Playing the game of human capital hopscotch

Guess who said: “Human capital is the 21st century equivalent of the 19th century dependence on natural resources. Modern wealth creation depends upon the development of people”.

No, not me, or anyone else at the Chartered Institute of Personnel and Development (CIPD) or Personnel Today. It was the prime minister, just before last year’s general election. The early Christmas present chancellor Gordon Brown delivered to the CBI’s anti-red-tape lobby at its annual conference last November was therefore somewhat surprising (or perhaps not, given the leadership situation in the Labour Party).

Brown announced he would be scrapping the Operating and Financial Reviews (OFRs) that the government introduced in April for all quoted UK companies. These would have obliged firms to report on their future strategy and prospects, including policies for managing their people. He described the OFRs as an example of the unnecessary “gold plating” of European regulation.

“An astonishing U-turn that contradicts his own government’s policy and the needs of investors and the business community itself.” OK, I own up, that one was me on behalf of the CIPD. But I wasn’t alone. Peter Montagnon, at the Association of British Insurers, was “baffled, bewildered and rather disappointed”; while Christine Farnish, at the National Association of Pension Funds, lamented a significant “missed opportunity”.

Friends of the Earth accused Brown of “short-term political expediency”, and the Institute of Directors felt he “demonstrates a cavalier and ill thought-through approach to regulation”.

So what’s all the fuss over this obscure requirement? The OFR’s abolition will not have a massive immediate effect. But it was a potent symbol of how the economy and business is changing, and how investor, accounting and management behaviour needs to respond.

Voluntary OFRs were recommended in the early 1990s by the Institute of Chartered Accountants of England and Wales (ICAEW). A joint meeting of senior CIPD and ICAEW members 10 years later concluded: “Organisations need to stop being shy about their human capital if they are to give a full view of their performance.”

The mandatory OFRs had little to do with Europe. They emerged from the process of updating UK company law. Modernising Company Law in July 2002 stated: “The government agrees that companies should provide more forward-looking reporting… companies are increasingly reliant on intangible assets such as the skills and knowledge of employees… [Such] informa-tion is as vital to the users of financial reports as a historical review of performance.”

The chancellor’s colleague, Patricia Hewitt, introduced the OFRs as “embedding in law the concept of enlightened shareholder value… the importance of human capital reporting”.

She said: “The best UK companies understand that smart people management underpins their business performance.”

CBI president John Sunderland similarly emphasises the necessity of analysts understanding the “relationship between the effectiveness of HR policies and performance”.

Compulsory OFRs would have encouraged such understanding, but it is happening anyway. Take law firm CMS Cameron Mckenna. Its annual people report shows how the large number of partners recruited as trainees by the firm underpins its financial success (see And job advertisements for sandwich retailer Pret a Manger claim: “We pay our wonderful staff as much as we can afford, rather than as little as we can get away with.”

The initial public offering document for internet services company Google states: “Our employees are everything to us… we will reward and treat them well.” And look at its stellar stock market performance since then.

The volte-face over the compulsory OFRs is a minor skirmish in the long-term campaign to get many more organisations to recognise that managing and motivating their employees effectively is the only sustainable route to high performance.

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