Labor & Employee Welfare

How Investors and Employees Can Work Together to Instill Better Human Capital Management Practices

Tech giant Alphabet is known for giving voice to employee grievances internally, but leaders may not have anticipated the public complaint aired by a staffer at the Google parent company’s recent annual shareholder meeting.

At the June meeting, software engineer Irene Knapp reportedly presented a proposal that would have tied executive pay to measures of workforce diversity and inclusion. Shareholders promptly voted down the plan, which had been submitted by Zevin Asset Management.

The incident illustrates the potential for alignment between employees and impact investors, particularly when it comes to human capital management practices. Here’s why companies who put a premium on their employees’ well-being stand to excel.

Why Human Capital Management Is a Growing Priority

McKinsey research has shown that companies with a more diverse leadership team are more likely than their more homogenous competitors “to have financial returns above their national industry medians.” But the alignment between investors and employees goes beyond measures of diversity. Human capital management includes everything from attracting and retaining talent to maintaining an engaging company culture. Companies with poor human capital management practices may lose valuable talent—and their edge in the market.

That realization is why human capital management has become a priority for investors this year. A recent Ernst & Young survey found that nearly 40% of investors wanted companies to pay attention to human capital management.

Institutional investing giant BlackRock has identified human capital management as one of its 2018 engagement priorities. “Companies that can better articulate their purpose are more likely to build strong relationships with their employees (and customers), and have a clear sense of their strategic objectives,” BlackRock managing director and global head of investment stewardship Michelle Edkins recently wrote. “These are essential components of long-term growth.”

When Employees Are Assets

Both investors and employees may benefit from policy changes aimed at increasing retention, particularly in highly competitive fields like technology, where the employees themselves often represent a company’s most valuable assets. The better a company’s human capital management, the less money the company has to spend on recruitment and training.

Those cost savings, combined with the sustained presence of employees who feel connected to the company and motivated to perform, can lead to tangible results.

In fact, a February 2018 analysis of Fortune’s “100 Best Companies to Work For” found that companies on the list generally outperformed the market. The analysis showed that $1,000 invested in the Russell 3000 20 years ago would be worth $4,161 today. The same amount invested in the “Best Companies” would be worth more than twice that—$10,346.

Harnessing the Value of Social Capital

The renewed focus on human capital management best practices reflects an ongoing shift as large companies realize that they must find ways to grow their social capital in order to remain competitive in today’s markets, according to the 2018 Global Human Capital Trends report from Deloitte.

“Organizations are no longer assessed based only on traditional metrics such as financial performance, or even the quality of their products or services,” the report’s authors write. “Rather, organizations are judged on the basis of their relationships with their workers, their customers, and their communities, as well as their impact on society at large—transforming them from business enterprises into social enterprises.”

It makes sense that such a transition would occur alongside the rise in interest in impact investing. Both movements reflect similar principles and an understanding that doing business in a socially responsible manner can correspond to long-term financial success and higher returns for investors.

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