What Is Human Capital Management? An easy-to-understand explanation of the background to and advantages of an approach that is in the spotlight, and how to put it into practice and make relevant disclosures | Insights

As the business environment has undergone rapid change in recent times, many companies have embarked upon a variety of transformations in an effort to adapt to and survive change. The driving force behind all those transformation efforts is maximizing human capital, or, in other words, implementing human capital management.
While interest in Japan tends to be concentrated on the mandatory “disclosures” around personnel information, the true meaning of human capital management lies in “practice.” By procuring the top-performing personnel, giving them a greater stage to perform, and raising productivity through the practice of human capital management, corporate leaders can lead transformations of their companies to successful outcomes.
This insight will seek to explain why companies are taking on the challenge of human capital management at this point in time, what advantages they can reap from putting in place a human capital management approach, and what approaches they can adopt in practice when taking such initiatives.

What Is Human Capital Management?

Firstly, to lay the groundwork, we will define what human capital management is, go over how it differs from previous management approaches and what has led to the approach taking up the spotlight, and explain the trends around it in Japan and abroad.

What Is Human Capital Management?

The Ministry of Economy, Trade and Industry defines “human capital management” as “a style of management that leads to medium- to long-term improvement of corporate value by treating personnel as "capital" and seeking to maximize their value.”
The term “human capital management” began garnering attention in Japan with the publication by METI of the “ITO Report for Human Capital Management” in September 2020. Initially, the focus tended to be on legal responses beginning with the disclosure of personnel information and on the sustainability angle.
But as Figure 1 shows, human capital management is a management approach that offers solutions to “human-centered issues” from the long-term perspective of ensuring business viability and the short to medium-term perspective of realizing business strategy. For that reason, the important point is to take on human capital management considering both sustainability and the execution of business strategy.

Figure 1. What Is Human Capital Management?

How Does Human Capital Management Differ from Previous Management Philosophies?

So, how does human capital management differ from previous approaches to corporate management? Figure 2 outlines these differences organized around three major axes.
Previous approaches to corporate management tended to treat personnel in terms of volume and cost. Based on investment philosophies that revolved around being “spread out and distributed,” companies made indiscriminate investments in personnel, with the connection between personnel strategy and the business often not clear.
Human capital management, by contrast, views personnel in terms of quality and investment. It also involves “selecting and concentrating” personnel who should be invested in, so that companies can maximize their value. Human capital management also differs from previous management approaches in that it is a philosophy that practices HR in coordination with business and management aspects, with the aim of ensuring business viability (over the long term) and realizing the company’s business strategy (in the short to medium-term).
The aforementioned “ITO Report for Human Capital Management” also urged a change in attitudes away from “personnel and management” towards “human capital and creating value.”

Figure 2. How Does Human Capital Management Differ From Previous Management Philosophies?

Overseas Movements

Interest in human capital management has started to rise, beginning in the West (see Figure 3). The source of this trend has been investors beginning to turn their focus to human capital as indicator for evaluating companies beyond the share price. Particularly in recent years, we have seen share price not necessarily serve as an accurate expression of the performance of a company, leading to greater interest in non-financial indicators, beginning with human capital.

In 2014, the European Commission issued the “Non-Financial Reporting Directive” (NFRD), requiring companies to disclose non-financial information related to their human capital. This was a radical and unprecedented step, with its aims being “the elimination of gender discrimination,” “equality of opportunity” and “workplace health and safety.” The directive then saw significant revision in 2023, when it was renamed the “Corporate Sustainability Reporting Directive” (CSRD). At this time, not only was there an expansion of the scope of disclosure and the range of companies required to report, but assurance of the reporting through third-party verification was also mandated. Such developments have led to European companies being highly aware of human capital management.

On the other hand, in the US, 2019 saw a revision to the Sustainability Accounting Standards Board (SASB) standards, incorporating disclosures of information related to the human capital of companies. A bill influenced by this passed the House of Representatives in 2021, and the Securities and Exchange Commission (SEC) is currently drawing up disclosure guidelines.

