Accounting for People

A DTI consultation document

Comments from ACCA
July 2003

Executive Summary

The Association of Chartered Certified Accountants (ACCA) welcomes this opportunity to comment on the consultative document "Accounting for People" issued by the DTI Task Force on Human Capital Management (HCM). As a professional accountancy body, ACCA is well aware of the importance of HCM and the role which it plays in enabling us to fulfil our responsibilities to our 350,000 members and students around the world.

ACCA has been involved with the development of integrated reporting on economic, environmental and social issues since the early 1990s. Much of the detailed content of this response draws upon that experience. It follows that we support the general thrust of the Task Force arguments.

ACCA is fully supportive of the Task Force aim of improving disclosures in the area of human capital management. We believe that this is likely to best be achieved via a link with the mandatory OFR, or through separate disclosures in a formal social/sustainability report. The Government should remain vigilant and be prepared to mandate a minimum core of disclosures should the OFR route prove unsuccessful. In supporting the objectives of the Task Force, however, we should stress that the aim of disclosure should not simply be to demonstrate "value added" by "human capital". The aim should also be to formalize, and if necessary regulate for, an important area of corporate accountability.

We do not believe that significant progress has been made in the area of applying financial valuations to human resources. For the time being at least, the focus of attention should be on identifying HCM metrics which are of relevance to the wider stakeholder community.

We encourage the Task Force to provide guidance which will have the effect of integrating the corporate HR function more closely into the strategic planning and finance functions.

We also call on the Task Force to explore the links between reporting on human capital and the well-established and rapidly growing practice of triple bottom line reporting � especially the approach to sustainability reporting pioneered by the Global Reporting Initiative. To approach HCM issues only through the lens of the annual report and accounts package is to take too narrow a view of the importance of this issue.

Research evidence

Previous ACCA research has shown that organisations generally have been poor at reporting on employment-related issues. Recent research commissioned by ACCA shows that, at present, organisations use a wide variety of HCM metrics and that there is little agreement as to which are considered most important from either the internal HCM perspective or an external public reporting perspective. Out of 33 human resource measures identified by the research, only seven are currently used by more than 50% of the respondents, and only ten are identified as important by more than 70% of respondents. These are:

Measures currently used	Measures deemed important
Absenteeism (70%+)	Absenteeism rates (84%)
Accident rates (70%+)	Client satisfaction surveys (84%)
Client satisfaction surveys (60%)	Competencies (77%)
Competencies (51%)	Cost of people (75%)
Cost of people (65%)	Job satisfaction (85%)
Training and educational costs (69%)	Leadership (84%)
Turnover rate (67%)	Learning (75%)
	Organisational commitment (72%)
	Return on training (71%)
	Turnover rate (79%)

This research is discussed in more detail in the body of our response. ACCA will be happy to co-operate with the Task Force on any of the issues arising from our comments.

Response to questions raised in the consultative document

A number of priority concerns are identified in paragraph 5 of the consultative document. In this Executive Summary we provide brief answers to these challenging questions. These brief answers are expanded on in the main body of this response.

Q1. The value of organisations reporting on what they identify to be their most important HCM issues.

We believe that there is considerable value attached to improved reporting of HCM issues. The growth of socially responsible investment (SRI) is one important driver in this respect. In addition, improved reporting of HCM issues will enhance relationships with all stakeholder groups, not just the investment community. As noted above, however, we have some concerns over the suitability of the OFR as a vehicle for such disclosures. This is because the OFR is primarily an investor directed document and much employee data is of interest to a wider set of stakeholders.

Q2. Whether, in addition to organisation-specific reporting, all organisations should be encouraged to report on the size and profile of their workforce, employee motivation, training and development, and remuneration and fair employment.

All organisations should be encouraged to report on these issues. ACCA is already committed to this vision through its long-term involvement in developing the sustainability reporting guidelines published by the Global Reporting Initiative. Indicators reflecting HCM metrics are a core part of the GRI guidelines, and the guidelines themselves have been adopted by nearly 300 large global companies since their publication in June 2000.

