Concept of ‘human Capital’ Finally Getting the Recognition It Deserves

Yomiuri Shimbun file photo
Prime Minister Kishida has stated that “investment in people” is one of his priorities.

A concept described by Adam Smith in his 1776 book “The Wealth of Nations” is gaining new importance in our 21st-century post-pandemic world. Smith recognized that people who spent time and effort to become educated or gain specialized work skills were increasing their own value. He likened them to expensive machines.

Today we call that “human capital.”

Economist Gary Becker and others studied the concept more deeply from the 1960s onward. Corporate human resources, previously viewed as the “cost” of labor, became seen as “capital” — a source of corporate growth and an object of investment.

With rapid changes in the business environment after the pandemic, companies’ nonfinancial information is attracting more attention. Interest in human capital is exceptionally high, and systems requiring listed companies to disclose related information have been established.

In 2018, the International Organization for Standardization published “ISO 30414,” a standard setting out the world’s first disclosure guidelines on human capital. In 2020, the U.S. Securities and Exchange Commission made human capital disclosure a rule. In Japan, the Corporate Governance Code, which sets forth principles of conduct for listed companies, was revised in 2019 to encourage disclosure, and the Financial Services Agency has also required disclosure beginning with annual securities reports for the fiscal year ending March 2023.

As an example of disclosure under the new FSA rules, the report by Sugi Holdings, which operates drugstores such as Sugi Pharmacy, is fascinating. In a pharmacy, a single mistake can cost lives. In an organization where workers feel they have a high level of psychological safety, employees can immediately consult with the company if they feel something is “a little bit, well, not quite right.” That is why the number of whistleblowing cases is disclosed as human capital information. The company believes that the higher the number, the fewer serious mistakes there will be.

The company also includes data in its integrated report showing that stores with employees with high work engagement have 10% higher work performance than stores without such employees. These information disclosures amount to a declaration that corporate value will increase if work engagement is enhanced and that serious accidents can be prevented by creating an environment with a high level of psychological safety.

However, according to a survey of Japanese companies conducted by ABeam Consulting in 2022, only 11.5% of companies responded that they have companywide human capital management practices, and most of the disclosed information is not detailed. Investment managers who focus on environmental, social and governance (ESG) factors are also increasingly using divestment to fulfill their fiduciary responsibility by selling shares in problematic companies and thereby encouraging them to reform their operations. A delayed response to a disclosure request can lead to a company being viewed as unattractive by investors, which can reduce corporate value.

In their book “The End of Accounting and the Path Forward for Investors and Managers,” Prof. Baruch Lev and his colleagues at New York University analyzed the relationship between earnings growth and financial improvement of U.S. companies and their stock price trends. According to the book, the degree to which business performance is reflected in stock prices has declined from the 80% to 90% range in the 1950s and 1960s to 50% today. Lev and his colleagues recommend that existing financial statements be boldly reconfigured and that “invisible assets” such as human resources and intellectual property be disclosed to investors in an easy-to-understand manner. An era is quickly approaching in which the degree of disclosure of nonfinancial information will determine whether a company survives.

One of the key indicators will be employee engagement, which has been confirmed to correlate with a company’s operating margin and labor productivity. According to Gallup’s “State of the Global Workplace: 2023 Report,” 23% of global respondents said they felt engaged in their work in 2022. By country, Mali had the highest rate at 47%, and the U.S. was the top developed country at 34%. Japan ranked last with 5%, unchanged for the fourth consecutive year. Low engagement in a country where the seniority system remains entrenched is unfortunate for companies and employees alike, as it means that employees are forced to work for one company until retirement without job satisfaction or the ability to change jobs.

How do you create a situation in which employees can change jobs and are highly engaged?

The Sony Group conducts an annual engagement survey of all employees. Management compensation decisions are made in consideration of the degree of improvement in engagement scores and the results of diversity and other initiatives and is linked to management and HR strategies.

In areas such as retail and logistics, where people rather than AI are needed for the last mile, it is also essential to solve the problem of labor shortages. West Japan Railway Co., suffering from labor shortages, will allow employees to take a leave of absence for up to three years starting in November in connection with life events such as marriage and childcare. The program also covers same-sex marriages and de facto marriages.

JR West President Kazuaki Hasegawa said: “We aim to foster a corporate culture where every employee can have high work engagement and a sense of growth. While encouraging employees to have a healthy sense of urgency, management will engage in dialogue with the front line and encourage self-innovation.” To achieve human capital management without widening inequalities, the government should increase public investment in human capital and coordinate cooperation between industry, government and academia to make investment more effective.

Political Pulse appears every Saturday.

Shingo Sugime

Shingo Sugime is a staff writer in the Economic News Department of The Yomiuri Shimbun Osaka.