Human Capital Governance: The beginning of a new era.

Author:Delves, Don
 
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The era of human capital has arrived in the boardroom and, with it, the need for more thorough board oversight and governance of this mission-critical investment.

As evidence, consider three current paradigm-shifting items:

* Institutional investors are demanding that the companies they invest in pay more attention to environmental, social and governance issues (ESG); and are increasingly focused on the topic of human capital management, a large component of the "S" in ESG. In fact, some claim that 2020 will be "The year of the S," while others believe 2020 will be just the start of an era of social focus and opportunity.

* The Business Roundtable (BRT) issued an updated purpose statement for corporations in August 2019 describing how a company's purpose is to serve the interests of all stakeholders including employees, customers, vendors and suppliers, the community and environment, and shareholders/owners. This is a dramatic change from the BRT's decade-long stance that a corporation's sole purpose is to serve the interests of shareholders. It acknowledges that employees, as human capital, are key stakeholders in the long-term success of a business and suggests that shareholder interests are aligned with having healthy, engaged, hard-working and productive employees.

* The U.S. Securities and Exchange Commission (SEC) has proposed that because human capital is such an important and material part of the economic value of enterprises, companies should consider disclosing key human capital metrics in their public filings. SEC chairman Jay Clayton indicated that up to 70% of the value of corporations is embodied in intangibles and human capital, and not captured in traditional financial statements.

The following are suggested approaches boards can take to provide oversight of human capital management in the new era.

Tapping human potential

The increased focus on human capital is neither a random confluence of events nor a "perfect storm." Rather, it reflects the result of decades of evolution in technology, how humans relate to that technology to get work done, and, in turn, how this creates value for society. Technology has greatly enhanced, not diminished, the value of human labor. While technology has catalyzed the automation of work and eliminated certain jobs, it also has allowed industries and organizations to rethink how work gets done and how to redeploy human capital to create new jobs and deliver value. This evolution has accelerated to a tipping point where human effort and ingenuity can be at least as valuable as physical and financial capital.

Boards recognize this relevance as both a performance and shareholder imperative...

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