Human capital management (HCM) refers to how an organization recruits, engages with, empowers, and ultimately retains its people.
The concept of human capital management has always existed, although it was primarily considered the domain of HR (Human Resources). But as ESG (Environmental, Social & Governance) has evolved as an important analysis framework, more stakeholders (including the investment community) have become increasingly interested in understanding how an organization engages with its workforce.
Human capital management has emerged as a key component of ESG analysis and is widely recognized as a potential source of both financial and reputational risk for organizations of all sizes.
Once the exclusive domain of Human Resources teams, HCM is now top of mind in many boardrooms and on many trading floors around the world.
An organization with weak HCM standards or practices is likely to struggle to attract and retain talent, which in turn affects its competitiveness and its bottom line.
The evolution of more standardized ESG reporting frameworks has made it easier for analysts to find good HCM data and benchmark company performance accordingly.
Human Capital Management and ESG
ESG stands for Environmental, Social & Governance. ESG serves as an analysis framework that, through a variety of 3rd party rating agencies and ESG Scores, helps stakeholders understand and quantify how sustainable a firm and its operations are.
While historically, the word sustainability was often used in the context of environmental practices, ESG as a framework looks at the concept of sustainability through a much broader lens. Human capital management has evolved as a significant component of the “S” pillar in the ESG framework, since a business cannot operate without qualified human capital to run it.
HCM appears as a prominent part of the scoring criteria for a number of leading ESG rating bodies, including MSCI, Sustainalytics, and Just Capital.
Key HCM Topics and Issues
There continues to be growing pressure on organizations to provide more comprehensive ESG disclosure around key HCM topics. These include, but are certainly not limited to:
Compensation & Benefits
Analysts are keen to understand how employees at an organization are compensated, especially the most vulnerable staff (like frontline workers). Employment status is another emerging area of analysis, meaning the contractual relationship – are staff actual employees, or are they contractors (maybe “gig workers”) that don’t receive the same benefits or legal protections as employees?
Benefits include sick leave and health coverage, as well as other non-monetary benefits like on-site childcare or upskilling opportunities (among others).
Corporate culture refers to the behaviors, shared values, and beliefs of an organization and its employees. High levels of corporate communication and general transparency within the business tend to support higher ESG ratings.
One of the most important subtopics in this category is employee engagement; this, of course, influences employee retention. High turnover rates have always resulted in lost productivity and IP leakage (among other issues). However, high turnover is now also considered a major red flag by ESG analysts and ESG rating agencies when scoring human capital management metrics.
Talent Development & Talent Management
Management’s efforts to engage employees and mitigate turnover have led many organizations to invest heavily in talent development and management. If an employee doesn’t feel they can develop or grow within an organization, they’re much less likely to stay.
Good training and development programs can improve the performance of employees individually but also at the group or departmental levels. And a clear and forward-looking policy around remote/hybrid work is now a minimum requirement for organizations in today’s highly competitive labor market.
The rationale is that a diverse workforce (by gender, culture, race, or otherwise) is not just one that’s more inclusive but should also be a workforce with more diversity of thought. DEI initiatives also extend beyond the workforce to senior leadership and company boards.
Health & Safety
Human capital management is about stewarding an organization’s workforce; ensuring staff safety and a generally healthy workplace is a big part of that.
Healthy & safety considerations range from working conditions, including bullying and anti-harassment policies, to structured safety protocols like disaster planning and pandemic measures (among other enterprise risk management practices). Maintaining management practices that create a “psychologically safe” workplace is of increasing importance.
HCM Metrics and Performance Measures
Human capital management was traditionally a difficult concept for analysts to measure and assess objectively.
Increased clarity around disclosure requirements, coupled with the availability of much more standardized reporting frameworks (like SASB, GRI, and PRI, among others), have given way to HCM metrics that analysts can use to benchmark company performance.
HCM metrics often fall into the categories we discussed earlier. Examples include, but are certainly not limited to:
Compensation: Some examples are the CEO-to-employee compensation ratio, as well as the percentage of cost of the workforce.
Culture: Like average employee net promoter score (NPS), or percentage of vacation days used.
Talent Development and Management: Metrics include average employee tenure, as well as the new hire 90-day failure rate.
Diversity, Equity & Inclusion: HCM metrics around DEI include the percentage of procurement spent with diverse businesses and the number (or percentage) of diverse employees at the various levels (staff, management, and board).
Analysts that are evaluating the HCM performance of an organization or a management team will want to assess these (and other) metrics both in terms of improvement period-over-period, as well as relative to other firms in the same industry.
Thank you for reading CFI’s guide to Human Capital Management (HCM). To keep learning and developing your knowledge base, please explore the additional relevant resources below: