Investors start to see the tangible value of human capital

human capital city investorsFriday 20 November 2015 may well be remembered as a seminal moment in corporate history. It was the day when the debate about human capital reporting ended and the professional practice of mature, human capital management was established.  One where the investment community showed clear recognition and concrete affirmation that Human Governance, and the human capital management practices that support it, are not just material to the value of companies, and the risk factor they carry, but a specific quantum is identifiable.  This was the day when the accountant’s, catch-all excuse for not measuring or managing human capital was laid bare; this was the day when the term ‘intangibles’ became obsolete in corporate parlance.

The London Stock Exchange was the venue chosen by the Investment Association to for its launch event on Human Capital Reporting.  There could be no more appropriate a location to remind capitalists just how much people matter; and no better way to influence and convince than by using the City’s own hard measures of corporate performance.

This was the platform from which Stuart Woollard, Managing Partner, presented OMS’s organizational maturity rating (OMR) of BBB- and its Research Note for Nestlé to a number of senior figures from the investment community.  Research that was described as “excellent” by the Chair of the Panel, Ian McVeigh, Head of Governance at Jupiter Asset Management.  Stuart clearly and unequivocally advised that Nestlé has much to do from a Human Governance (HG) standpoint and declared that it could be worth 5-10 additional percentage points on current margins. On Nestlé’s 2014 figures this would equate to another CHF4.58-9.16bn (c. £2.9 – 5.9bn) of profit.

Another senior fund manager present on the panel, who had large holdings in Nestlé stock, had minor “quibbles” with OMS’s analysis and accepted the broad conclusion that Nestlé could significantly and sustainably enhance its value through better HG. This was recognition that conventional investment research and analysis had been short of the missing piece in company valuation for far too long and it now enables investors to ‘price in’ how effective a company is in Human Governance terms.

OMS’s ground-breaking work, under the auspices of the Maturity Institute, is rapidly finding acceptance with other investment professionals who are encouraged to make confident approaches to companies with the ‘key questions for investors’ that OMS’s Human Capital Reporting Template© provides. For example, rather than accept meaningless metrics such as staff training hours or employee engagement scores at face value, investment teams are wanting to find out what lies beneath the PR surface; asking about the extent to which a company creates value from learning and how engagement drives value creation in the long term. This is only one short, step away from requiring companies to provide much better evidence that they are making every effort to improve Human Governance in a way that will directly create higher, material value.

Before the Investment Association event last Friday, human capital reporting was still seen as a subject for debate; a hypothetical situation that might never exist. That particular debate is now consigned to history.  OMRs have made it a reality and disavowed investors, boards and executives of any notion that human capital is intangible or immaterial.  OMRs use the common language of credit rating and based on a universal rating scale (that mirrors S&P).  Ian McVeigh referred to the OMR scale, remarking that Nestlé’s BBB- was, in effect, only one point above ‘junk’ status.  Helena Morrissey, President of the Investment Association, said in her Welcome note for the event that it was time to ‘turn ideas into actions’; OMS already has and human capital analysis in investor research is here to stay.