Chief executives often repeat the mantra that the most important assets in their business “Walk in and out of the door every day.” But few actively take steps to improve the well-being, training and productivity of the workforce. Fewer still adequately report to investors on the contribution their employees make. As the pressure mounts on companies to increase the transparency of their corporate reporting and to take a longer-term perspective on the factors affecting their businesses, the issue of human capital is rising up the agenda.

The Chartered Institute of Personnel and Development (CIPD) has created the “Valuing Your Talent” initiative examining ways to improve the corporate reporting of human capital. At an event organised by the CIPD in early 2015, business secretary Vince Cable said that promoting long-term thinking in business was vital and he added that he believed that improved reporting on human capital would aid this process. He, and many people at the CIPD event, acknowledged that annual reports are backward-looking documents that reveal a company’s performance over a historic period. To encourage long-term thinking and transparency, they need to offer information which can help investors make judgements about the future performance of the business.

As Stephen Haddrill, chief executive of the Financial Reporting Council, told the CIPD seminar, “Investors do want to hear the holistic story, and they don’t want historic documents. Unless companies talk about their people then the investment community can’t make proper judgements.” 

Another challenge is recognising that businesses are not just about finance, figures and machinery. Measuring softer contributions to a company’s performance such as brand value and the input of staff is essential. The CIPD has worked with Anthony Hesketh, a senior professor at Lancaster Business School, to develop the Valuing Your Talent framework.

Hesketh points out that FTSE 100 companies spend £200bn a year on staff, but barely recognise them as assets in their annual reports. “If I buy a piece of kit and depreciate it over 10 years, I have to show how I depreciate that. A large organisation might spend £5bn on people, but you don’t even know about that cost because it is tucked away in cost of goods sold,” he says.

The time has come for the asset that operates all other assets – human capital – to be recognised in accounting, says CIPD chief executive Peter Cheese. He believes human capital has not been well measured by businesses and has not been done in a consistent way.

Human capital reporting holds the key to improving the UK’s economic performance, according to Cheese. Only when businesses recognise the contribution of employees will they be able to solve the crisis in the UK’s productivity, he argues.

“Now is the time to start to encourage more consistent reporting of the human capital dimension of business. This is not just about human resources, this is about good business, it is of interest to the investment community, they are saying that long term sustainable value has to be better understood,” he says.

One company that takes corporate reporting of human capital seriously is German engineering giant Siemens. The company regularly canvasses its workers on their attitudes and feelings. Logging on to their computers in the morning, staff may be asked a probing question about their relationship with their employment, such as whether they believe their capabilities are being put to best use or whether they feel empowered.

According to Siemens’ human resources director for the UK and northwest Europe Toby Peyton Jones, finding ways to assess the performance, happiness and training of staff is essential to providing investors with a forward-looking picture of its capabilities and future. The measures are included in the company’s annual report so investors can gain a long term understanding of the company’s prospects.

But he says many investors need to transform their thinking and start looking at the underlying health of a business and the strength of its employee base.

“At the moment I don’t think investors are influenced by this to the extent that they should be,” he says. But he says they will increasingly look at the intangible assets of businesses as these become ever-more important differentiators. “People will look further. At the moment, they just look at the chief executive, not the strength and depth of the leadership of the organisation. Those that do will be the ones that really start to create an advantage and therefore organisations will have to put forward more than a shop window, they will have to do what it says on the tin.”

He is wary of creating a boiler plate system for reporting on human capital, since every company has different needs and situations, “It is very difficult to say ‘Here is a standard set of reporting that companies should have.’ What you choose to focus on needs to be correlated to your strategy and where you are today.”

There is a growing awareness among the big accounting firms that they need to improve the way they measure intangible assets. This is vital whether valuing a company for sale or recommending to clients that they purchase a business. As Simon Constance, director of human resources advisory at EY, says, “Auditors send accountants in to check the stock but when it comes to looking at intangibles, it is more of an art than a science.” He says that businesses are starting to understand the importance of human capital to assessing a company’s value and its health.

He adds, “It is critical you report on factors like diversity, where you acquire talent from, how you invest in your talent, because those are critical inputs to deliver a higher quality service.”

