The Materiality of Human Capital to Corporate Financial Performance

Abstract

Institutional investors have become increasingly interested in analyzing long-term investment risks and rewards posed by environmental, social and governance (ESG) factors. A growing body of data and analytical tools has been developed to assist in the task, but the focus has largely been on environmental and governance matters. This paper helps fill in the gap on social factors, specifically those involving how companies manage workplace relationships, a topic often referred to broadly as human capital or human resource (HR) management. We examine both a wide range of HR policies and separately those that relate directly to employee training.

Our survey of the literature on human capital found 92 empirical studies that examined the relationship between HR polices and financial outcomes such as return on equity, return on investment and profit margins. We conclude that there is sufficient evidence of human capital materiality to financial performance to warrant inclusion in standard investment analysis. However, we also find that doing so remains a challenge for a number of reasons. These range from the fact that companies do not provide investors with comparable data to a lack of consensus over which combinations of policies have the most impact on financial outcomes.

Keywords: human capital, human resource policy, investment, corporate financial performance, ESG materiality

JEL Classification: G3, L1