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Column

Rick Guzzo and Haig Nalbantian
Principals
Mercer Human Resource Consulting

The Sound of Silence in Corporate Reporting
The demand signal for human capital information is getting stronger –– as it should.

By Rick Guzzo and Haig Nalbantian

Annual reporting season is soon to be upon us, and once again something is likely to be missing: a discussion of how 36% of corporate revenues are being used. That’s the average reportedly spent on human capital each year for salaries, benefits, hiring costs, training investments, and the like.

Take our challenge: Pick any recently issued annual report and find the section on management’s discussion of human capital and its contribution to business success. Our two–year study of annual reports of the 100 largest publicly traded U.S. companies reveals that few organizations –– 20% at best –– have much to say on the subject.

Sure, there may be warm words about valuable employees and grateful expressions for the service rendered by retiring board members. But where’s the detailed explanation of what was invested in the workforce and why? Where’s the discussion of the results of such investments?

Imagine a company spending a third of its revenues on a capital investment or an interest payment and never addressing it with shareholders in its annual report. Unthinkable.

About a quarter of the companies’ reports seem oblivious to the fact that business operations actually require a workforce. Some don’t mention employees at all. Of those that report something, simple payroll or wage statistics predominate. Another quarter offer platitudes (“our people are our greatest asset”) or a few lines about the caring nature of the organization.

The other half offer more hope. ExxonMobil’ 2003 annual report highlighted its employees’ educational attainments. AutoNation addressed training in its 2003 report’s financial review. PepsiCo’s 2003 and 2004 annuals stand out because they devote several pages to human capital topics.

But even when annual reports do discuss human capital as an asset, they usually fail to offer hard facts about how their practices for managing this vital asset drive business results.

Financials and business operations are what annual reports are about. Management –– especially the CEO –– is responsible for business operations, including how human capital assets are used. CEOs have a duty to break the silence and report to shareholders about how they are managing the human capital side of the enterprise. €€In the modern knowledge economy, the way human capital is managed is one of the few remaining sources of competitive advantage. As a principal intangible asset, the workforce adds direct value and contributes to the value of other intangibles, such as brand and intellectual property. Since intangibles widen the gap between market value and book value, it follows that companies that tell compelling, fact–based stories about their human capital assets will gain considerably in the eyes of investors.

When such benefits are so obvious, and when a significant slice of revenue is involved, the puzzle is why so little reporting occurs. The SEC imposes no substantial rules of human capital reporting beyond requiring proxy–statement disclosure of compensation for the top five executives –– as if they are the only human capital of consequence.

But the absence of a rule doesn’t explain it all. Could it be that companies simply are reluctant to divulge information of clear strategic value? A more likely explanation is that the state of external human capital reporting accurately reflects the internal state: Companies have little to say.

As one corporate director recently put it, “The hardest thing for boards to get their arms around are human capital issues.” By comparison, companies often have sophisticated measurement and analysis systems that monitor the transactions, characteristics, and behaviors of their customers.

These capabilities provide great insights and understanding that shape business decisions. Comparable tools and information databases exist for companies to gain insights into the intangible asset that is their workforce and how it can best be managed for business success. Unfortunately, these are mostly going unused. In our experience, too many companies can say far more about their customers than they can about their workforces.

We predict that demand for human capital reporting will quickly escalate. Frankly, we’re staggered that investors have so far let companies get away with keeping mum about it. Wall Street usually limits its attention to whether top management is sufficiently experienced and whether a successor is ready if the CEO is hit by the proverbial bus.

But there are thousands of other bright minds on the payroll who are improving productivity and cutting costs and spurring innovation and engaging customers –– or not. When it comes to formally reporting on managing this asset, mum is most definitely not the word.

Rick Guzzo and Haig Nalbantian are principals and human capital strategy consultants with Mercer Human Resource Consulting (http://www.mercerhr.com). They can be contacted at rick.guzzo@mercer.com and haig.nalbantian@mercer.com.