When we talk about capital as a way to create value for shareholders, we typically refer to financial or physical capital. However, human capital — a company's workforce and its combined skills and attributes — should not be overlooked. Despite being historically undervalued by investors, it can have a powerful influence on profitability, both positive and negative. The failure to address it strategically has been starkly evident since the COVID-19 pandemic, as labor disputes about worker rights and protections frequently appear in the headlines. But when deftly managed, human capital is a critical source of sustainable and scalable competitive advantage to organizations.
One reason why human capital has been undervalued is that it has been previously difficult to quantify. But there has been progress on this front as recent research has helped investors more concretely understand the tangible impact of strong and effective human capital management. The $457.9 billion California Public Employees' Retirement System, Sacramento; University of Oxford; and Schroders recently worked together on a research framework that confirmed what many sophisticated investors understood to be true: Human capital can act as a clear driver of company productivity and profitability.