One area of exploration has been looking at metrics from the world of financial accounting and using them for assessing the contribution of labour, such as return on invested capital. But above all, finance directors need to work more closely with human resources directors to assess the financial contribution of staff. Constance mentions research on 550 companies which showed that for the top 10% in terms of EBITDA growth year on year, they rated their chief financial officer and chief human resources officer as having collaborated significantly on corporate strategy and investment.

“It comes back to how disciplined are you about all your investment decisions, it requires the same level of rigour and discipline as any other investment decision. Chief executives have a duty to report on how they are investing in a significant asset – people. We can’t let them off the hook,” says Constance. In recent years, companies have paid more attention to communicating their corporate values to staff and improving employer branding, especially in service companies. The idea is that employees will then be able to communicate the values of the organisation to the customers. But making the leap to getting investors interested in this approach is difficult, says Leon Milligan, a consultant at corporate communications consultancy Emperor Design. “Companies ought to invest in their employer value proposition – what is it that they are presenting to their employees as to why this is a great place to work?” This is vital in the battle to acquire the best staff and many companies are starting to pay more attention to internal communications.

He adds, “But when you ask shareholders to recognise the value of that, they are short-term and it is a struggle to attribute any value to it. So many companies don’t bother to report it well because it is not a huge driver.” While big FTSE 100 companies have started to make progress on human capital reporting, smaller businesses still ignore it.

In reality, there is little incentive for investors to want to find out about human capital. Much investment is done for short-term reasons. With index-linked investment playing such an important role, investment managers tend to look at averages and performance metrics rather than assessing the longer-term risks and possible rewards from businesses.

Moves to transform the way investors approach their decisions are under way, though progress is slow. Business secretary Cable has said that his ambitions in Government include creating more long-term approaches to business, improving governance and boosting human capital reporting. There is a trickle of companies that is ditching quarterly reporting, such as Unilever. National Grid recently dropped quarterly reporting and encouraged other companies to do the same.

Such progress towards a longer-term approach to reporting is welcomed by some institutional investors, pensions funds and ethical investors. At the same time, there is a push for companies to introduce integrated reporting in which financial performance is reported alongside environmental and social activity. This is being promoted by the International Integrated Reporting Council (IIRC), which was set up after a campaign was spearheaded by Prince Charles for companies to take into account the long-term risk factors facing their businesses. So far this has been mostly about reporting on environmental factors such as carbon emissions and pollution and the risks and external costs of these. There has been little attention paid to the social side of reporting, such as analysing the supply chain and assessing the input of human capital. Integrated reporting could provide fertile ground for including aspects of reporting on the workforce contribution.

But investors often complain that annual reports are becoming too bulky and are packed with information that can get in the way of understand the overall health of the business. Too much data can cloud their decisions rather than clarify them.

But for modern businesses, investors need to know about personnel issues – from succession management to how the company is managing to attract top staff.

The battle for talent is becoming the defining business issue of our age. The winners in the digital wars are those companies that can attract the most talented programmers and technicians. But this requires more than just offering high salaries and share options. Tech giants such as Google and Apple compete for staff using all sorts of bait, from offering top quality in-house food to luxurious office environments.

Perhaps the social media revolution will boost transparency about companies and the way they treat their staff. People are sharing their views about their workplaces online and commenting on employers through social media. Recruitment and advice website Glassdoor – which claims to have 27m members worldwide and operates in the US, UK and is launching across Europe – advertises jobs and allows people to rate employers and post comments about working for them and the salaries they pay. Unilever, for instance, gains a star rating of 3.7 and numerous positive reviews from people who have worked there. Apple gets a rating of 3.9 and Siemens gets 3.6.

“From a reputation management point of view, you now have a place where you have an employer voice and the employee voice in one place so there is nowhere to hide,” says Glassdoor’s UK PR manager Joe Wiggins. “Companies that nurture and engage and have a happy workforce have a huge opportunity to attract the best people.” The site has data and ratings on 25,000 companies in the UK and 350,000 worldwide.

In the age of transparency, it seems inconceivable that businesses can avoid coming clean about how they value their staff. The pressure is building for companies to measure and report the contribution of their workforce.