A Lancaster academic has played a central role in a major initiative designed to improve corporate reporting, due to be launched by leading global companies at an event in New York today.

With the collective power and diversity of the entire investment chain, the Embankment Project for Inclusive Capitalism (EPIC) involves companies that represent $30 trillion of assets under management and almost 2 million employees right around the world. EPIC and the ‘big four’ global accounting firm EY was set up with the intention of making corporate reporting more useful by developing a framework and metrics to better articulate the long-term value created by businesses.

Dr Anthony Hesketh of Lancaster University Management School was invited by EPIC to work side-by-side with the leading global corporations for eighteen months to develop a new framework for understanding and reporting the contribution made by employees – or ‘human capital’ – to the success of their organisations.

Building on a framework developed by previously funded academic research, Dr Hesketh and his team examined the human capital reporting practices of the globe’s top 700 firms by revenue with results now endorsed by leaders of the global financial community.

In addition to a number of prominent CEOs, speakers at today’s launch in New York will include Governor of the Bank of England Mark Carney, SEC Chairman Jay Clayton, Governor John Kasich and Senators Rob Portman and Mark Warner. This follows a dinner held last night for Embankment Project participants, attended by former President Bill Clinton.

Dr Hesketh’s research established a clear economic case for businesses to engage in deeper and more transparent reporting of their human capital practices. Findings demonstrated:

• Human capital disclosers perform better. Those firms with higher levels of disclosure about their human capital are disproportionately represented in the highest performing firms.
• The deeper the disclosure, the greater the economic returns. Using a human capital disclosure index developed by Hesketh and endorsed by EPIC participants, analysis established how firm financial performance increases in step with human capital reporting intensity.
• Human capital disclosers focus on value creation over the long term.Firms with higher levels of human capital disclosure on average secure higher levels of operating margin and retain higher levels of earnings to reinvest in the future returns of their businesses.
• Establishing the return on investment (ROI) from human capital. Dr Hesketh has also developed a financial equation endorsed by EPIC participants to enable firms to calculate the returns generated from their investment in human capital. This demonstrated the return on invested talent (or ROIT) for those firms with deeper and wider levels of human capital reporting (£3.17 for every £1 invested) were nearly three times those with those lowest levels of human capital disclosure (£1.17).
• Human capital reporters let their numbers do their talking. Evaluating recent developments in corporate narrative reporting, Dr Hesketh’s research also revealed how those firms with greater levels of human capital disclosure use three times less words in their narratives than other firms.

EPIC has endorsed Dr Hesketh’s findings and human capital reporting indicators.

Lancaster University’s Dr Anthony Hesketh said: “The value of human capital has evaded accountants for half a millennium.

“Changes in the way society values our largest firms, and the role people play in this value creation, demands a higher level of transparency from firms about how they enable their employees to thrive at work. People are less motivated to work for firms whose levels of human capital disclosure fall beneath the standards of their peers.

“Reporting standards are currently running behind the demands of workers and wider society, but EPIC has opened the conversation to address this anomaly and we are looking forward to taking the EPIC framework on to the next level as firms deepen their understanding about their intangible value.”

The health of corporations and financial markets – and public trust in both – is critical to economic growth. Our collective future strongly depends on vibrant and sustainable capital markets. Market participants have a role to ensure long-term value creation that benefits all.

Today, a company’s value is increasingly reflected not just in its short-term financial performance, but also by intangible assets such as intellectual property, talent, brand and innovation, as well as impacts on society and the environment that are not fully captured by traditional financial statements. To understand this value, participants in EPIC believe it is essential to focus on and measure:

• Talent: the way companies manage their human capital when it comes to compensation and benefits; recruitment; training and development; diversity and inclusion; well-being and creating a purpose-driven culture of engagement.
• Innovation: fulfilling unmet needs and maintaining focus on the end user during the innovation process and fostering trust in the organization.
• Society and environment: the impact on external stakeholders and communities by contributing to business-relevant social and environmental goals.
• Governance: the effectiveness of the board in providing appropriate oversight, governance mechanisms to ensure board quality and independence, and the ability of leadership, in conjunction with the board, to develop and assess long-term strategy.

The report released today, which is available at https://www.epic-value.com, outlines several of these intangible assets and possible metrics for helping companies communicate their ability to generate long-term value to both investors and society as a whole. The group believes that these findings serve as a contribution to ongoing discussions around long-term value creation and, at the same time, serve as an impetus for discussions that have yet to begin.