-by Dr Tumo Kele
The King IV Report on Corporate Governance for South Africa recommends that, in formulating its strategy, the organisation should consider the connectivity and interdependencies that exist between the functions and resources involved in the strategy implementation and value creation process.
The functions referred to may include, but are not limited to the operations, human resources, marketing and communications, finance, information and technology, and other departments, depending on the nature of the organisation’s business.
The resources, according to the International Integrated Reporting Council (IIRC), include the financial capital; manufactured capital; intellectual capital; human capital; social and relationship capital and natural capital.
Traditionally, organisations and societies in which they operate have placed immeasurable value on reliable financial reporting (i.e. giving accountability on the use of the deployed financial capital). This is because there is a myriad of benefits flowing from audited financial statements. These include potential investors buying the company’s shares, lenders extending the much-needed credit facilities (if the audited figures look good, of course) and increased efficiencies in due diligence processes undertaken in the case of a possible merger or acquisition.
However, as societies evolve, there is an increasing realisation that financial capital is not the only input utilised and transformed into the organisation’s products or services. The other five capitals, listed above, hold equal importance and as such form the core part of integrated thinking (i.e. planning) and reporting (i.e. accountability).
Every report must give feedback on performance against objectives and targets, which are outlined in the approved plan (strategic, operational or any other plan). Hence, understanding the relationship and the required alignment between integrated thinking and reporting is the starting point in the process of identifying and utilising (or affecting) the capitals considered relevant to the organisation’s value creation efforts.
As part of the strategy formulation process, determination must be made of whether strategy implementation will require an increase in the organisation’s staff capacity; whether there’s a need for improvement in the human vs manufactured capital ratio; the nature of skills required, and the levels (on the organogram) at which such skills are required; whether there is a need to upskill the existing staff cohort in line with the new strategies; whether strategic partnerships with leading human capital development bodies is required; and how the current and new employees will be better deployed to increase the possibility of creating value and attaining competitive advantage. Further, it is
imperative to determine at this stage whether there is a need to supplement internal skills and capacity with professional consultants – a thorough cost-benefit analysis should inform such a determination.
The results of the above exercise should be used to improve existing human resources policies, competency frameworks, performance management and reporting instruments. Such tools must be designed to encourage fairness, transparency and relevance to the societal needs and local legislative frameworks. Policies must be developed with integrity and a robust ethical thrust. Developing human capital policies to simply tick the compliance box and then knowingly (or unknowingly) failing to implement them will only lead to a definite failure to achieve strategic goals and reduced sustainability. The organisation’s human capital structure should be a true reflection of the society and communities in which the organisation operates.
Internal human capital oversight structures must be created or improved to ensure effective application of the human capital implementation tools. Such structures must enjoy maximum support from the governing body and its committees. Undermining the internal human capital structures and overruling them on key strategic aspects is tantamount to committing governance suicide. Key human capital reports should be fully discussed, and not just submitted for noting, at meetings of the governing body. The practice of noting human capital issues mainly results in low staff morale and unwanted labour action. Both the internal and external governance structures must wake up to one reality – human beings are not machines, and as such must be treated with fairness and respect always. Further, for employees to be effective and to perform beyond expectations, ethical, motivational and excellent leadership are a pre-requisite for every organisation.
External reporting (i.e. inclusion in the integrated report) on human capital should only focus on material human capital matters. Such matters may include the overall employee head count; employment statistics in terms demographics (in line with local laws and regulations); the number of permanent vs fixed term contract vs part-time/casual staff; employee turnover rate; the extent of reliance on human vs manufactured capital; performance of human capital development programmes; and performance of employee wellness programmes. For multi-national organisations, reporting on the organisation’s performance on human rights matters is also quite significant.
All the planning, implementation, monitoring and reporting activities regarding human capital should consider the impact of this resource on other capitals and also how it is affected by the other capitals.
The rhetoric that “our employees are our most important assets” must truly show in integrated reports and allow stakeholders to determine, on the basis of this, whether they want to continue relations with the organisation or not.
Dr Tumo Kele, Gordon Institute of Business Science Full-time Faculty Member and Malefetsane Mohlakoana, SekelaXabiso Senior Manager for Technical and Quality Assurance