Understanding human capital is becoming a critical component for maximizing profits

An often overlooked and undermentioned topic of value, human capital, simply put, is the ends all be all for intangible values. Without consideration for how to best value it, the potential for your company to perform at its peak ability will be wasted. This becomes an absolute crucial point when making the case for how ESG performance maximizes value.

We spoke with Geoffrey Burger and Robert McGarrah, two experts in the field of ESG performance as it relates to valuing human capital.

Geoffrey Burger is the Chief Executive Officer, founder, and portfolio manager of Culture Capital. With over twenty years of investment experience in implementing quantitative research and portfolio management. Prior to Culture Capital, he was with American Century Investments as a portfolio manager of global equities overseeing quantitative research for twelve strategies totaling $25 Billion. During the past four years, Burger lead their research on ESG integration.

Robert McGarrah is Corporate Sustainability Attorney and a director of the Global Reporting Initiative, where he advises companies, investors and workers on climate change, human rights and corporate governance.

Christopher P. Skroupa: How does human capital fit into ESG performance?

Geoffrey Burger: While is completely obvious that companies are built and run by humans, it’s not always obvious they are treated as valuable capital. At Culture Capital our research shows the true value of human capital gets recognized through the culture of a company. Without a culture that values human capital it won’t be able to fully achieve the ESG performance that investors expect. The “S” component is particularly vulnerable as the metrics to define performance are very limited.

Robert McGarrah: Human capital is a critical component of successful ESG performance. Every CEO will agree that company employees and workers for their franchisees and suppliers play a vital role in corporate performance. When human capital is ignored or improperly deployed, as BP’s Macondo Gulf of Mexico disaster demonstrated, the results can literally destroy earnings and reveal glaring deficiencies in corporate environmental and governance. As University of Chicago Business School professor Luigi Zingales, puts it, human capital is a firm’s “most valuable asset.”

Skroupa: What can companies do to develop human capital?

Burger: If a company believes the human capital of its employees is a valuable resource then it will care about this capital, and invest in using it in the best ways possible. Mentoring programs for employees at every stage of their career shows that you care about their development now, and into the future. Education and training programs tied to a career growth plan is another way to renew and develop human capital. Many firms leave that responsibility to the employee, and that tends to result in them looking for options outside the firm to grow and learn.

McGarrah: There are no limits to the opportunities companies have to develop human capital. At a time when income disparities are all too obvious, raising wages just as Walmart, Starbucks and many other leading companies have done, is one answer. Education, training, occupational safety and health improvements are also clear areas for company initiatives. Just reporting on human capital in the 10-K as major investors have urged the SEC to consider, will identify significant opportunities for management and directors. For example, the Human Capital Management Coalition of leading investors, including CalPERS, has a petition to the SEC calling for company disclosures in workforce demographics, turnover, safety and health, wages and benefits, training and human rights.   

Skroupa: How does human capital affect risk management?

Burger: Companies that embrace diversity and transparency will have better risk management results than their peers. A diverse group of team members will bring a multitude of viewpoints and experience to every situation. This results in a more robust solution and execution of the strategy, avoiding the blind spots from “group think.” Transparency will make every solution more effective as it allows stakeholders, both inside and outside of the organization, to detect and mitigate risks early on before they become a major liability.   

McGarrah Human capital goes right to the core of corporate risk management. Look at Massey Energy, a major coal company whose CEO willfully ignored federal and state mine safety rules. Not only did the company’s stock price plummet after 29 miners were killed in one of the worst coal mine disasters, but the CEO faces jail time and the board was forced to sell. Chipotle’s earning were hit when human capital management – simple safe food preparation and handling were ignored.

Risk management is all about people, performance and operations. Unless human capital is a significant management and board concern, with accountability embedded in executive compensation, it becomes all too easy to overlook risks. Exxon Mobil’s performance improved significantly after the Exxon Valdez disaster. Once again human capital was at the core of risk management.

Skoupa: Does climate change affect human capital? How so?

Burger: Climate change in the short-term affects human capital through disruptions and dislocations from natural disasters. Hurricanes Harvey & Irma are the most recent events to make this point clear. These events cause loss of life and damage to property that can permanently change a person’s ability to best apply their human capital. The best companies recognize this impact and are making adjustments to reduce their impact on climate change.

McGarrah: Climate change affects human capital, just as it affects profits and risk management. Consider the impact of climate change at Walmart, where renewable energy goals are a core concern. Solar panels at retail outlets require new and redeployed workers, trained and compensated to manage the company’s energy use in the most efficient, cost-effective process. Mars, sourcing cocoa from Africa, relies on people to cultivate and harvest its most vital asset, while constantly adjusting to drought from climate change.

Coal mining has declined precipitously, as a direct result climate change and natural gas. Unemployed coal miners played a key role in President Trump’s pronouncements, withdrawing the United States from the Paris Agreement. Renewable energy is a central objective of companies whose bottom lines are affected by climate change. Human capital – well-trained and paid workers are essential to successful corporate climate change planning and operations.

Both McGarrah and Burger are two of three panelists on Development and Valuation of Human Capital and Corporate Citizenship: How They Factor into ESG Performance at the Generating Alpha conference in New York, NY on October 30.

Originally published on More articles by Christopher Skroupa on his Forbes column.