Q3. How far there should be central guidance on the most appropriate numerical measures (metrics) to be included in these reports, or whether this is something best left to individual organisations.

ACCA recommends that the Task Force reviews the core GRI metrics and assesses their suitability for a voluntary UK HCM reporting regime. The GRI guidelines are the result of a multi-stakeholder engagement process involving industry, the labour movement, investors and non-governmental organisations (NGOs) and therefore possess a high level of legitimacy and authority.

Q4. How best to ensure that HCM is both widely reported and the information is trusted by investors and other stakeholders as relevant, reliable and consistent, and what obstacles there might be to such reporting.

ACCA believes that the best way of ensuring widespread and consistent HCM reporting will be to include it as an issue for consideration by the proposed "Standards Board" which will eventually take responsibility for providing guidance on the content of the mandatory Operating and Financial Review statement.

The major obstacle to wider disclosure is likely to be the difficulty of demonstrating in any quantified manner that HCM issues cross the materiality threshold for OFR disclosure purposes. In the event that companies fail to improve significantly their disclosure performance, the Government may wish to consider mandating a set of core HCM disclosure requirements.

The issue of creating trust is always problematic. The inception of a mandatory OFR regime should, however, improve the quality of organisational stakeholder engagement processes. If the OFR is not the only target of the exercise, we believe that the Task Force should also consider some form of endorsement in respect of the disclosures recommended by GRI.

Q5. How best to encourage progressive improvement in reporting standards, and in particular whether:
- a body should be established charged with monitoring and encouraging development of standards over time, including the role, composition and funding of any such body
- there should be some recognition for organisations that meet certain standards
- there should be some award for exemplary or significantly improving organisations.

As noted above, we understand that a new Standards Board may be created to deal with the detailed contents of the mandatory OFR. In the first instance, we prefer that this body is charged with the responsibility for developing guidance on HCM reporting.

A number of award schemes identify excellence in corporate communications. Since 1991, ACCA itself has been running an award scheme to recognise excellence in environmental and sustainability reporting. We think it quite likely that the Task Force will be able to identify a number of potential opportunities to identify and reward exceptional performance in the HCM reporting area.

Q6. Whether there are any special considerations that would mark out the public from the private sector, whether the same recommendations should in principle apply across the board or whether distinctive reporting requirements should apply to each sector.

We believe that the eventual recommendations of the Task Force will need to reflect the segmented nature of the reporting domain. The reporting requirements for limited companies in general, and large listed companies in particular, are different to those for reporting requirements from public sector and not-for-profit organisations. The Task Force will need to identify those organisations which are influential in determining reporting disclosure requirements and recommendations in both the private and public sectors and to explore with them the general applicability of HCM reporting guidance. A comment from one of our members is especially pertinent in respect of this private sector/public sector question:

"Many of us who handle accounts on behalf of charities and organisations in the voluntary sector might feel that reporting on HCM will be a very useful tool in assessing the overall performance. Indeed, I find it strange that the consultation paper makes no reference to the charitable sector. I feel that incorporation of the ideas presented would be well received by readers of charity accounts."

Our experience with the GRI has demonstrated that generic metrics have only limited appeal. In the sustainability reporting field, there is a high level of demand for sector specific performance metrics �extending to special requirements for small and medium sized enterprises, public sector organisations and the not-for profit sector.

Finally, we urge the Task Force to provide or encourage the development of guidance which will have the effect of integrating the corporate HR function more closely into the strategic planning and finance functions. If this can be done successfully, it has the potential to become an important source of competitive advantage.

Accounting for People � Detailed Comments

Accounting for/reporting on Intangibles

As business increasingly "dematerialises" and becomes service and IT focused, so the ratio of tangible to intangible assets shrinks. Some estimates put the proportion of intangibles supporting total market capitalisation of companies like Microsoft and Cisco Systems at 70 or 80 per cent.

