- ESG prioritizes human capital development and management in corporate practices.
- Investing in human capital development leads to benefits such as employee retention, talent attraction, and cost savings.
- Human capital management enhances performance, data analytics, and governance adaptability for organizations.
As Environment, Social, and Governance (ESG) matters begin to gain continued and steady momentum in the corporate world, concepts such as human capital management and development are among the main concepts at the forefront of the Social part of ESG.
It is worth noting that Human capital management and development are not new concepts. However, due to a change in the corporate and economic climate, these concepts are now front and centre.
With the rise in shareholder activism globally, institutional investors especially those in these industries, finance, consultancy, and high technology require increasingly thorough disclosures from corporations, about how they are developing the capabilities of their workforce, to improve the company’s net income.
Definitions of Human Capital Development and Human Capital Management
Human capital development can be said to be the process of developing individuals’ knowledge, skills, talents, and general capacities within an organization.
This definition was further reiterated by Mathias A. O et al they defined human capital development as a process that “has to do with to do with recruiting, supporting and investing in people, using training, coaching, mentoring, internships, organizational development and human resource management for the eventual realization of desired goal”.
On the other hand human capital management (HCM) “is the set of practices an organization uses for recruiting, managing, developing, and optimizing employees to increase their value to the company”.
Gibbons M defines HCM has “the collection of organizational practices related to the acquisition, management, and development of the human workforce—or human capital—within an organization”.
Although both terms are almost similar they are different, human capital development involves methods that concentrate on making the workforce the biggest asset the company has, these methods strictly focus on the development of employees in a company, while human capital management is the strategies implemented to maximize the value and return on investment (ROI) of the personnel in an organization.
Thus, it can be asserted that human capital management is the chicken, while human capital development is the egg. Human capital development is a branch of human capital management.
Why should companies invest in human capital development?
Reduces Employee Attrition and Turnover: Employee attrition and turnover, threaten the smooth operation of a business. When employees keep leaving a company in droves, it affects business activities, which in turn affects the bottom line.
It has been submitted that when companies develop their staff through training and other staff development programs; employees are incentivized to stay at the company and be more committed to their job.
The Corporate Finance Institute asserted that committed employees have been shown to significantly improve profitability, while uncommitted employees led companies to suffer colossal losses. Therefore, investing in staff training and development leads to staff retention and commitment which in turn improves the bottom-line.
Attracts the crème de la crème of employees: According to Hall J, post-covid there has been a plethora of remote opportunities which has made it possible for top-grade employees to be picky when it comes to where they choose to work.
Gone are the days when employees are solely incentivized to work strictly for pay, employee development is key to top talent who are constantly looking for ways to further their talents. When companies are able to attract top talents, it will increase productivity, this point is buttressed by a survey carried out by Mckinsey &Co; it was submitted that top –talent is 800 percent times more productive than their colleagues who are not as talented.
Succession planning: Human capital development aids in succession planning, by investing in training and skill acquisition of the workforce, and companies are able to fine-tune their future leaders. Often times one of the major defenses as to why boards are not diversified, and why the same set of people keep being directors in various companies is the ‘Lack of Talent’.
If companies invest in their workforce by training them to the industry’s best standards, they will always have a revolving door of talent at every level. This will, in turn, lead to better corporate governance in the company, because the best talent will always be available.
Saves the company money on recruitment: Employee turnover costs companies several million yearly. When dissatisfied employees resign or low–talented employees get fired from companies, it leaves a void in the company’s workforce, and other employees might have to step in to fill this void; which in turn might lead to burn-out and reduce productivity.
This is due to the fact that the workforce is stretched thin. In situations like this employers scramble to find employees to fill this void at all costs. It has been submitted that the losses a company accrues from employee turnover are 1.5 to 2 times more than the exiting employee’s remuneration.
Nevertheless, it was further opined that the cost of employee turnover goes beyond the cost of filling the role, other undetected expenses can have a significant impact on a company’s bottom line and corporate culture. By training staff, companies tend to retain employees and as a result, avoid the costs associated with employee turnover.
Optimizes existing talent: By training employees and helping to develop their skill sets companies can capitalize on their new knowledge and acquired skills, which could save the company money on outsourcing talent. It has been submitted that a trained workforce is more knowledgeable about the objectives and policies of the business. Furthermore, it was asserted that trained employees are less likely to make errors and are more effective.
Why should companies focus on human capital management?
Performance Management: By coordinating individual goals with the business’s strategic objectives, it encourages employees to put forth their best efforts, and promotes accountability. A performance-driven culture strengthens corporate governance by creating a results-oriented environment. An HCM system can facilitate objective performance evaluations, goal setting, and feedback mechanisms.
Data and Analytics: A cutting-edge HCM system can produce insightful data and analytics on worker productivity, engagement, turnover, and other pertinent indicators. Companies may use this data to influence decisions, pinpoint areas for development, and track the results of their governance processes. Proactive governance measures are made possible by data-driven insights.
Whistleblowing and a channel for employee feedback: An efficient HCM system has channels for grievance reporting and employee feedback. The system promotes a culture of openness and compliance by giving employees a secure and private forum on which to express their concerns, report wrongdoing, or make suggestions for change. By promoting the disclosure of corrupt or illegal actions, whistleblower protection procedures help solidify the governance structure of a company.
Revolving door of Growth and Adaptability: Corporate governance needs to be adaptable and flexible in order to deal with a changing environment. Through the gathering and analysis of data on performance, engagement, and other pertinent criteria, an HCM system promotes continuous improvement. This makes it possible for the business to pinpoint areas for development, modify its governance procedures, and act before problems or opportunities arise.
In conclusion, a strong human capital management system is essential for enhancing corporate governance because it helps to recruit and retain talent, promote performance-driven cultures, facilitate learning and development, encourage compliance and ethics, support succession planning, and make use of data and analytics. Companies may improve accountability, openness, and stakeholder confidence by integrating human capital strategies with governance goals.
An essential component of organizational growth and success is the development of human capital.
Organizations may improve their competitive advantage, advance ethical corporate governance, and foster a healthy work environment by investing in the skills and knowledge of their workforce. Effective human capital development plans that are underpinned by solid leadership and assessment frameworks promote innovation, long-term sustainability, and continual progress.
As the economic and corporate climate changes companies need to realize they are only as good as their talent pool. Companies that refuse to invest in their workforce will be left behind, while those that do, will reap its many benefits and improve their bottom line.
About the author: Oluwaseun Modupe Ogungbe is the Lead on (Research and Publications) at the Society for Corporate Governance Nigeria
About The Society for Corporate Governance Nigeria: SCGN is a registered not-for-profit organization committed to the development of corporate governance best practices in Nigeria. Today, the Society is the foremost institution committed to the development and promotion of corporate governance best practices in Nigeria.
moluwaseun@corpgovnigeria.org
Lovely write up as usual. I always look forward to read your article. I enjoyed the whole article. God bless your.
As an hr professional this is a good body of work that can be a point of reference to:
Hr professionals
Companies
Startups
We look forward to another master piece