Human Capital Disclosures and Management Practices - Report Example

Human capital has been recognized as an invaluable asset to any organization and there have a succession of management theories on how to value humancapital. Human capital (HC) is a sub-set of the intellectual capital and it has been defined as the capabilities of individuals who are the source of innovation and renewal within companies (Carson, Ranzijn, Winefield & Marsden, 2004). It has also considered as an inventory of the skill sets and knowledge of individuals within an organization. Some others consider it to be the knowledge that employees take with them when they leave the organization. All these thus make it difficult to find an appropriate method to value human capital. Human capital has become important as it is the source of innovation and strategy. Human capital is the combination of genetic inheritance, education, experience and attitude towards life and business (Bontis & Fitz-enz, 2002). Tacit knowledge is acquired by interacting with others and is connected to life’s experiences. This tacit knowledge has to be converted and retained within the organization so that they can compete in the knowledge-based economy (Marwick, 2001). Human capital adds value, is not substitutable and leads to sustained competitive advantage. Human capital can be innate or learned and hence classified as personal attributes (personality traits and psychological attributes) and skills (work-related skills and competencies). Apart from personal attributes and skills, human resource accounting (HRA) aims to quantify the economic value of people to the organization (Chen, Zhu & Xie, 2004). This analysis helps in managerial and financial decisions. Several models have been proposed that evaluate human capital in financial terms but they tend to be subjective in nature and uncertain. They thus lack reliability and their measures cannot be testified with any assurance. Several other economic models have been introduced to evaluate the human capital. Kaplan and Norton’s Balanced Scorecard framework focuses on the capabilities and productivity of employees apart from employee satisfaction and retention. They measure the financial and non-financial factors but they consider employees an unimportant ignoring the fact that knowledge management is a critical success factor of the new economic activity and the key to its long-term survival (Chen, Zhu & Xie, 2004). Edvinsson and Malone’s Skandia Navigator measures an organisation’s human capital in terms of annual turnover, average years of service with the company and a leadership index that measures the proportion of leaders within an organization. Intangible Asset Monitor by Sveiby measures staff education levels, training and education costs, professional turnover, and proportion of professionals to support staff, average age, seniority, and relative pay position. Modified Intangible Assets Monitor by Guthrie and Petty measures employee know-how, education, vocational qualifications, work-related knowledge, work-related competencies, entrepreneurial spirit, innovations, proactive and reactive abilities, and changeability. While there is no appropriate method to value human capital, it is argued that enhanced skills can help an organization to adopt certain strategies which might lead to reduction in the production cost of the services and in turn allow the company to offer services at competitive rates. This gives it a competitive advantage while allowing maximizing value creation. Hence skills have been considered an effective measure of human capital as it fetches better returns for the firm. El-Bannany (2008) conducted a study of the Major British Banks Group (MBBG) on the assumption that the role of human capital in these large banks is clearer than other medium or small-sized banks. This is because the cost of obtaining skilled staff that plays a critical role in improving efficiency is affordable only by the major banks. This empirical study found that banks that invest more in IT system have a lower human capital performance. In other words, investments in IT have a negative impact on the motivations of human capital to perform better. At the same time, interpersonal skills have been shown to enhance leadership and team work performance (Carson, Ranzijn, Winefield & Marsden, 2004). Hence skills are not an appropriate measure of human capital. As far as personality factors are concerned, the “big five” (neuroticism/emotional stability, extraversion, openness to experience, agreeableness and conscientiousness) have been studied. A recent research by Muchinsly has shown that personality factors are related to successful organizational leadership, to job satisfaction, to organizational citizenship behaviour, to team-work performance, to work motivation and to the ability to cope with change and manage stress (Carson, Ranzijn, Winefield & Marsden, 2004). All these require that emotional stability is very essential to cope with change and manage stress. Cap Gemini Ernst & Youngs Center for Business Innovation (CBI) has established that non-financial performance accounts for as much as 35 percent of institutional investors valuation (Low, 2000). The intangibles are the most significant differentiating factors between successful and unsuccessful IPOs (Initial Public Offerings). Hence, since human capital is a combination of factors possessed by individuals, this needs to be documented in the annual report. This is because the annual report is an important document for corporate communication of activities and intentions to stake holders. Reporting of human capital has become important as it indicates the future company value creation capabilities. Research suggests that if disclosures on human capital are made effectively, it could result in reduction in cost of capital, enhancement of stock market liquidity, and increased demand for company’s securities (Ax & Marton, 2008). Such measure of human capital too has been empirically studied in a set of Swedish firms. Disclosure data was collected and the content analyzed. The study found a weak link was found between disclosure and benefits to the company. At the same time, another qualitative and quantitative study by Watson Wyatt indicates superior human capital management is a leading indicator of improved financial success and has a positive impact on the future share price of the company (Royal & O’Donnel, 2008). What is essential is the right way to analyze human capital. While human capital is valuable information, it is used unsystematically by equity markets in their decisions making process. The researchers conducted an action research and the results were recorded in a diary. The observations included the traders’ request for tools and techniques to bridge the knowledge gap in the analysis of intangibles. When information collected through different tools were fed back to the traders, they indicated benefits from the timeliness of human capital information as it provided a better balance between real time and right time financial and non-financial information. Hence disclosure is also not an appropriate model for valuation of human capital. It depends on how information is disseminated including the right time and the right information. Thus it can be seen that the value of human capital can be determined in different ways across industries and even across firms within the same industry. Human capital is an intangible asset that needs to be disclosed in the annual reports under non-financial reporting. It has immense value according to some studies while other found a weak link. Investments in IT to enhance the skills have also been found to have negative impact on staff motivation but interpersonal skills have been shown to enhance leadership and team work performance. While some companies use skills as the measure for human value, other use personality traits to determine the vale of human capital. What is recognized by all researchers is that human capital is valuable, adds value to the company, needs to be nurtured, allows gaining competitive advantage and is not substitutable. Hence, even though the method to value human capital may vary and depend on various factors, human capital may be difficult to quantify, but human capital is the differentiating factor which is taken into account not just by the potential investors but even by the future employees. Reference Ax, C., & Marton, J. (2008). Human capital disclosures and management practices. Journal of Intellectual Capital, 9(3), 433-455 Bontis, N., & Fitz-enz, J. (2002). Intellectual Capital ROI: a causal map of human capital antecedents and consequents. Journal of Intellectual Capital, 3(3). 223-247 Carson, E., Ranzijn, R., Winefield, A., & Marsden, H. (2004). Intellectual capital Mapping employee and work group attributes. Journal of Intellectual Capital, 5(3), 443-463 Chen, J., Zhu, Z., & Xie, H. Y. (2004). Measuring intellectual capital: a new model and empirical study. Journal of Intellectual Capital, 5(1), 195-212 El-Bannany, M. (2008). A study of determinants of intellectual capital performance in banks: the UK case. Journal of Intellectual Capital, 9(3), 487-498 Low, J. (2000). The value creation index. Journal of Intellectual Capital, 1(3), 252-262 Royal, C., & ODonnell, L. (2008). Emerging human capital analytics for investment processes. Journal of Intellectual Capital, 9(3), 367-379 Marwick, A. D. (2001). Knowledge management technology. IBM SYSTEMS JOURNAL, 40 (4). Read More