For financial accountants, this represents a major area of concern. We are rarely permitted to capitalise internally-generated intangible assets such as brands and � of particular relevance to this response � we have no accepted methodology for valuing human capital from a balance sheet perspective. As a result, balance sheets significantly fail to explain � or support � the valuations placed on a company by the market.

Issues like innovation continue to be dealt with in narrative form, if at all. Recent developments in narrative reporting via the Operating and Financial Review statement are, however, partly designed to close this intelligence gap and to provide investors with a much clearer picture of how wealth is both created and sustained. Disclosures in respect of product innovation, patents applied for, research and development trends and brand support are all part of filling in the gap between the balance sheet and the market valuation.

Accounting for human capital

Accounting for human capital (or people) is probably a subset of either accounting for intangibles (except that human beings are not intangible) or triple bottom line reporting. The starting point for any discussion on human asset accounting is usually a statement in the Chairman�s report to the effect that "our most important asset is our employees". It then transpires that all employee-related costs are expensed immediately and, with the possible exception of transfer fees related to sporting stars � particularly footballers � never appear in the balance sheet at all.

But, of course, employees are valuable. As well as wages and salaries, companies also incur significant training expenditures. In the case of directors, companies make huge commitments in terms of share options (usually ignored for accounting purposes but soon to be expensed along with all other employee related costs). Companies take out "key person" insurance policies and place restrictions on the ability of disaffected employees to move to competitor organisations. In part, they take these precautions because they do recognise the value of the human capital which they employ and the loss which they are likely to suffer should the employer/employee relationship end unfortunately or acrimoniously.

It seems unlikely, however, that the traditional approach to dealing with employee related costs is going to change in the near future. Values based approaches � discounted or otherwise � are simply not within our reach. What is more likely to happen is that companies will begin to disclose more pertinent information relating to employees so that better informed analysis and bench-marking can take place. These disclosures will be in the OFR, a separate section of the annual report, perhaps called an "Intellectual/human capital" report, which will bring together information relating to both costs and innovation or a stand alone social/sustainability style report.

In fact, it may be easier to establish a causal link between profitability and growth on the one hand and HCM on the other if disclosure comes in the form of non-financially quantified employee metrics rather than as a financial "guesstimate" in the intangibles section of the balance sheet. Many companies are already disclosing significant amounts of employee related data in social, sustainability and environment, health and safety reports. These disclosures are discussed further in the section below dealing with the Global Reporting Initiative.

Current aspects of personnel-related disclosures � the case of equal opportunities reporting

Research conducted for ACCA by the University of Glasgow in the area of equal opportunities indicated that UK companies are generally poor at communicating discretionary information relating to employees. Equally, they also appear to be poor at complying with even the minimal level of mandatory disclosures which do currently exist � these are mainly in the area of disability.

The recommendations of the Task Force will be important in ensuring that currently mandated disclosures are complied with by the majority of UK companies. But, if our research findings in the sensitive area of equal opportunities hold true across the piece, the Government will need to do more than simply "encourage" voluntary disclosures in the employment related area.

Employee disclosures in the GRI

The sustainability reporting guidelines (2002) of the Global Reporting Initiative contains a section on performance indicators dealing with labour practices. To date, about 300 companies, mainly large multi-nationals, are applying the GRI guidelines. The relevant extracts are set out in summary form below.

This set of disclosures represents an aspect of company/employee relations which is given insufficient space in the consultative document. This is that organisations have responsibilities to their employees and that these responsibilities can and should be accounted for and disclosed. There is an implied argument in the document that disclosures are only useful as an aid to closing the valuation gap. We should like to see any final guidance acknowledge both the drivers of disclosures.

We recommend that the Task Force examines the detail of the GRI metrics set out on the next page. These metrics were produced through an extended, internationally structured multi-stakeholder discourse involving employers, trades unions, investors and NGO�s. They can, therefore, lay claim to a high level of legitimacy in terms of being preferred disclosure requirements.

