'Human capital' leaders outperform, again

Michael Bennet
03:09pm September 25 2018

Research shows a link between productivity and employee satisfaction. (Getty)

Amongst the deluge of equities research hitting inboxes last month, a report landed that attracted little public attention during the hectic corporate results season, but contained some timely findings.   
 
Headlined “People Power”, it found listed companies with higher “human capital management” (HCM) scores outperformed other stocks over the past 10 years, and even more so in recent times.

It was done by creating two portfolios, one comprising Australian companies with net positive HCM scores based on employee engagement metrics such as staff turnover and diversity, and another of those with negative HCM scores. The companies were weighted in the portfolios based on their relative HCM scores, which showed the leaders produced annual outperformance of 1.5 per cent a year over 10 years and 3.2 per cent in the past five years.

While reinforcing previous research linking HCM metrics and market performance, the report authored by Macquarie equities shines a local light on the upside of getting more out of humans not yet displaced by automation and changing demands for skills, and comes amid greater scrutiny of companies’ actions beyond core businesses.

But it also pointed to the historical starting point for a lot of companies. At least in accounting terms, it seems the classic saying “people are our biggest asset” isn’t always recognised that way.


“Tangible capital is reported as an asset in the financial statements, whereas the contribution of the workforce has traditionally been reported as a historical cost item. Hence the value of forward looking investment in employees as a form of human capital has been largely ignored,” the report, from Macquarie’s environmental, social and governance (ESG) equity analysts, noted.

Alex Edmans, a professor of finance from the London Business School and a former Morgan Stanley banker, has been exploring the tensions for several years.

In a paper published in 2011 when at The University of Pennsylvania’s Wharton School, Edmans found while US companies with high levels of employee satisfaction outperformed other stocks, investors didn’t seem to fully incorporate “intangible” assets into stock valuations until they manifested in “tangibles that are valued by the market, such as earnings announcements”.

He continued: “Even if managers are able to credibly communicate the value of their intangible investment, it may still not affect outsiders’ valuations, and so they may be reluctant to invest in the first place.”

Seven years on, even though more investors are focusing on ESG issues, Macquarie’s analysis noted opportunities still remain to identify HCM factors “not yet priced by the market”. But awareness is on the rise as more investors and regulators put companies on notice to elevate a range of issues traditionally seen as “non-financial”, such as culture, their role in society and climate change.

“To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society,” Larry Fink, the founder of asset management giant Blackrock, said in his topical letter to CEOs earlier this year.

“Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”

Larry Fink made headlines earlier this year with a public letter to CEOs titled “A sense of purpose”. (Getty)


The benefits from good HCM are borne out in a link between productivity and employee satisfaction, Macquarie’s analysts found.

Westpac, ANZ, Aurizon, Qantas and Worley were cited for generating productivity gains from managing absenteeism and staff turnover well, supporting revenues. Diverse workforces were also found to be more productive, while superior safety performance reduced incidents that can trigger delays and shutdowns, the research added, potentially helping to offset the trend of weak productivity growth weighing on many developed economies.

Remuneration likely also plays a role in employees’ productivity and engagement, the research noted, while minimising any damage through transitions is important, particularly when staff are being shed.

In the past decade, corporate Australia has come a long way in embedding HCM into strategy and upping investment in the space, the analysts finding more companies in the S&P/ASX200 had positive than negative net HCM scores, leaders including REA Group, Westpac, Fortescue Metals, Woodside Petroleum, GPT Group, Aurizon and Scentre Group.

Qantas, for example, lists “shifting customer and workforce preferences” as one of four global forces to have the biggest impact “both positively and negatively” on the airline, and in August – several years into a major transformation program – unveiled a further $67 million in bonuses for its 27,000 non-executive employees following record underlying pre-tax profits.  

Driving a “workforce revolution” is also one of Westpac’s five strategic priorities. Meanwhile, in start-up land, Marta Higuera, co-founder of OpenAgent, recently labelled human capital the greatest asset companies can leverage.

As a nation, Australia is relatively well placed, ranking 20 out of 130 nations in the World Economic Forum’s 2017 “Human Capital Index”, which was topped by Norway, Finland and Switzerland due to their “longstanding commitment to their people’s educational attainment”. The WEF, however, suggested Australia take greater efforts to reduce unemployment and underemployment, “particularly among its young generation”.

Qantas CEO Alan Joyce (centre) with team members at the airline’s results in August. (Getty)


A challenge for companies is the sheer pace of change, says Deloitte’s human capital leader David Brown.

Releasing Deloitte’s latest “Human Capital Trends” report in April, he cited the rising importance of social responsibility, the need for greater connectivity and collaboration, evolving career pathways, ageing workforces, greater demand for wellbeing programs, and the rise of artificial intelligence, robotics and automation.

While the greatest opportunity was to “fundamentally re-think ‘how work works’ to benefit employers, teams and individuals” rather than just redesign jobs or automate routine work, Deloitte found only 5 per cent of Australian respondents were doing this. That’s despite the large millennial demographic of the workforce wanting business to focus “more on people, products and purpose and less on profits”.

“This year’s report is a wake-up call for organisations to look beyond their own four walls, cultivate these relationships in a meaningful way and reimagine their approach to their workforce – and their broader role in society – if they want to succeed,” Mr Brown said.

“In the past we have measured business performance on financials and the quality of products or services…today, social capital is just as important as – and inextricably linked to – human, financial and physical capital.”

The views expressed are those of the author and do not necessarily reflect those of the Westpac Group. This article is general commentary and it is not intended as financial advice and should not be relied upon as such.

Michael Bennet

Michael Bennet was inaugural Editor of Westpac Wire from June 2017 to December 2021. He joined Westpac after more than 12 years in journalism, most recently at The Australian as the national newspaper’s banking reporter based in Sydney. Michael has worked at various News Corp publications and other media companies covering industries including financial services, resources, industrials, markets and economics. He is originally from Perth, Western Australia, where he also wrote across magazines covering the arts with a focus on music.

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