Human Capital Analysis, Corruption, and Corporate Transparency

Introduction: The Importance of Human Capital

Although not always acknowledged — especially in an increasingly automated age — human capital is critically important in any company. In corporate organization, the significance of recruiting and retaining human capital (HC) is essential for generating the ongoing innovation that a firm needs to succeed. Given the crises evident in so many companies in recent years, it is necessary to deeply analyze key human capital trends as business has evolved. The events of the last decade have seriously affected human perceptions of the market, and this makes an understanding of human capital more important than ever.

HC Analysis and Existing Frameworks

Human capital is undeniably a central issue in business. Humans are always at the center of commercial activity — after all, machines and raw materials do not buy commodities; people do. Royal and O'Donnell theorize that commoditization has made it necessary to better analyze market intangibles such as HC. This type of market transformation follows in the wake of corporate collapses such as Enron in the United States and HIH in Australia, which generated pressure on financial market analysts to provide better leading indicators of financial performance in publicly listed firms. In addition, Australian law requires that a high proportion of superannuation funds be invested directly or indirectly in share markets, creating both opportunities and threats for investors.

Given the reality of human corruption, HC analysis is becoming critical (Royal and O'Donnell 2008, 367). Standard reporting tools such as those from Moody's or Standard and Poor's — which are so controversial today — were equally problematic during the Enron crisis (Behrenson, 2001). Little has changed in terms of corporate behavior, and hence there is a need for a more sophisticated approach.

In a separate journal article, O'Donnell proposed analyzing HC using the Star Model as a step toward standardizing the interpretation and reporting of HC. This research approach uses semi-structured interviews as a methodology for studying HC, and finds that firms typically measure what they can rather than what they should (O'Donnell, Kramer, and Dyball 2008, 362). This implies that alternative frameworks are necessary. O'Donnell and colleagues raise important questions about the quality, sustainability, and effectiveness of a company's HC systems and practices. However, in this author's view, we also need to examine more tangible HC risk factors — including those exemplified by figures like Bernie Madoff. Diagnostic and analytical approaches tend to produce a superficial analysis of HC that does not adequately account for human corruption. As distasteful as it may be, a law-enforcement or regulatory approach to HC would seem more appropriate, particularly as taxpayers are repeatedly asked to bail out investment houses such as Lehman Brothers. In the cases of Enron and HIH, corruption was pervasive, and ratings giants such as Standard and Poor's and Moody's simply failed to detect the warning signs. Unless frameworks like the Star Model incorporate this dimension, such exercises risk being conducted in vain.

Conclusion: Accountability as the Path Forward

This author's approach to human capital analysis is somewhat more traditional and less progressive than current frameworks suggest. Human capital analysis cannot be conducted solely in accounting firms or boardrooms — it must also be conducted in courtrooms if stocks in any company are to have a chance at earning investor confidence.

Maria Laura Seguiti has put it well when she states that "the US financial and economic distress that began in 2007 poses profound challenges for public policy and public administration in the US and abroad. Corporate mismanagement, insider trading in the stock market, reckless behavior of accountants and auditors, and conflicts of interest are at the heart of the problem" (Seguiti 2011, 69). Past experience with corporate scandals — such as Enron and similar failures around the world — has demonstrated that information produced by private markets cannot be trusted. Severe deficiencies in transparency, fairness, trust, and freedom from corruption are so deeply embedded in the corporate world and in governments worldwide that the problem is profound and systemic.

The only effective way to manage and analyze human capital is to ensure that misconduct carries real consequences — as demonstrated by cases such as Bernie Madoff's prosecution. When bad behavior is punished, the broader pool of human capital has an incentive to demonstrate higher motivations and better conduct.

Few of us are without flaws, but we must have systems that prosecute bad behavior and reward good. Without such systems, all the sophisticated talk about managing human capital amounts to little more than empty rhetoric — as worthless as the financial products that have driven the ongoing crisis in capitalism.

References

Barth, J., Trimbath, S., and Yago, G. (2003). Before the Enron collapse: What corporate CFOs around the world said about the status of accounting and disclosure practices. Review of Pacific Basin Financial Markets and Policies, 6(4), 433–440.

Behrenson, A. (2001). Enron's collapse: The rating agencies; debt rankings finally fizzle, but the deal fizzled first. The New York Times. Retrieved September 20, 2011, from http://www.nytimes.com/2001/11/29/business/enron-s-collapse-rating-agencies-debt-rankings-finally-fizzle-but-deal-fizzled.html

O'Donnell, L., Kramer, R., and Dyball, M. (2008). Human capital reporting: Should it be industry specific? Asia Pacific Journal of Human Resources, 47(3), 358–373.

Royal, C., and O'Donnell, L. (2008). Emerging human capital analytics. Journal of Intellectual Capital, 9(3), 367–379.

Seguiti, M. (2011). Corporate corruption and the new challenges for the role of government. Journal of the Washington Institute of China Studies, 5(3), 69–87.

Svensson, J. (2005). Eight questions about corruption. Journal of Economic Perspectives, 19(3), 19–42.