Institutional investors in the UK are starting to ask probing questions about companies’ human capital strategies in the wake of the credit crisis. In a marked turn-around from the boom years, where matters such as market opportunities and financial engineering dominated strategic discussions, the agenda now is around people.

Tim Breedon, chief executive of Legal & General, whose fund managers control around 5 per cent of the UK stock market, said that companies looking for rights issues ‘are going to have to tell a very good story, not only about the investment case, but also about how they propose to measure up in corporate governance terms. The boot is on the other foot.’

In a similar vein, Aviva, which controls about 2 per cent of the British stock market, called for an end to pay policies that are unlinked to performance. It called for more attention to be paid to pay and conditions for staff, saying that companies had ‘paid little more than lip service’ in the past.

On executive pay, it wants an end to bonuses paid, especially in banking, for short-term performance targets reached in ways that undermined longer term organizational strength. This was a key feature of the run-up to the credit crisis in sub-prime mortgage sales and investment bankers’ trading in securitized debt.
Aviva wants employers and their legal advisers to explore the potential to change executives’ contracts so that bonuses can be clawed back if it turns out that they were earned on an ‘illusory performance’.

Recent calls by investors mark a belated recognition that risk is a people issue, and that the calibre of management matters at least as much as governance structures and strategic objectives. These developments could well herald the start of more structured, detailed conversations between investors and executives about the people capabilities of the business, and the ability to convert strategic priorities into real business results.

In December the consultancy Mercer reported increased interest in corporate clients in understanding human capital capabilities, as a result of the downturn (HCF News, 16 December 2008).