Figure 3. Overseas Movements Around Human Capital Management

Movements in Japan

In response to these trends in the West, moves to disclose human capital information is also accelerating in Japan, under the leadership of the Tokyo Stock Exchange and government agencies (see Figure 4).
In Japan, since the March 2023 quarter reporting period, 4,000 large companies issuing securities reports have been mandated to publish a “strategy” together with “indicators and targets” related to their investment in human capital. It also became a requirement for companies to disclose three indicators of corporate diversity (ratio of women in management, rate of parental leave taken by men, male-female wage gap) at all consolidated subsidiaries related to them.
On top of this, in August 2022, the Cabinet Secretariat announced its “Guidelines for Human Capital Visualization” and indicated 19 items across 7 areas where disclosure was deemed desirable (see below for details).
In response to this mounting interest, the number of participating companies in the Human Capital Management Consortium, which was launched under government leadership in August 2022, has risen to 613 (as of October 24, 2024).
Human capital management initiatives are likely to gather further steam going forward.

Figure 4. Movements in Japan Around Human Capital Management

What is Behind the Growing Interest in Human Capital Management?

So, why would companies need to take on the challenge of human capital management now? The three standout developments behind this are as follows.

Growing Investor Interest

The first development that has led companies to take on human capital management is growing interest on the part of investors. According to a survey released by the Cabinet Secretariat in February 2022 (Secretariat of New Form of Capitalism Realization Headquarters, Cabinet Secretariat, Economic and Industrial Policy Bureau, Ministry of Economy, Trade and Industry, “Basic Materials”), “investment in personnel” is a piece of information that institutional investors will pay more attention to going forward (see Figure 5). The most common response as to why this is the case was “because it allows us to trust in the future viability of the company.” Given this, we can see that the idea that the value of human capital is directly linked to the corporate value has permeated the minds of investors.

Figure 5. Growing Investor Interest

Transforming Business Portfolios Following Technological Transformations

The second development has been the need to transform business portfolios following technological transformations. In the results of the ABeam Consulting “Survey of Business Portfolio Transformation and the Internal and External Appeal to Human Capital,” we found that over 85% of companies surveyed were attempting transformation of their business portfolios in order to survive amidst extreme change in the business environment (see Figure 6). Business portfolio transformation refers to fundamental transformation in the form of change in business model, new business development, improvement of profit structure or advances in management controls, as opposed to gradual, step-by-step improvement. However, we also found that companies were only managing to secure no more than 10% of the personnel they needed to transform their business portfolios.
From these results, we see that, as companies now attempt to transform their business portfolios, they are being confronted by the question of how to increase the value of the personnel that serve as the driving force behind those initiatives. To that end, many companies are attempting to put human capital management into practice.

Figure 6. Where Companies Are at in Terms of Business Portfolio Transformation and Personnel

Accelerating Labor Shortages and Further Intensifying Competition to Secure Personnel

The third development has been the combination of an accelerating labor shortage and an intensification in the competition to secure personnel. In the aforementioned ABeam Consulting survey, we also found that “lack of personnel in the labor market” was the number one reason companies cited for their failure to secure the quality and quantity of personnel they needed to realize transformations of their business portfolios (see Figure 7). Obviously, Japan’s falling productive working population is a major factor behind this. But another key factor at play here is the rise in demand for highly skilled personnel that can serve as the driving force behind transformation.
For that reason, many companies are putting their focus on measures to increase quality by investing in personnel already at the company rather than just trying to secure more people from the labor market, which is leading to increased interest in human capital management.

Figure 7. Reasons Why Companies are Failing to Supplement the Quantity and Quality of Their Personnel

Advantages of Implementing Human Capital Management Measures

Moving on, let’s look at the advantages that companies taking on human capital management accrue from investor-facing, employee-facing, labor market-facing and customer-facing perspectives.

