Schroders, a global asset manager, has released a novel approach for the investment analysis of human capital management, evaluating the systems deployed to optimize the performance of a company’s workforce. Created with academic support from the Oxford Rethinking Performance Initiative at Saïd Business School, University of Oxford, and in partnership with California Public Employees’ Retirement System (CalPERS), the analysis confirms that human capital is a clear driver of company productivity and profitability and that companies with durable management frameworks create stronger returns and value for investors.
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“This research tells us that investors should not ignore human capital management in evaluating investee companies”
Human capital refers to the capabilities of an organization’s workforce, including skills, experiences and relationships, available to the organization to create economic value. Strong human capital management systems can be deployed through a combination of operating model and workforce strategies, culture and inclusion, incentive and performance management, talent and learning, and innovation.
“As the corporate landscape evolves in a more volatile market, a company’s workforce is integral to its performance,” said Marina Severinovsky, Head of Sustainability, North America at Schroders. “However, the market has lacked distinct, quantitative ways to analyze these factors as tangible assets. This research allows us to identify companies that are leaders and laggards in human capital management to make informed allocation and engagement decisions.”
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Top-line findings and takeaways from the empirical analysis include:
- We can define and measure what the outcomes of good human capital management look like, and why we see structural and cyclical reasons to focus on this currently.
- Human capital returns are positively correlated with forward excess returns (those exceeding a relevant benchmark or index) over multiple time horizons and across a majority of sectors, even after controlling for Return on Capital Employed and adjusting for a variety of factors.
- There are multiple paths to human capital management affecting balance sheets and profit and loss.
- This being said, there is risk associated with focusing too much on an objective measure for human capital. Human capital analysis must combine qualitative and quantitative assessment. With KPIs to identify good human capital management, we can consider the drivers of change, and show how to optimize human capital productivity.
“This research tells us that investors should not ignore human capital management in evaluating investee companies,” said Angus Bauer, Head of Sustainable Research. “As we approach continued economic volatility, our research shows that companies with strong human capital management are likely to be more capable of navigating the future effectively. Even as the integration of artificial intelligence across industries evolves, the relevance of people as the stewards of value creation will remain high.”
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