How Financial Accounting Screws Up HR | Harvard Business Review

HR Effectiveness

Many organizations strive to report meaningful human capital (HC) measures. But as pointed out in this HBR article by Peter Cappelli, one challenge in HC reporting is that: current U.S. financial reporting standards are counterproductive since they treat employees and investments in them as expenses or liabilities, which makes companies look less valuable to investors.” This issue becomes more critical given the Securities and Exchange Commission (SEC) rule—which requires public firms governed by the SEC 60-90 days after their fiscal year to include HC information in their annual report. However, since the rule leaves it up to companies to determine what measures to disclose, there is much variation in what organizations report. For example, I previously shared a recent 51-page research paper that analyzed the HC disclosures of over 3,000 unique public companies that found disclosures are:

  1. “extremely heterogeneous in terms of length, numerical intensity, tone, readability, and similarity with peer firms.”
  2. about 18% of sample firms provide HC disclosures of less than 100 words.
  3. disclosures are not numerically intensive, except in firms with better financial performance, which provide more specific and quantitative disclosures.

The HBR article offers suggestions for how HC reporting requirements can be improved. One suggestion is to break out cost categories that are already reported, such as: “What % of vacancies are filled from within? Answering this question reveals the extent to which a company is growing its own talent or having to buy it from outside. What other suggestions do you have for linking talent to value in organizations and showing the impact (or lack of) of an organization’s talent and HC practices?