The Materiality of Human Capital to Corporate Financial Performance

May 2015

Webinar: Review of Research Findings and Q&A Monday, May 11, 2015, 2:00 PM ET

Investor Responsibility Research Center Institute & The Pensions and Capital Stewardship Project at Harvard Law School's Labor and Worklife Program.

Agenda

• Introductions

• Research Review

• IRRCi Perspective

• Q&A

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Webinar Logistics

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• Attendees in listen only mode. • Questions encouraged. Type using the

“Question” function, and we will answer following report overview.

• You will receive email with link to replay of this session.

• This report and all others available at www.irrcinstitute.org

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Speakers

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Aaron Bernstein Report Co-Author Pensions and Capital Stewardship Project at Harvard Law School's Labor and Worklife

Larry Beeferman Report Co-Author Pensions and Capital Stewardship Project at Harvard Law School's Labor and Worklife

Jon Lukomnik Executive Director, Investor Responsibility Research Center Institute

• Not-for-profit established in 2005.

• Funds, disseminates research on range of issues at intersection of corporate responsibility, investors informational needs.

• Examines the capital market context that impacts how investors and companies make decisions.

• Sponsors annual research award.

• Five Year Impact report available.

• All research available at no charge.

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About Investor Responsibility Research Center Institute

• The Alignment Gap Between Creating Value, Performance Measurement, and Long-Term Incentive Design

• Nanotechnology and the S&P 500: Small Sizes, Big Questions • The Impact and Future of High Frequency Trading • What Investors Need To Know About Cybersecurity • Informed Options Trading prior to M&A Announcements: Insider Trading? • Board Oversight of Sustainability Issues • Integrated Financial and Sustainability Reporting in the United States • Growing Traction For Environmental, Social Shareholder Proposals • Controlled Companies in the Standard and Poor’s 1500: A Ten Year Performance

and Risk Review • Executive Superstars, Peer Groups and Over-Compensation • Voting Decisions at US Mutual Funds: How Investors Use Proxy Advisors • Discovering Shale Gas: An Investor Guide to Hydraulic Fracturing

Download at no cost at www.irrcinstitute.org

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Broad ResearchRecent Studies Include:

Environmental, Social and Governance (ESG)

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• Many materiality studies on “G” and growing number on “E.”

• “S” far less studied. A catchall category including issues such as labor and human rights, community relations.

• We focus on human resource (HR) policies, including training.

Materiality

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• Hundreds of HR studies, excluding employee job satisfaction.

• Standard investment metrics: TSR, ROE, ROI, ROA, ROCE, profit margins.

• Focus on materiality acceptable to SEC and U.S. securities law. Normative a separate discussion.

Study Approaches

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• Most use regression analysis.

• Some link to stock prices, objective, perceived measures.

• Not a meta study. Metrics and data too diverse.

• Span decades, dozens of countries and industries.

• Roughly half US and UK companies.

Summary of Studies

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Training and HR

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• Many studies include training as one element.

• Many report positive correlations when training considered by itself.

• We look separately at training and HR policies.

• Some of latter include training as an element of HR policy.

Training and Performance

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• Enhances employee knowledge, skills, abilities.

• These improve productivity, product and service quality, customer satisfaction.

• Result: higher sales, profitability, stock valuations.

• General vs. specific training.

Measures of Training• Training expenditures:

oPer employee. oPer firm. oAs a percentage of total payroll.

• Existence of a training policy.

• Fraction of workforce trained.

• Time devoted to training.

Example of Findings

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• 2004 study of 388 U.S. companies between 1996 and 1998.

• Top quartile of training expenditures per employee averaged 31% annual stock price returns.

• Bottom quartile averaged 15%.

Examples of HR Policies

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• Compensation and Benefits • Job and Work Design • Training and Development • Recruiting and Selection • Employee Relations • Communication • Performance Management and Appraisal • Promotions

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Policy Bundles

• Some research looks at discrete policies.

• Since mid 1990s most look at bundles of policies.

• Some use term high performance work systems.

• Seminal 1995 study started focus on high performance work systems.

• Examined 968 U.S. firms with 100 or more employees.

• Found positive correlations to Tobin’s Q and return on capital employed.

Example of Findings

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Examples of Limitations

• Causality: Good policies=better performance, or reverse?

• Bundles: Which policy combinations?

• Black Box: How do policies affect performance?

Conclusion

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• Investors: Ask companies and ESG providers for data.

• Companies: Describe to investors: oHR Policies and their relation to HR and

business strategies. oKPIs used to track to implementation

and impact. • ESG providers: Market opportunity.

From the IRRCi Viewpoint

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• The “S” in “ESG” has long been tempting but challenging for investors.

• Taking advantage of human capital management insight is difficult to implement.

• Lack of standardized metrics.

• Intuitive that it should make a difference, particularly as the economy becomes more service oriented.

• Physical capital has become less important; human capital more so.

• In 1990, manufacturing was the leading employer in 36 states. By 2013 that was down to 7.

• In 1990, services (health care/social assistance, travel) was the leading employer in 2 states. By 2013, that was up to 39.

• But, rich reward for those who get it right.

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• Type using the “Question” function. • We will read questions aloud and speakers will respond.

Contacts

Jon LukomnikExecutive DirectorIRRC Institute+1.646.512.5807jon@irrcinstitute.org@irrcresearchwww.irrcinstitute.org

Larry BeefermanCo-Author & Project DirectorThe Pensions and Capital Stewardship ProjectHarvard Law School's Labor * Worklife Program(+1) 617.495.9265lwb@law.harvard.eduwww.law.harvard.edu/programs/lwp

Aaron BernsteinCo-Author & Sr. Research FellowThe Pensions and Capital Stewardship ProjectHarvard Law School's Labor & Worklife Program(+1) 617.495.9265abernstein@law.harvard.eduwww.law.harvard.edu/programs/lwp