Risky business this Human Capital


Continuing my HR related theme…

I’m not an investment expert, but I remember from economics at university that portfolio management is not just about maximising potential returns, it is also about doing so at an exceptable level of risk.  Risk management has developed into a highly sophisicated field. Letters of the Greek alphabet appearing in long, complex formulae and all that.

The more you know, the easier it becomes to quantify risk. Investors dont mind risk, as long as they know it is there, because with risk, comes opportunity.

You may be asking what this has to do with HR, well it turns out quite a lot.

I stumbled across (thanks knowledge infusion) this report from the Economist on Risk.

International risk managers surveyed by the Economist Intelligence Unit cite human capital risks as being the most significant threat they face to their global business operations. The findings show that human capital risks, such as skills shortages, succession issues and the loss of key personnel, were seen by respondents as being more significant than threats from reputational risk, information technology risk, political risk and regulatory risk. This represents a change from a year ago, when reputational risk was perceived in our quarterly risk barometer survey as being the biggest threat that respondents faced.

Despite acknowledging the importance of the skills issue, just 32% of the survey respondents say that they manage human capital risks effectively. The only areas where they feel less confident are risks associated with terrorism and climate change.

These findings point to the need for closer integration between the risk function and the human resources function, as well as a clearer understanding of the risks that companies face with their location and human capital strategies.

Read the full  Economist paper on Risk Best Practice.  If you think risk is just some compliance thingy, you may be surprised.

HR executives would be well served by articulating the need to invest in succession planning and combating skills shortages in the language of risk. Sprinkle in a couple Betas into the business case and you will be amazed at its impact.

But taking it a step further.

If I was the HR Director of a listed company, I’d ask for a meeting with the investment analysts that cover my company and ask them what people information they would like to have for their analysis. I’d ask them what models they use to measure intangible assets and how I can help them provide the human capital risk information they need to make safer investment decisions. Actually I’d probably go into the meeting with a series of “here’s one I prepared earlier”. (I’d work with a risk  and ratio expert beforehand..)

Perhaps I’d give him ratios like revenue per sales executive, top 10% sales exec turnover, revenue spread in sales, hipo retention,  I’d show who we were hiring from. I’d talk about the executive and key position pipeline coverage, diversity ratios, employee engagement…  I’d also show benchmarks.

If I was feeling brave, I’d give them a card to the employee dining room and let them ask anything they want.

Perhaps I’m nuts. But then imagine the face of the competitor’s CEO when the analyst asks to talk to the HR director.

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One thought on “Risky business this Human Capital”

  1. I love to say investment analyst should care about HR risk but the fact of the matter is they don’t. As we both know, companies today are littered with HR risk today that absolutely has a direct correlation to business performance. Not just risks like executive succession but risk of payroll/compensation data integrity, litigation exposure, employee dis-engagement, etc. I would love to tell HR executives, “use the risk card to get funding for your business case”. Unfortunately, the fact of the matter is that risk today is only viewed in relation to government mandated programs (ie SOX). For investment analysts, SOX was the risk mitigation card they needed.

    I would flip the equation around and encourage financial analysts to invest in companies that focus on human capital as a key differentiator. McBassi & Co has supposedly done this with some success, using an assessment model to determine things such as employee engagement.


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