Core Indicators	Additional Indicators
1. breakdown of workforce, where possible by region/country, status, employment type and by employment contract.	12. employee benefits beyond those legally mandated
2. net employment creation and average turnover segmented by region / country	13. provision for formal worker representation in decision-making, including corporate governance
3. percentage of employees represented by independent trade union organisations or other bona fide employee representatives broken down geographically	14. evidence of substantial compliance with the ILO Guidelines for Occupational Health Management Systems
4. policy and procedures involving information, consultation and negotiation with employees over changes in the reporting organisations operations	15. description of formal agreements with trade unions or other bona fide employee representatives covering health and safety at work and proportion of the workforce covered by any such agreements
5. practices on recording and notification of occupational accidents and diseases, and how they relate to the ILO Code	16. description of programmes to support the continued employability of employees and to manage career endings
6. description of formal health and safety committees comprising management and worker representatives and proportion of workforce covered by any such committees	17. specific policies and programmes for skills management or for lifelong learning
7. standard injury, lost day, and absentee rates and number of work-related fatalities (including sub-contracted workers)
8. description of policies or programmes (for the workplace and beyond) on HIV/AIDs
9. average hours of training per year per employee by category of employee
10. description of equal opportunities policies or programmes, as well as monitoring systems to ensure compliance and results of monitoring
11. composition of senior management and corporate governance bodies , including male/female ratio and other indicators of diversity as culturally appropriate
Source: "Sustainability Reporting Guidelines", Global Reporting Initiative, 2002.

ACCA research on labour related performance indicators

Research conducted on behalf of ACCA in 2002�2003 by Birkbeck College, London, has identified a number of employee related performance indicators which are in common use in the UK today. It also records corporate views about the validity and feasibility of the HCM reporting process. A summary appears below.

Respondents stated that monitoring and measuring human resources is important for two main reasons. First, it will improve the accountability of the human resources function. Secondly, it will facilitate strategic planning by giving information about whether people resources will be available to achieve strategic plans. It will also make the costs of different actions visible and it will provide a focus on people as an investment rather than as an expense.

The evaluation of human resources was seen as important not only for the HR function but also for senior management and the CEO. Line management and the accounting function were identified as having only moderate interest in the valuation of human resources. 50% of the respondents stated that the HR function should drive the evaluation of human resources because it has knowledge and expertise in dealing with human resources and access to the appropriate data.

One third of respondents considered, however, that HR professionals do not have the necessary skills to carry out this task. 35% of the respondents stated that a multifunctional team should drive the monitoring and measurement of human resources; this will marry the expertise of the HR and accounting functions and facilitate the acceptance and understanding of these measures across the organisation.

Respondents were asked to indicate which of thirty-three human resource measures, are used in practice and which are considered important, irrespective of whether they are currently calculated. Only seven measures were used by more than 50% of respondents. These were:

absenteeism
accident rates
training and educational costs
turnover rate
cost of people
client satisfaction surveys
and
competencies.

When asked about how important the measures were, over 70% of respondents identified ten as being important. These were:

job satisfaction
leadership
absenteeism rates
client satisfaction surveys
turnover rate, competencies
cost of people
learning
organisational commitment
and
return on training.

Only four measures were identified by fewer than 25% of the respondents as being important with nineteen having the support of between 30% and 70% of the respondents.

Having such a wide range of measures considered to be either of moderate or high importance seems to indicate that there is no consensus as to what should be measured and may also indicate that a prescriptive approach is neither feasible nor desirable. Instead, the way forward may be a flexible approach with organisations being able to use those measures which are most appropriate to their circumstances.

The main barriers to the evaluation of human resources were identified to be:

lack of time and resources to progress the area
lack of understanding of the area by others in the organisation
uncertainty as to whom the information should be reported
lack of interest in this area by senior management
lack of reliable and valid measures which are not overly complex and difficult
lack of widely accepted measures and models
concerns as to quantifying people
and
lack of expertise in the human resource function in relation to evaluation of human resources.

