SAKIS KOTSANTONIS | Co-Founder and Managing Partner, KKS Advisors
GEORGE SERAFEIM | Charles M. Williams Professor of Business Administration, Harvard Business School, and a Co-Founder, KKS Advisors
Human capital development (HCD) is a key consideration for most companies, but only recently have investors focused on understanding the risks and opportunities related to human capital with the emergence of environmental, social, and governance (ESG) investment frameworks and impact investing.
We argue that the importance of human capital is likely to be magnified in an environment of rapid technological change, where the future of work is uncertain and that existing frameworks for measuring and evaluating HCD might not be fit for purpose. Against this backdrop, we derive an HCD metric that focuses on outcomes rather than inputs; demonstrate that even in the current disclosure landscape one could measure with reasonable accuracy this metric for thousands of companies; and provide exploratory evidence on its relationship with employee productivity. Moreover, we develop an estimate of probability of automation of job tasks for each sub-industry and show the relationship between this probability to elements of our HCD metric and other human capital characteristics. Finally, we outline an investor engagement framework to improve the disclosure landscape related to HCD and to empower effective investment stewardship.