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Focusing on Human Capital Risk

January 05, 2021

Human Capital is as an important intangible asset, providing a significant contribution to a company’s profitability despite not being listed on its balance sheet and Human Capital related risks therefore need to be managed.  Human Capital has been negatively impacted as result of recent developments relating to the pandemic: people tend to work longer hours, exercise less, worry more about their families and the future, and potentially have their eating and sleeping habits disrupted - all leading to increased levels of stress and ultimately physical and mental health problems.  This invariably affects a company’s performance and creates more problems for its workers down the line. 

Health is a key component of Human Capital quality, and the link between the profitability of an organisation and the health of its employees is confirmed by a number of studies that consistently shown that workplace stress related costs to the employers in the US and EU are around $500bn and €500bn respectively. 

Poor employee engagement in the workplace is another important factor affecting productivity, and costs US companies roughly $450–$550 billion annually.  It is well documented that inspired people can deliver over twice as much as their ‘merely satisfied’ colleagues.  Companies that focus on productivity through a more inspired workforce show a 30-50% higher operating margins growth than their industry peers.

Given the importance of Human Capital in terms of its impact on a company’s bottom line, the risk of Human Capital underperformance must be substantial. However, many do not measure or manage this separately, and are, therefore, unaware of how much of this risk is carried in their business and how effective the mitigation is. 

Human Capital risk, if it materialises, can disrupt the execution of both the strategic and operational objectives of an organisation, and therefore should be at the top of the list of things the Boards must pay attention to.   However, often, responsibility for this risk falls somewhere between the Enterprise Risk Management (ERM) and Human Resources (HR) departments, which do not always agree on the impact and management of Human Capital risk.  The only way to ensure this risk is properly addressed is for boards and the business to take ownership. 

Taking into account the potential disruption of the business and the inherent upside in monetary rewards if managed properly, companies should consider establishing a formal Human Capital risk process with business ownership and participation, and a standing group that oversees this process.

 

Oleg Lebedev is a Partner at Feel Good In Companies and a Co-Regional Director at the London Chapter of PRMIA

Tags: Oleg Lebedev
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