Harvard Law School Study Encourages Investors to Ask Companies for Human Capital Metrics

Human capital factors such as training and corporate HR policies are "important to investors," with "sufficient evidence of...materiality to financial performance to warrant inclusion in standard investment analysis," according to a recent report by Aaron Bernstein and Larry Beeferman of the Pensions and Capital Stewardship Project at Harvard Law School's Labor and Worklife Program.  The report, which was funded by the Investor Responsibility Research Center Institute, analyzed more than 90 studies going as far back as the 1970s to refute the primary criticism of the inclusion of human capital metrics in investment analysis; namely, that HR metrics are not material to financial outcomes. Analyzing previously published data on the relationship between training and HR policies and financial indicators such as return on equity, return on investment and profit margins, the IRRCi report concludes that a large percentage of available studies show a positive correlation between HR metrics and financial outcomes.  The report goes on to suggest that investors should be asking companies to provide data on a range of internal processes including extensive detail around training design, costs and outcomes, and "an overview of a firm’s HR strategy that explains which bundle of policies it employs and why."  The report cites extensively studies by HR analytics consultant Laurie Bassi, who spearheaded a failed attempt by SHRM in 2012 to issue an ANSI-certified public standard for the disclosure of human capital metrics in company SEC filings.  At that time, HR Policy Association expressed strong opposition to requiring public reporting of internal HR metrics, noting that the data would not provide meaningful information to investors and could in fact cause competitive harm for companies disclosing it.  As the IRRCi study concedes, HR policies differ widely by region and are difficult to compare across companies; as a result, significant doubt remains as to whether correlations between HR policies and financial performance also indicate causality.  However, it seems clear that human capital metrics are gaining increasing focus, a trend which may only intensify as environmental, social and governance (ESG) reporting continues to gain traction among investors and regulators.