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The Materiality of Human Capital to Corporate Financial Performance
May 2015
Webinar: Review of Research Findings and Q&A Monday, May 11, 2015, 2:00 PM ET
Investor Responsibility Research Center Institute & The Pensions and Capital Stewardship Project at Harvard Law School's Labor and Worklife Program.
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Agenda
• Introductions
• Research Review
• IRRCi Perspective
• Q&A
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Webinar Logistics
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• Attendees in listen only mode. • Questions encouraged. Type using the
“Question” function, and we will answer following report overview.
• You will receive email with link to replay of this session.
• This report and all others available at www.irrcinstitute.org
• Share info on social media. Find us at @irrcresearch, #irrcresearch.
• Audio issues during webinar, please call contact GoToWebinar @ 1-800-263-6317.
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Speakers
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Aaron Bernstein Report Co-Author Pensions and Capital Stewardship Project at Harvard Law School's Labor and Worklife
Larry Beeferman Report Co-Author Pensions and Capital Stewardship Project at Harvard Law School's Labor and Worklife
Jon Lukomnik Executive Director, Investor Responsibility Research Center Institute
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• Not-for-profit established in 2005.
• Funds, disseminates research on range of issues at intersection of corporate responsibility, investors informational needs.
• Examines the capital market context that impacts how investors and companies make decisions.
• Sponsors annual research award.
• Five Year Impact report available.
• All research available at no charge.
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About Investor Responsibility Research Center Institute
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• The Alignment Gap Between Creating Value, Performance Measurement, and Long-Term Incentive Design
• Nanotechnology and the S&P 500: Small Sizes, Big Questions • The Impact and Future of High Frequency Trading • What Investors Need To Know About Cybersecurity • Informed Options Trading prior to M&A Announcements: Insider Trading? • Board Oversight of Sustainability Issues • Integrated Financial and Sustainability Reporting in the United States • Growing Traction For Environmental, Social Shareholder Proposals • Controlled Companies in the Standard and Poor’s 1500: A Ten Year Performance
and Risk Review • Executive Superstars, Peer Groups and Over-Compensation • Voting Decisions at US Mutual Funds: How Investors Use Proxy Advisors • Discovering Shale Gas: An Investor Guide to Hydraulic Fracturing
Download at no cost at www.irrcinstitute.org
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Broad ResearchRecent Studies Include:
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Environmental, Social and Governance (ESG)
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• Many materiality studies on “G” and growing number on “E.”
• “S” far less studied. A catchall category including issues such as labor and human rights, community relations.
• We focus on human resource (HR) policies, including training.
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Materiality
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• Hundreds of HR studies, excluding employee job satisfaction.
• Standard investment metrics: TSR, ROE, ROI, ROA, ROCE, profit margins.
• Focus on materiality acceptable to SEC and U.S. securities law. Normative a separate discussion.
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Study Approaches
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• Most use regression analysis.
• Some link to stock prices, objective, perceived measures.
• Not a meta study. Metrics and data too diverse.
• Span decades, dozens of countries and industries.
• Roughly half US and UK companies.
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Summary of Studies
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Training and HR
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• Many studies include training as one element.
• Many report positive correlations when training considered by itself.
• We look separately at training and HR policies.
• Some of latter include training as an element of HR policy.
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Training and Performance
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• Enhances employee knowledge, skills, abilities.
• These improve productivity, product and service quality, customer satisfaction.
• Result: higher sales, profitability, stock valuations.
• General vs. specific training.
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Measures of Training• Training expenditures:
oPer employee. oPer firm. oAs a percentage of total payroll.
• Existence of a training policy.
• Fraction of workforce trained.
• Time devoted to training.
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Example of Findings
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• 2004 study of 388 U.S. companies between 1996 and 1998.
• Top quartile of training expenditures per employee averaged 31% annual stock price returns.
• Bottom quartile averaged 15%.
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Examples of HR Policies
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• Compensation and Benefits • Job and Work Design • Training and Development • Recruiting and Selection • Employee Relations • Communication • Performance Management and Appraisal • Promotions
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Policy Bundles
• Some research looks at discrete policies.
• Since mid 1990s most look at bundles of policies.
• Some use term high performance work systems.
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• Seminal 1995 study started focus on high performance work systems.
• Examined 968 U.S. firms with 100 or more employees.
• Found positive correlations to Tobin’s Q and return on capital employed.
Example of Findings
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Examples of Limitations
• Causality: Good policies=better performance, or reverse?
• Bundles: Which policy combinations?
• Black Box: How do policies affect performance?
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Conclusion
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• Investors: Ask companies and ESG providers for data.
• Companies: Describe to investors: oHR Policies and their relation to HR and
business strategies. oKPIs used to track to implementation
and impact. • ESG providers: Market opportunity.
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From the IRRCi Viewpoint
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• The “S” in “ESG” has long been tempting but challenging for investors.
• Taking advantage of human capital management insight is difficult to implement.
• Lack of standardized metrics.
• Intuitive that it should make a difference, particularly as the economy becomes more service oriented.
• Physical capital has become less important; human capital more so.
• In 1990, manufacturing was the leading employer in 36 states. By 2013 that was down to 7.
• In 1990, services (health care/social assistance, travel) was the leading employer in 2 states. By 2013, that was up to 39.
• But, rich reward for those who get it right.
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• Type using the “Question” function. • We will read questions aloud and speakers will respond.
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Contacts
Jon LukomnikExecutive DirectorIRRC [email protected]@irrcresearchwww.irrcinstitute.org
Larry BeefermanCo-Author & Project DirectorThe Pensions and Capital Stewardship ProjectHarvard Law School's Labor * Worklife Program(+1) [email protected]/programs/lwp
Aaron BernsteinCo-Author & Sr. Research FellowThe Pensions and Capital Stewardship ProjectHarvard Law School's Labor & Worklife Program(+1) [email protected]/programs/lwp