Today’s post comes to us from The Workforce Institute advisory board member David Creelman, CEO of Creelman Research, and guest contributor Kuniko Takahashi, who is co-founder of the BoardHR Initiative and leads the WICI Human Capital Working Group in Japan.
The U.S. Securities and Exchange Commission (SEC) has been encouraging companies to disclose material information on human capital while being rather vague about what exactly they expect companies to do. A useful source of insight on how to report on human capital can be found in Japan.
Japan has become the undisputed world leader in what is known as “integrated reporting.” Integrated reporting seeks to look beyond financial data to give a complete picture of how a company creates value, and the approach explicitly highlights human capital as one driver of value. In 2022, almost 800 Japanese companies published an integrated report.
The most important difference between a good integrated report and the commentary on human capital found in U.S. company reports (often in the corporate social responsibility or substantiality report) is that Japanese integrated reports tell a story of how the various elements come together to create value, whereas U.S. reports typically just share some narrative and data on a mix of human capital practices they are proud of.
Producing an integrated report takes time and effort, however, Japanese companies don’t see publishing the report itself as the main goal. The companies see the process of creating the report as a way to improve value-creation activities.
For example, a large electronics manufacturer used a cross-functional team of around 50 employees to develop the integrated report. It could have used a smaller team, but the company saw it as a way for team members to develop insight into how the integrated activities of the company across functions create value for external stakeholders.
Two integrated reports we like are the ones from electrical equipment manufacturer Omron and video game company Capcom. Omron has a unique theory of the interrelationships of science, technology, and society that integrates its efforts. Capcom shows a clear focus on the importance of long-term investment in the key role of game developers.
The best integrated reports have a clear story about how they create value and the role human capital plays in that. The trick to doing this well is having a real story to tell. A good integrated report is not a clever document dreamed up by marketing or investor relations. It reflects the real way managers across the organization align their efforts.
The general consensus is that, compared with U.S. companies, Japanese companies have strong coordination capability between middle managers and weak capability of top management. This coordination at the middle-manager level may be one reason that Japan has taken the lead in integrated reporting, and it may also be a competitive advantage when it comes to long-term value creation.
U.S. companies should not let the SEC pressure to report on human capital lead to yet another compliance activity. They should follow the Japanese in using the integrated reporting process to better align company activities, including those related to human capital, to drive long-term value.
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