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.