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  • Solange Charas, PhD and Stela Lupushor

The Value of Transparency in Human Capital

As businesses globally strive to adapt to the accelerating pace of change, the role of transparency in managing human capital continues to gain prominence. Recent discussions at the Davos meeting underscored the importance of fostering trust in our institutions, highlighting transparency as a key factor in achieving that trust as a foundation for global stability and economic prosperity. Davos participants acknowledged that in a world rife with misinformation, at risk of acceleration by advancements in AI, transparency acts as a cornerstone for building trust and facilitating clear, constructive dialogues between businesses and their stakeholders.

Transparency and Trust: The Foundation of Stakeholder Value

Transparency in an organization starts with open communication and the equitable distribution of information. According to Joseph Stiglitz (Nobel prize-winner in economics), when information asymmetry occurs—where one party has more or better information than the other—significant inefficiencies occur, resulting in lost opportunities to create economic value. In the context of human capital, withholding  information - especially when it pertains to a major cost center (HR) – typically 50% or more of a company's expenses -  will most likely result in information asymmetry. This occurs because the company knows something the stakeholder doesn’t and this compromises the ability for stakeholders to make informed decisions about investing in the company, buying their products or working for them.

The Impact on Employees: For employees, transparency breeds trust, which in turn can lead to what is referred to as Organizational Citizenship Behavior (OCB). This concept, enriched by the theories of Daniel Kahneman and Richard Thaler (both Nobel prize-winners in Economics), implies that when employees trust their employers, they are more likely to engage in discretionary behaviors that are beneficial to the organization but not explicitly recognized by the formal reward system. These behaviors can significantly enhance the human capital return on investment by improving teamwork, reducing conflict, and increasing productivity, extending tenure, etc.

The Impact on Customers:  From a customer's perspective, transparency builds confidence in a brand. Customers who trust a company are more likely to remain loyal, provide positive referrals, and contribute to a higher Net Promoter Score (NPS). The Conference Board’s research indicated that 68% of consumers consider how employees are being treated by their companies as part of their purchase decisions. Behavioral economics suggests that customers value transparency because it reduces the cognitive load and potential regret in decision-making processes, aligning with Thaler’s concept of 'nudging' towards beneficial behaviors.

The Impact on Investors: Investors, guided by the theories of perfect information and portfolio optimization, look for transparency because it reduces the uncertainty inherent in investment decisions. With clearer information, they can better assess the risk (beta) and potential return above the market (alpha) of their investments. Human Capital transparency allows for more accurate assessments of a company’s value and growth potential, aligning more closely with the investor's goal of optimizing their portfolio's performance.

Calls for Human Capital Transparency

Human Capital transparency isn’t a new idea as evidenced by the suite of existing human capital standards culminating in ISO30414:2018: Human Capital Governance and Reporting. This standard provides guidelines that help organizations disclose critical elements about their workforce practices, such as workforce availability, composition, turnover rates, and productivity metrics. By adopting these standards, companies enhance their transparency and provide stakeholders with a clearer picture of organizational health and strategic alignment.

Some say that this ISO standard was the precursor to corporate governance disclosures required by the CSRD (Corporate Sustainability Reporting Directive) in Europe through the passage of their European Sustainability Reporting Standards (ESRS). These are a suite of 10 standards set to transform how companies report on sustainability issues, including human capital. The ESRS S-1 Own Workforce standard, in particular, will require companies who trade their shares on the European exchanges (including US companies) to provide detailed information on human capital performance such as workforce composition, development, and engagement. In fact, there are more than 50 data elements related to human capital reporting embedded in the standard.

The CSRD is not alone – the U.S. Securities and Exchange Commission (SEC) is expected to introduce new rules regarding human capital disclosures within the next several weeks. These requirements are expected to focus on quantitative and qualitative metrics that provide insights into a company’s workforce management, such as diversity and inclusion, workforce composition, workforce stability and most importantly, transparency on the total cost of human capital. Perhaps the most significant pronouncement from the SEC was that human capital is not simply an expense, but an “investment in an intangible asset.” Reframing human capital as an “investment” and the requirement to disclose detailed costs associated with human capital management should transform the way human capital is managed in the organization – accruing benefit to all stakeholders.

Transparency as a Driver of Alpha in Human Capital

In the context of human capital, transparency can be seen as a direct driver of 'alpha' – that is, the additional value or return an investment generates above the expected outcome based on the market or its peers. Just as investors seek alpha in financial returns, organizations can achieve human capital alpha by fostering an environment of trust and openness that enhances employee performance, customer satisfaction, and investor confidence.

The Enhanced Value of Transparency

With these developments, the transparency in human capital management is not just about complying with regulatory requirements but about embracing a culture that values open communication and ethical practices. This shift is crucial for building lasting trust with all stakeholders, thereby enhancing organizational resilience and capacity for innovation.

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