“Improving Corporate Value” From an Investor-Facing Perspective

By realizing a human capital management approach, companies gain the advantages of “improving their corporate value” from an investor-facing perspective.
Market capitalization, an indicator of the corporate value, is made up of its tangible and intangible assets. Recent years have seen an increase of the proportion of market capitalization taken up by the intangibles. For this reason, there has been an increase in cases where adopting human capital management has, on its own, directly impacted companies’ share prices.
In the results of the ABeam Consulting “Survey on the State of Human Capital Management Initiatives at Japanese Companies”, the most commonly cited reason for companies taking on human capital management was “the need to be accountable to investors.” From this we can also see that investor interest is moving away from the tangible assets that turn up in financial indicators towards intangibles like human capital management.

“Improving Engagement” From an Employee-Facing Perspective

Human capital management also has advantages in terms of “improving employee engagement.”
Human capital management initiatives include things that are, in practice, advantageous to employees, such as putting in place environments that are easy for employees to work in and providing opportunities to acquire skills, beginning with reskilling programs. For this reason, putting human capital management into practice can be expected to improve employees’ enthusiasm for their work, drive productivity and lower turnover.

“Improving Hiring Attractiveness” From a Labor Market Perspective

Human capital management initiatives can offer advantages to companies in the labor market. In recent times, more and more companies have been seeking to reform their workstyles. In the labor market, a company being an “easy place to work” is an important indicator by which prospective employees might evaluate it. With the concept of “employer branding” also gathering steam, there is also an increased focus being placed on the brand images companies are putting forward to potential hires. The potential to be able to improve hiring attractiveness and reduce hiring costs through the synergistic effects of improving employee engagement and upgrading the brand image of the company in the labor market is an advantage in the labor market for companies that adopt human capital management.

“Improving Brand Power” From a Customer-Facing Perspective

There are also advantages to taking on human capital management in terms of “improving customer-facing brand power.”
An external image of being “an easy place to work” or “good to employees” can contribute to a company’s brand image, and not just for its employees. In recent years, companies have also faced growing calls to go beyond added business value to generate social value from an ethical perspective through things like SDGs and greater diversity. By putting forward their human capital initiatives aimed at generating social value, companies can potentially improve their customer-facing brand image.

How to Take on the Challenge of Putting Human Capital Management Into Practice

From here on, we will be looking at the four processes companies need to put human capital management into practice, and the specifics of how to advance those, in line with the “human capital management storyboard” put forward by ABeam Consulting (see Figure 8).

(1) Defining your vision

In putting in place a human capital management approach, companies must formulate in specific terms their purpose, vision, and their sustainability targets (from a long-term point of view) and business strategy (from a short to medium-term point of view), which help achieve said purpose and vision, and which sustain the company’s corporate continuity and persistent competitive advantage.

Here we want to pay attention to how sustainability targets and business strategy feed into one another and go together to make up a company’s vision. As a brief example, supposing a company were to hire mainly men to fill the personnel required as part of its business strategy, even if the company achieved its business targets, it may find that this has led to a deterioration in its image and branding towards investors, employees, potential hires and customers, when looked at from a sustainability point of view.

In such circumstances, we seek to derive to what degree the company needs personnel with what specific skills, experiences and competencies from both long term and short to medium-term perspectives. We term such a visualization of the quality and quantity of desirable personnel a “HR portfolio”. This helps clarify the gap between targets and present state, or, the “HR gap.” We then seek to close the HR gap while maintaining consistency with the company’s sustainability targets.

(2) Defining HR Materialities

Once a company has defined its vision as set out in (1), we then move on to defining the most important HR challenges, or “HR materialities” involved in realizing that vision. The key here is the process of “selecting and focusing” referred to above. While the HR materialities companies face are many and varied, rather than treating these all equally, it is important for them to calculate the materialities that require the greatest degree of focus, while also working to form consensus among management.

(3) Understanding Stakeholder Expectations

This point should be worked on in parallel with the process of defining HR materialities outlined in (2). Stakeholder affairs as referred to here include a company’s image with the public, compliance with laws and regulations coming from the government, trends among competitors and the interests of investors.
While companies naturally needs to comply with laws and regulations, as an example, investor interests could raise questions such as whether a company has managed to assemble a diverse leadership team to achieve its business strategy by the targeted business year, or whether the company has a plan in place to secure personnel with the skills and experience to execute the company’s strategy. It is necessary for corporate leaders to generally understand and meet such broad-ranging expectations.

