Will the sometimes tenuous relationship between HR and Finance get more involved?
A new proposed disclosure on Human Capital, developed by a committee at SHRM chaired by Lauri Bassi, CEO of McBassi & Co., is in process of being considered by ANSI (American National Standards Institute).
David McCann wrote an article on the proposed Human Capital Standard in
CFO Magazine this week, and says that the proposal “could ultimately have a profound impact on investors’ understanding of why companies succeed or fail. Or it could have no impact at all.”
Whether the proposal will have an impact or not remains to be seen. I first learned of this proposed project in September 2010 when I had the opportunity to meet with Lee Webster, Director of HR Standards at SHRM at a conference. I was involved in a Taskforce at the beginning of the process, but I stopped being involved after a few meetings due to personal time constraints.
However, I was (and still am) enamored with the idea that a standardized manner of reporting human capital can add value to investors and other users of information. I believe that solely reporting financial capital to investors without giving valuable and relevant information on human capital gives them incomplete information on the assets and performance of an organization.
Most accounting and financial reporting standards develop over time. They need to start somewhere. Having human capital reporting standards that are voluntary can lead to better information which will lead to better decisions. So this is a good thing.
I’m curious as to what impact this reporting will have on the relationship between Finance and HR in organizations. Having identified HR as a key Relationship for CFO Success (Read: CFO Relationship Map), and surveyed CFOs relationships with HR (Read: CFO / HR Survey Results), CFOs and HR in many companies have challenges working together.
Will the need for HR and Finance to work closely together to make reporting on human capital have a positive impact on the Finance / HR Relationship?
I’m hopeful. What about you?
Samuel,
While I am in total support of closer working alliances between HR and finance, I question the benefit of the proposed reporting. Company A can have x number of talented people, and Company B can have the same number of talented people, but one company can dramatically outperform the other based on HOW those folks work together, which speaks to the culture and is quite difficult to measure by standardized means.
David
If you think about it, the same argument can be made for machinery. The cost of the machinery and it’s depreciation are disclosed in current reporting, but comparing the book value of property, plant and equipment from one company to another may have nothing to do with efficiency or effectiveness of the information. Still, the information is useful.
It would be great David if the standards were able to report what you’ve requested. Maybe one day they will. In the mean time, beginning to report on human capital in a standardized manner makes sense and has value.
Thoughts?
Samuel
I have a number of questions about the reporting of human capital in the financial statements. My assumption is that the value that will be reported will be derived out of the value reported in the current statements and not as an elemental additive which will inflate the values now reported. Among those questions are:
1. How will the qualitative characteristics be developed?
2. Can the qualitative characteristics be made comparable across all verticals?
3. How will the current set of financial statements be adjusted to reflect the value of human capital?
Carlton
I’m glad you find the topic of interest.
I would recommend that you take the time to read the draft proposal (a link is noted above). Feel free to comment on the proposal – I’m sure the committee that prepared the draft would be interested in receiving your input.
For your point #3, the financial statements will be adjusted for human capital in this proposal. The standard is a voluntary disclosure outside of the financial statements.
Reegards,
Samuel