Can Human Capital Save Capitalism?

Capitalism has become dysfunctional and is facing an existential crisis. But human capital, in the form of engaged and committed employees, has a role in its future.

These are the views of Dominic Barton, the chair of the International Integrated Reporting Council and the Hong Kong-based global Managing Partner Emeritus of McKinsey & Co.

Speaking in Sydney, Barton outlined his views in a presentation titled “Reforming Capitalism for the 21st Century.”

Barton sees a capitalist system that has lost its way over the last four decades. It is beset with short-termism, worrying levels of rising social inequality, evaporating trust in institutions and business and political leaders unable and unwilling to make bold decisions on urgent reform.

Given the dangers of climate change and accelerating disruption, Barton believes change is urgent.

“These problems don’t need to go to their endpoint to create chaos. They are close enough to be urgent, so we better get moving,” said Barton.

Barton outlined some of the symptoms of the current malaise. Over the last four decades, he said, capitalism had become less inclusive. It is because the proportion of privately-held companies has increased. In turn, they have locked ordinary people out of the opportunity of participating.

It meant dealing with issues such as climate change and the growing inequality of wealth has ground to a halt.

So, Where Does Human Capital Come In?

Along with shareholder and consumer activism, Barton sees employees as part of the solution.

“I think there is a shift in the younger generation, and its more than I thought could be the case,” he said.

Young employees, he said, are giving organizations their social license to operate. They choose employers whose values align with their own and rejecting those who do not.

Corporates who neglect to pay attention to issues such as equality and sustainability are less likely to attract and keep talent. This would ultimately lead to negative performance.

Conversely, those companies that were starting to combine "profit and purpose," including being more responsive to employee sentiment, are more likely to outperform others.

As a champion of integrated reporting, Barton also saw that reporting on “human capital” is part of the evolving solution for a more sustainable version of capitalism.

“It is about thinking more holistically about all of the different resources, and how companies are combining them and what impact are they having on those different sorts of capital in the short and near term,” he said.

“In the area of human capital, talent is becoming more critical. So, companies need to look at how much they are investing in training and how engaged or happy [they are]."

In the past, human capital was underestimated.  But Barton noted it is now seen as a catalyst for change.

Part of this change in perception was the development of metrics to measure human capital as a contributor to the performance, and the health, of companies.

“Much like how financial management benefitted from the development of tools like spreadsheets, this is starting to happen with human capital. We need more digital tools to be able to do this better,” said Barton.

Are You Training Future Leaders or Shoplifters?

The downside of neglecting the rise of the engaged employee is apparent. A recent study in the U.K. by Lloyd C Harris of the Birmingham Business School and Hongwei He at the Alliance Manchester Business School looked at one manifestation of this: employee pilferage.

The key takeout from that research was that moral disengagement is the crucial psychological mechanism that frees employees to steal from their workplace without feelings of guilt or self-censure.

“Moral identity centrality and ethical leadership inhibit pilferage and moral disengagement, while cynicism enhances it,” said the abstract to Harris’ research.

The imperative for corporates to change is clear. If they don’t, their employees will become shoplifters within the organization. And they will take what they can for the brief time they are there and then move on.

In that scenario, capitalism doesn’t have a very healthy future.