The Human Resources function has long had the reputation of lacking the discipline or controls of other functions like accounting and supply chain management. Partly this is due to the nature of HR and Human Capital Management. When the fundamental asset you’re working with is a person, rather than a widget or unit of currency, it’s harder to expect predictability and measurable results. But accounting professionals are also governed by strict standards measuring the performance of a company – accounting standards that are applied to all publicly held firms. This forces a type of rigor into financial or other operational analyses that impact statutory reports. This enables investors to rate companies relative to each other with a relatively useful degree of accuracy. Comparing which company has a better cash flow, or a larger operating margin, or a better return on assets becomes very straightforward.
But for Human Capital Management, there are no such accounting standards. None that are publicly accepted, anyway. There really is no systematic measure that tells different companies apart in terms of how well they manage their workforce, other than derived measures like revenue per employee. But if such a set of standards existed, it would help investors predict future performance more effectively. It would help job applicants identify desirable employers and help financial institutions assess the creditworthiness of companies seeking funds. Consistent, cross-industry measures of corporate human capital management would be beneficial in many ways, and are kind of a ‘holy grail’ of HR.
So why don’t these standards exist? Pick a reason – who would be motivated to create a new set of regulatory criteria about assets as difficult to measure as human beings? Who would design the standards and get companies to agree to them? And who would implement and enforce them? Clearly there isn’t a single entity that could produce and enforce standards like this – much cooperation would be needed from industry, labor and regulatory officials, not just professionals within the HR function itself.
That’s why some of us were excited to see an article that appeared on the website of the Financial Times Deutschland this week, about a new standard called the Human Potential Index (HPI). The HPI seeks to provide exactly such a measure, and help rate German companies according to their effective management of human capital. Among the factors considered under HPI are management culture, employee wellness, compensation programs, employee engagement and personnel development programs. It’s not an official measurement yet, but it should be noted that the HPI is being developed by a partnership of DAX member firms, medical insurance providers, and the German government’s Labor ministry. The first draft of the standard was tested on 113 companies. This shows a broad base of interest in such a standard from both the corporate world and other important stakeholders that could help make HPI a reality in Germany. The intent of the HPI participants is to use the standard to help rate the creditworthiness of businesses, providing a powerful incentive for businesses to maintain a good score. The HPI rating is a simple scale of 1 to 5 stars, representing a large number of different HR-related measures collected through self-reporting and independent audits.
The benefits of a system like HPI are clear. The collaboration of early stakeholders from public and private sectors bodes well for the future of this standard. It will be interesting to see whether HPI gains more than just a foothold next year, when the Labor ministry makes a formal proposal to business leaders. A standard like HPI would certainly have an impact on SAP’s customer base in Germany. Since many participants in the HPI initiative are also multinational firms based in the EU, the standard would eventually impact other countries as well.
We’ll certainly be watching this one to see how it turns out!