Buyers Become Aware

(Editor’s note, Nov. 26, 2012: After publication of this article, SHRM withdrew these metrics from consideration for proposed ANSI standards citing continued resistance from industry groups.)

In many industries and professions, standards are essential to ensure safe and reliable operations. It’s hard, for example, to argue against the need for minimum safety requirements for food manufacturing and handling. But when the Society for Human Resource Management (SHRM) set out to create a set of standards for HR practice it touched off a controversy.

Nearly 600 HR practitioners, academics and consultants began work in 2009 to develop standard measures and practices for HR in areas such as employee retention and turnover, diversity and inclusion and performance management. That effort sparked criticism earlier this year when it came to a proposed standard for reporting HR metrics to investors.

The first draft, released in April, drew fire from members of the HR Policy Association, a lobbying group that includes senior HR leaders from Fortune 500 companies, who called it time-consuming and potentially risky on one hand and difficult to measure and reconcile across disparate industries on the other.

Talent Management caught up with Laurie Bassi, CEO of human capital management consulting firm McBassi & Co. and the head of the work group that developed the standard, shortly before the second draft was released in early October to discuss the project and address the criticism from the HR community.

Why do you think it’s important that investors have a set of metrics for human capital?
Human capital [is] our most important asset and a very large cost, and investors really know very little about it. The work I have done as an economist over many years indicates pretty strongly that lack of information contributes to a chronic underinvestment in the people side of the business, which is harmful to everyone — employees, ultimately firms, certainly shareholders and the society in which we live. Anything we can do to address that is a good thing.

The potential power of providing better information to investors to help create a longer-term view would be very helpful. Picture a big circle of measures that HR needs to know to run itself efficiently and effectively and a smaller circle within that that executives and C-level folks need to know and then a smaller subset still — the circle within the circle — of what investors would need to know. It’s a very small kernel of information that we’re suggesting be made available to investors.

Why is it important to be able to disclose these metrics now?
There’s a good deal of theory and evidence that points to a chronic tendency to under-invest in human capital, which is not a good thing for anybody. It’s what you might think of in economic jargon as a market failure. The market fails to produce the optimal, efficient outcome. And one of the classic solutions to a market failure is information. So potentially this could really have an enormous beneficial impact on employees, shareholders and society. But that market failure is not going to be corrected without better and more relevant information.

As human capital becomes more and more central to the evolution of our economy and the generation of wealth, the accounting and reporting systems that we have are just not up to where we need them to be. So how do you get them to evolve? It’s not easy but that evolution is an important part of the advance of society.

One of the major points of criticism was that making this information public would put companies at a competitive disadvantage, that it would allow their rivals to see into their operations.

I think there was a misunderstanding about the level of specificity of information that was being requested. We have attempted to clarify that and make it clear that we’re not asking for names or asking for org charts or for identification of their best and brightest.

That level of specificity is not what is being suggested. To the extent that there was any misinterpretation or misunderstanding of that in the first draft, that should hopefully be remedied in the second draft.

Now there are some people who take the position that they don’t want to disclose anything, it’s all going to put us at a competitive disadvantage. And of course they don’t have to because this is voluntary.

How do you see this information being valuable within the HR community?
My personal belief is that this is a part of elevating the status and importance of the HR profession and function. What do investors want and need to know? Ultimately, it’s the same thing the board of directors wants and needs to know: are we doing the right things to manage risk and position ourselves for value creation and resiliency? A lot of that has to do with the people side of the business, and there are no standards.

Certainly, bright, clever HR folks and bright, clever people on the board of directors are trying to figure this out. But wouldn’t it be helpful to have some standard of information to make it easier for the board of directors as well as investors to know what it is they should be asking? Having serious conversations about the human side of the business as something other than just a cost is going to be a good thing for everyone, including HR.

How do you address those who feel this level of reporting is overly burdensome?
We’ve tried to keep it simple. Many of these metrics are things that are readily available within the HR function. The cost issues may be the most difficult for vast, far-flung multinationals that have grown primarily through acquisition and don’t yet have their systems aligned. If those organizations can’t do it, they don’t need to. It’s voluntary. But I have talked to people in very large organizations who told me they can pull this information together in 20 minutes.