Content area
Full Text
Working together, strategic finance and human resources executives can create great value for their companies by developing and analyzing human capital metrics.
There's a global groundswell of interest in human capital management (HCM). A 2013 Conference Board report cited it as the number one challenge CEOs face. More recently, in a March 2015 Harvard Business Review article, "The 3 Things CEOs Worry About the Most," talent-related issues were the top concern. And don't forget the competency crisis in accounting (www.competencycrisis.org).
Human capital analytics is an area of critical importance to strategic CFOs and the finance organization. Why? Because the company bottom line depends on the quality of people who determine business results and long-term value creation.
In financial reporting, the investment community is also interested in human capital metrics as a way to better understand how a company will create future value. Meredith Miller, chief corporate governance officer of UAW Retiree Medical Benefits Trust (composed of global institutions with $1.2 trillion in assets), recently said at a CFA Institute event in Chicago: "Investors have been looking for the proxy for human capital investment, and pressing for public disclosure is key-especially in making the connection to return on invested capital (ROIC)."
To help show the past, present, and future of the use of human capital analytics in measuring, managing, and predicting business performance, we focus on the value of aligning CFO (chief financial officer) and CHRO (chief human resources officer) goals to strengthen execution and accountability. Later in this article we describe a version of an employee turnover measure converted to a more predictive financial metric by capturing compensation. We developed this metric we call Investment-Based Pivotal Employee Turnover (IBPET), and almost any organization can adapt it.
The CFO/CHRO Connection
A 2014 study by Ernst & Young, "Partnering for Performance Part 2: The CFO and HR," found that high-performing companies feature a strong CFO/CHRO connection. CFOs and CHROs say that improving their working relationship led to significant improvement in workforce productivity and company earnings.
A 2009 study by the Corporate Executive Board (CEB) drew on interviews from nearly 500 executives and combined the information with a large data set assembled on long-term corporate performance. The study found that more than 80% of the time the...