Portfolio Partners will become probably the first Australian fund manager to incorporate a human capital risk-rating in its company research process.
The introduction of the rating follows a review of published quantitative and qualitative research aimed at establishing how strong the link is between a company’s culture and people and its profitability and long-term performance.
The results of the review, initiated by Portfolio Partners, have been published in a policy paper entitled “Human Capital”, and follows the release of two policy papers earlier in the year on “Corporate Governance and Voting Policy” and “Guidelines for Environmental Reporting”.
Managing director Craig Bingham says: “We based our corporate governance papers on the premise that we are committed to ensuring that Australian companies act in the best interests of their shareholders.”
While CLERP 9 has introduced a range of corporate governance guidelines, Portfolio Partners felt it was imperative to provoke discussion on an area of corporate governance that is rarely considered as a contributor to a company’s performance.
Bingham says while many companies are now disclosing the triple bottom line in their annual reports (financial, environmental and social reporting), the social reporting component requires more disclosure in terms of human capital.
“Our review indicated that where companies have displayed a culture based on ethics and integrity, there is a direct link to profitable company performance,” Bingham says.
Overseas research has concluded that a company can minimise risk to its bottom line, gain advantage over its competitors and ensure long-term survival and growth through an integrated and strategic approach to its people management activities.
This type of strategic people management (SPM) could be characterised by a link between performance management and remuneration, the belief that staff development is an investment and a proactive approach to OHS incident minimisation.
“Companies that demonstrate these cultural characteristics and SPM indicators will outperform their competitors in the long term,” Bingham says.
As a result of the review, Portfolio Partners has developed a human capital risk-rating, which will be incorporated into the corporate governance factor, one of eight stock principles applied for company research.
The human capital risk-rating, believed to be the first of its kind in Australia, covers three key areas — corporate culture (ethics and integrity), SPM indicators and HR activities — with data to be collected via a survey completed by HR staff.
Company responses will then be assessed against an index, rather than compared to other companies, and fed into the rating process.
One of the aims of implementing this rating, which could make a contribution to industry understanding of this area in a broader sense, is to track the performance and profitability of companies against their human capital rating to quantify the relationship between culture and people and company performance over a three to five year time frame.
Portfolio Partners will also communicate their assessment to the company at their request, to assist in their ongoing people management and development.
“This may also assist or prompt companies with their social reporting and corporate governance consideration,” Bingham says.
Portfolio Partners will share the results of the research on the link between company performance and human capital once the surveys have been completed and the results back-tested over the medium term.
The fund manager is also hopeful that others will follow its lead.
“Fund managers can’t go to a conference without a discussion or seminar on corporate governance. Inevitably, fund managers will address the human capital component and its link to company performance because fundamentally, companies are made up of people,” Bingham says.