Very few respondents had detailed plans in place in relation to implementing the evaluation of human resources, but 70% of the respondents indicated that they have plans to introduce some measures in relating to human resources over the next five years. When asked how much progress in the evaluation of human resources would take place in the next five years, only 13% of the respondents considered that there would be significant progress, with most identifying little or moderate progress, citing the barriers outlined above.

Overall, the survey shows that, although measuring human resources appears to be important to UK organisations, most of them do not attempt any financial valuation of their human resources; furthermore, plans to implement any such valuation are at a very early stage. Despite the interest in valuation, the survey concludes with the view that there will be little or moderate progress in the area over the next five years. This can be seen from the selection of quotes from qualitative comments given by respondents to the survey:

"I feel there is a lot of scope in this issue but other demands prevent it from being progressed significantly"

"Not a high priority for senior management in the short term"

"Lack of time and staff resources".

The researchers suggest that there should be more research into valuation methods and models and their practical implication; both human resource and accounting professionals should be engaged in the debate on valuation and its implementation in practice.

CONCLUSION

Overall, ACCA believes this is an exceptionally welcome document. If it leads to the introduction of a substantive form of employee/employment reporting, it is to be warmly encouraged. The points below are drawn from the views of various members who have submitted comments. We feel that the comments are useful and deserve separate reporting.

"The paper, the subject and the focus on a reporting standard are to be very warmly welcomed".

"The Task Force may have gained from a more careful examination of the very extensive experience that the UK gained with employment and employee reporting in the 1970s and 1980s. Although the language and, to a degree, the focus, is different, we are sure that lessons can be learned. There is no need to always reinvent wheels".

"We remain sceptical about the "capital" concepts when applied to employees (and in the sense of social capital more generally). It smacks of linear relationships and tractable situations when, as the Task Force has found, the links between employee well-being and economic performance are far from obvious".

"Some would have been more persuaded by the thrust of the paper had the Task Force taken a wider perspective. The Task Force should also examine the work-place pressures that employees have to face and the growing epidemic of stress and stress-related complaints within the workforce. These represent the dark side of the "human capital " movement, but no less crucial for that. It would take a solution to both sides of the issue to make progress".

"It would have been helpful to have seen a more explicit consideration of why companies might disclose. The emphasis is still on quasi-voluntary reporting, which means that information which will discharge accountability is less likely to meet with industry pleasure. Like the Company Law Review, the Task Force has chosen to ignore the opportunity to develop a more serious form of accountability for big organisations. This is an another opportunity lost".

"It is good to see some of the more important and robust metrics finding their way into recommendations. We hope that that these metrics (turnover, illness etc) are not watered down as the proposals are developed".

"We are moving towards a greater emphasis on the OFR but we would nevertheless prefer a more formal recognition of, and move towards, triple bottom line reporting and accountability. This does not fit comfortably within an OFR structure".

"The overall tone of the document gives cause for concern. It is exemplified clearly, but not only, in the model shown on page 4 in which the "HR outcomes" are shown as a means to an end - the end being financial performance. Working life, with all its implications for self identification, social cohesion and social justice has intrinsic value and should not be regarded merely as instrumental in the creation of financial value".

"Financial viability is, of course, a sine qua non for companies, but the intrinsic worth of other aspects of social endeavour should be born in mind. There has been a lot of work done in the development of "social reporting" by the Global Reporting Initiative and others in the context of "triple bottom line reporting": the tone of the consultative document appears inconsistent with this work".

"We are in agreement that it would be beneficial to formally acknowledge the contribution that people make and that they are 'accounted' for. We are concerned however that we could end up with a rigid and too formal structure to do so. Given the very nature of human capital, it could be hard to complete a report successfully for potential compliance purposes, especially where a company may take an innovative and groundbreaking approach that is brilliant and welcomed by its workers but is not catered for by any reporting scheme".

Notes

'Towards Corporate Accountability for Equal Opportunities Performance', Adams, C. & Harte, G. ACCA, 1999.

'Valuing Human Resources', Verma, S. & Dewe, P. ACCA forthcoming