In a business, human capital is the sum of all the intangibles that people bring to the business without which the business would be so much the poorer.
It’s the knowledge, skills, experience, the attitudes, creativity, training and judgement that help a business reach its goals, grow and succeed.
Human capital is the total capacity of the people in the business. It is another form of wealth which can be directed to accomplish the goals of the business.
‘Almost everything that can go wrong in a business has a human capital component.’
David Creelman, CEO of Creelman Research
Human capital risk – what is it and what do we do about it?
When you are in the process of assessing your business risk and putting together your risk management plan, make human capital risk one of your focus areas.
Human capital risk is a term which covers whatever arises out of not managing an organisation’s human capital well. This includes:
- catastrophic workplace events such as disabling illness, injury or death
- losing staff to rapid turnover
- a team member committing fraud or misappropriating assets
- negligent hiring or retention, such as where an employer fails to complete necessary background checks on a new hire and, as a result, employs someone who is dangerous or untrustworthy
- complacency, where the organisational culture is one of ‘I don’t know’ and ‘I don’t care’ and the business drifts or runs aground because of this
When you review the risk management strategy for your business, assessing risk is not so much about analysing how likely or unlikely it may be for an event to occur. Over the last few years, we’ve certainly witnessed that extreme and unlikely events occur far too often for comfort. It helps to analyse what the cost to the business would be if any of these risks occurred. Could the business take the hit or do you need to have strategies in place either to avoid them altogether or cushion the blow? And what sort of strategies might be appropriate?
Where catastrophic events pose a danger to the business through the loss of key people, an insurance package might cover funds to help cover shortfalls through the transition and replacement costs, as well as funding a shareholder’s share of business debt, and purchase of the deceased or disabled partner’s share of the business. Backup strategies might also include developing a leadership programme, more effective delegation of responsibilities, mentoring and training.
If staff turnover’s an issue, is there something else going on? Are pay points far lower than those of competitors? Is morale an issue? Are the business’ recruitment strategies just not finding the right fit for the firm? You might look at what your competitors are doing but you could retool recruitment and training processes to increase employee retention.
If staff are leaving because for lack of a clear career path, could the organisational structure offer solutions? You might also look at organisational culture and introduce measures to improve morale, engagement and a positive outlook toward the business and customers.
The potential damage a fraudster could do to a business is truly horrifying. It’s hard to come back from the direct costs to management, as well as the damage to the brand, team morale, and vital relationships with partners, suppliers and regulatory bodies.
However, it is possible to create a climate which minimises the possibility. Strategies might include screening employees at pre-employment as well as screening suppliers and third parties, thorough internal controls and audit processes, as well as a clear code of conduct and awareness training for the whole team.
Whatever your assessment of business risk, a risk management strategy that meshes with every aspect of the business is crucial. Regular review and energetic follow through will help to minimise risk and create a stronger organisational culture alert to possibility and adaptive to change.