see https://bit.ly/43VxxzH.

Table 2 shows the remarkable finding that the “human capital” information reported in 2021 and 2022 has identical scores. This data reflects that the reported messages about human capability have not changed between these two years. We find that the processes and roles used to craft these messages are not evolving. Even though stakeholders want better human capital information, they are not receiving it. This consistency represents an enormous opportunity for differentiation if a firm can offer a more rigorous and reliable report on human capability than others in their industry.

Table 2. SEC Human Capability Scores 2021 and 2022

(7,000 firms with a 1 to 10 score for each cell)

With this large database and AI methodology, we found that the total human capability score explained 26 percent of cash flow and 25 percent of investor confidence, which is remarkably consistent with the findings in Table 1 from our earlier survey of investors.

Diagnose Your Human Capability Efforts

To improve building and to report better human capability, we have used the diagnostic in Table 3 to help focus attention on steps to enhance human capability efforts. The line in the scoring box is the typical pattern in answers we receive, with higher importance rated higher than effectiveness, effectiveness higher than clarity, and so on.

Table 3. Human Capability Diagnostic

Actions for Improving Human Capability Investments and Reporting

To respond to requests by all stakeholders for more information on human capability, we propose actions for each of the five diagnostic questions (see Table 4).

Table 4:

Human Capability Improvement and Reporting Actions


Conclusion
We expect human capability reporting to become more like financial reporting in the future because of human capability’s impact on all stakeholders. So, rather than be hesitant or offer piecemeal information about work in human capability, we encourage business, finance, and HR leaders to improve their human capability efforts to increase stakeholder confidence.

References
Talent determines long-term success, hkps://bit.ly/43TUKlL

A system for analyzing human capability at scale using AI, hkps://bit.ly/43VxxzH

Dave Ulrich, University of Michigan
The RBL Group| + posts

Dave Ulrich

Dave Ulrich is the Rensis Likert Professor at the Ross School of Business, University of Michigan and a partner at the RBL Group (http://www.rbl.net) a consulting firm focused on helping organizations and leaders deliver value.  He has published over 200 articles and book chapters and over 30 books. He edited Human Resource Management 1990-1999, served on editorial board of 4 other journals and on the Board of Directors for Herman Miller (16 years), has spoken to large audiences in 90 countries; performed workshops for over half of the Fortune 200; coached successful business leaders, and is a Distinguished Fellow in the National Academy of Human Resources. He is known for continually learning, turning complex ideas into simple solutions, and creating real value to those he works with in three fields.

Organization. With co-authors, he has influenced thinking about modern organizations (Reinventing the Organization) by empirically showing how organization delivers 4 times business results over talent (Victory Through Organization),defined organizations as bundles of capabilities (Organization Capability)and worked to delineate capabilities of talent management (Why of Work; Talent Accelerator),culture change (GE Workout),learning (Learning Organization Capability),and collaboration (Boundaryless Organization). 

Leadership. With colleagues, he has also articulated the basics of effective leadership (Leadership Codeand Results Based Leadership),connected leadership with customers (Leadership Brand),shown how leadership delivers market value (Why the Bottom Line Isn’t),shapes investor expectations with an ability to measure leadership (Leadership Capital Index),and synthesized ways to ensure that leadership aspirations turn into actions (Leadership Sustainability). 

Human Resources. He and his colleagues have shaped the HR profession and he has been called the “father of modern HR” and “HR thought leader of the decade” by focusing on HR outcomes, governance, competencies, and practices (HR Champions; HR Value Added; HR Transformation; HR Competencies; HR Outside In). He spearheaded a “gift” book on the future of HR (The Rise of HR) distributed to over 1,500,000 HR professionals), in which 70 thought leaders freely shared their insights.

Most recently, he posts new articles and insights each Tuesday on Linkedin (over 170).

Dave and Wendy live in Alpine, Utah, have 3 children and 10 grandchildren.

e-mail:  [email protected]

Norm Smallwood, The RBL Group
+ posts

Norm Smallwood is a recognized authority in developing businesses and their leaders to deliver results and increase value. In 1999, Norm co-founded The RBL Group with Dave Ulrich. Much of his current work relates to measurably improving the customer and employee experience to increase business outcomes. This is accomplished by partnering with clients to integrate organization design, technical and cultural capabilities, customer brand experience, leadership, HR practices and employee experience. Success is defined as increased confidence in the future by investors, customers and employees which translates in publicly traded firms to greater market value.

Norm has co-authored eight books: Real-Time Strategy, Results-Based Leadership, How Leaders Build Value, Change Champions Field Guide, Leadership Brand, Leadership Code, Leadership Sustainability and Agile Talent. He has published more than a hundred articles in leading journals and newspapers including Harvard Business Review, Washington Post, Forbes and Financial Times and has contributed chapters and forewords to multiple books. Norm has been a frequent blogger on HBR Online where his blog on Personal Leader Brand was highlighted as one of ten most read of that year.

In 2010, the Harvard Business Review recognized Norm in an ad for the magazine as doing “innovative and ground-breaking work on effective leadership.” In January of 2019, Norm joined the board of HRCI and later that year he received a lifetime achievement award from Utah Business Magazine. Norm has also been a faculty member in executive education at the University of Michigan in the Ross School of Management.

Prior to co-founding the RBL Group, Norm was a founding partner of Novations Group, Inc. where he led business strategy, organization design, and human resource management projects for a wide variety of clients spanning multiple industries. Before this, he was an organization development professional at Procter and Gamble in a start-up business in Georgia and an organization consultant in Calgary, Alberta with Esso Resources Canada.

On the family side, Norm and his wife, Tricia, are the designated leaders of Freddie, a Grand Champion Great Dane along with three cats (Achilles, Ghost and Max), a large school of koi fish and an assortment of delightful children and grandchildren.

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