Human capital has long been an important consideration for company management, but recent labour shortages and concerns about workers’ rights suggest that not all approaches have been effective.
In a new report our Research analysts argue that it is time to revisit the impact of human capital on financial performance, for three key reasons.
It can pay to limit staff turnover
A high level of staff “churn” is not necessarily ominous for a company. The retail and software services sectors, for example, have above-average rates of turnover, according to Barclays’ analysis of data from Revelio Labs.
But in many cases, rapid turnover can be a sign of an unhappy and unmotivated workforce. Career development – or a lack thereof – has been the most popular reason for employees to quit over the last 10 years, according to a study carried out by the Work Institute in the US. Other reasons often cited included the behaviour of managers, and a work-life imbalance.
Resignations can be expensive. The average cost of on-boarding a new employee is $4,129, according to 2018 figures from the US-based Society of Human Resource Management. And this excludes the costs that are harder to capture, such as loss of talent associated with the departure, and the time required to train the replacement. Once such factors are brought into consideration, we estimate that costs can rise to between 150% and 200% of the employee’s annual salary.
Source: T.F. Mahan, D.A. Nelms, Y. Jeeun, A. Jackson, M. Hein, and R. Moffett, “2020 Retention Report: Trends, Reasons & Wake Up Call” (Franklin, TN: Work Institute, 2020); 2018 figures from the US-based Society of Human Resource Management
Investors and regulators are pushing for better disclosures
Human capital assets do not appear on any balance sheet, so the costs of neglect are not always obvious. But failure to develop and to diversify a workforce can have serious consequences: unsuccessful product launches, regulatory penalties and increased litigation, among them.
That is why stakeholders are urging more of a focus on potential risks. The UK’s Investment Association, which represents funds with more than £8.5tn under management, said in February 2021 that it would be flagging companies that do not disclose the ethnic diversity of their boards or do not plan to do so.
In the US, the Securities and Exchange Commission has also called for more disclosure. The regulator said in November 2020 that companies must publish “material” information relating to the workforce. As of March 2021 more than a third of the 100 largest US companies had made public their previously private filings to the Equal Employment Opportunity Commission, according to Bloomberg. That was up from 25 before the SEC’s ruling.
Our analysts note that a number of large-cap companies including Starbucks, AirBnB and Facebook have commissioned racial equity audits, to better understand the makeup of their workforces. Some are shaking up organisational structures too. The position of Chief Diversity Officer was the fastest growing C-suite role in 2020, with appointments rising 84% from the previous year, according to Barclays’ analysis of LinkedIn data.
Chief diversity officer: the fastest-growing C-suite role in 2020
Source: Barclays Research, Linkedin
Advances in HR tech make greater transparency possible – while also heading off risks
As regulators and investors seek to manage human capital risks and opportunities, additional data and metrics will be required to supplement and enhance existing disclosures. Alternative data sets will play a key role in assessments. Third-party data providers such as Revelio and Equileap can be used to derive near real-time company insights.
Companies can also use HR tech to address important human capital-related risks. This might involve using tools to identify skills that are missing in the workforce, unearth promising candidates who may otherwise have been overlooked, or improve workplace culture with a view to reducing churn.
Markets have reacted negatively when problems related to diversity, skills, flexibility or culture have come to light. Our analysts think that companies’ human capital performance will only gain in importance, as stakeholders pay more attention to the “S” in ESG.
Read the full report
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Katherine Ogundiya is a member of the Sustainable & Thematic Investing team within Equity Research at Barclays. She joined the team in August 2018, following completion of the Compliance graduate scheme at Barclays. Katherine read Law at the London School of Economics.
Hiral Patel is the Head of Sustainable & Thematic Investing within Equity Research at Barclays. Hiral joined the team in June 2018 following five years covering the European Technology, Payments and FinTech sector. Prior to that, Hiral qualified as a Chartered Accountant with KPMG where she worked in Audit covering Financial Services. Hiral graduated from the University of Warwick with a degree in Economics, Politics and International Studies.