More clarity needed in key person risk management: Report

ESG researcher Regnan is calling on large corporates to provide greater disclosure around management of human capital, saying long-term investors should have greater oversight of strategic approaches to managing key people whose contribution - or lack of - has a material impact on share value.

In a new paper, Regnan argues the preservation of a company's share value and growth has never been so dependent on effective management of its people, with disruptors like artificial intelligence reshaping the modern business environment.

The paper aims to highlight the gap in knowledge of long-term investors and provide companies with practical means of better communicating the issues of strategic importance related to human capital management to current and future investors.

The paper reads: "Because human capital, its management, and the levers by which these translate to financial value in companies are less easily quantified, it receives relatively scant attention in corporate communications to investors."

It continues that the limited information available to inform investor judgements around human capital actions material to value and outlook means the market's recognition of and reward for investment in superior practices remains inaccurate and disproportionately distributed.

Regnan chief executive Pauline Vamos said tactical human capital management is a key foundation of successful strategy execution.

"We hear companies claim that 'people are our most important asset' so often that it has almost become cliched. Yet the reality is that for the majority of companies today, a significant portion of company value is deeply connected to its people. That is, the value created through the knowledge, skills and capabilities that reside in employees, as well as their shared knowledge as a group," Vamos said.

She continued that the true value story of a company's people is rarely told well in corporate disclosures.

"Without a fulsome picture communicated to the market, it is likely that company valuations will be misinformed. And this affects the entire investment chain," she said.

Regnan makes a number of recommendations, including that company disclosures should include information on key employee movements relevant to the operational performance of the business; availability of specialised skills where this may have affected capability to address business model threats; and strategies to retain key management personnel and critical employees.

"Accelerating business disruption gives greater urgency to communication of human capital responses, especially where business models are vulnerable to lower-cost competition, technology-led structural change or competing business models," the paper reads.

Read more: RegnanESGPauline Vamos
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