The direction of action of institutional investors is currently changing massively. First, the distinct focus was on financial performance only, then governance issues came on the agenda, followed by a broader view on sustainability (license to operate). Meanwhile, human capital management (HCM) issues are being prioritized more than ever.
Leading investors, first and foremost BlackRock, are increasingly asking about HCM aspects – from a global perspective. This involves best practice (e.g. employer branding, digitized recruiting), risk management (e.g. staff turnover, human rights) and normative issues (e.g. diversity, women’s quota). All of this increases the pressure for meaningful qualitative and quantitative capital market reporting on HR issues and an intensive direct engagement with investors (engagement) – typically with significantly strengthened ESG teams on the investor’s side.
In the U.S., for example, the volume of HCM topics published as part of annual reports quadrupled last year alone. In a recent study by hkp/// group, more than 50% of investors published concrete expectations with regards to HCM criteria, which - amongst others - build the basis for the respective voting behavior.
This new investor expectation has fundamental implications for at least three areas of action.
- The role of the CHRO in the investor dialogue: Today, CHROs typically don’t talk to investor representatives. In the German corporate governance system, however, responsibility for HCM issues lies with the HR Board member , who has a new and important role to play in the dialogue with investors – usually conducted by the Chairman of the Supervisory Board, the CEO and the CFO with support of Investor Relations only. Internally, for example, this relates to raising awareness for HCM topics among decision-making bodies such as the Executive Board and Supervisory Board. Externally it relates to laying the foundations for a professional dialogue with investors on HCM issues. In this communication, the CHRO typically does not meet with portfolio managers, but rather with the investor’s ESG specialists.
- Best practices in HR must take investor expectations into account: HR today typically does not speak the language of investors. At the same time, the “human resource ” is becoming increasingly important for almost all companies – often more important than abundant capital. This involves avoiding HR risks and anchoring socially relevant HR goals and programs as well as a holistic HR strategy with excellent operational implementation. That change covers all areas of HR activity – from health management and employee engagement to process excellence.
- HR reporting in the framework of capital market communication: The personnel report is often boring, not very meaningful and usually heavily administrative in nature. HR management metrics only come up in investor discussions in exceptional cases. The engagement process with institutional investors begins with the publication of information on HCM in the annual report. It is crucial for companies to understand what should be published and in what form and structure. To this end, frameworks and taxonomies are currently being developed by various bodies around the world. The HR Report can play an important role in non-financial reporting and external presentation.
Based on the knowledge of investors’ expectations and at the same time a deep understanding of HR strategies and processes as well as professional external reporting formats, hkp/// group supports companies in developing HR best practices, engaging on HR topics with investors and aligning HCM topics with investor expectations, thus contributing to their success on the capital market.
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