(4) Thinking Through a Human Value Creation Story

Having done the above, we then compile a complete, end-to-end story of how we will set KGIs that serve as numerical targets for the HR materialities set out in (2), formulate HR strategies and policies for reaching those KGIs, set KPIs to measure the progress of those policies, and figure out how to communicate to external stakeholders about all these initiatives. At ABeam Consulting, we call this a “Human Capital value Creation Story,” and position it as an axis for driving human capital management. By designing KGIs and KPIs based on stakeholder expectations, these also ultimately serve to back up disclosure items.

Once the process to this point is complete, we then move on to the phase where we put human capital management into practice in line with the story. If companies pursue human capital management without going through such a process of consideration, they risk repeatedly making investments without clear aims through ad hoc HR policies, and thus inviting outcomes that do not meet stakeholder expectations.

Figure 8. The Human Capital Management Storyboard

Key Points for Putting Human Capital Management into Practice

A variety of difficulties can arise when actually putting human capital management into practice. Here we want to go over some of these difficulties, focusing on four key points that leadership teams often feel are the most important (see Figure 9).

Finding Consensus Among Management, Business and HR on Which HR Materialities Need to be Addressed

One way to look at this point is that it refers back to the “defining of HR materialities” discussed earlier, and points to the importance of forming consensus around how to define these issues. For example, say there is a proposal to move top-performing personnel from a core business, which is elevating currently high revenue, to a new business that the company has high hopes for in the future. Managers at the core business may balk at agreeing to this. It is somewhat natural for managers in each business unit to think of their own department’s HR materialities as the most pressing ones. However, it is important for companies to focus on and to form consensus around higher order materialities, taking a company-wide perspective on things like purpose and stakeholder expectations.

Creating an Internal Labor Market to Generate Appropriate Internal Mobility

We stated that a “HR portfolio” is something that helps visualize the degree to which a company needs personnel with different skills, experiences and competencies, and that it is important for companies to ascertain the gap that exists between that and where they are at present (the “HR gap”). Practically speaking, however, it is difficult for companies to fill such gaps through hiring alone. Thus companies naturally also need policies to better utilize internal personnel, through things like internal resource shifts and reskilling of current employees. An “internal labor market” serves as the site for achieving this. How to go about creating a stronger internal labor market is an important question for companies.

Creating a Transformation Culture and Co-Creation Systems to Bring Together Internal and External Talent

Generally speaking, as companies grow and organizations expand, they tend to become less cohesive. It is essential for companies to continue to make their unique corporate culture permeate through multiple channels across the entire company, if they are to keep their employees unified. At the same time, it is also effective for companies to put in place a framework of co-creation platforms with other companies, including competitors, as a secondary network, rather than adopting a philosophy of necessarily only procuring personnel themselves. Through such initiatives, companies can draw on high levels of engagement from motivated internal and external personnel, helping them to attract and retain their personnel.

Redesigning New HR Organizations That Maximize the Effectiveness of Improvements

In advancing transformation, it is important for companies to make the shift from hitherto “operational HR departments” to “strategic HR departments.” People in HR departments need to fulfil the role of a strategic HR professional who can, as a partner to corporate leaders and business managers, put forward HR strategies that align with leadership perspectives, and support corporate and business growth. HRBPs (HR business partners), which are HR departments attached to business units, also need to go beyond just serving points for contact for communicating with headquarters HR to become capable of implementing business unit strategy, and proactively proposing requirements and policies for solving critical HR materialities to headquarters HR.

Figure 9. Key Points For Putting Human Capital Management Into Practice

Items Need to be Disclosed in Human Capital Management

Next, we will move on to the disclosures required as part of human capital management, based on what we have discussed so far. Disclosures refer to measures for explaining human capital information to external parties in order to meet the requirements of stakeholders beginning with investors.

What Items Should Be Disclosed?

As we touched on earlier, the “19 items across 7 areas where disclosure is desirable” indicated by the Cabinet as guidelines for human capital management disclosure in Japan (3 items in childcare, 1 item in engagement, 3 items in mobility, 3 items in diversity, 3 items in health and safety, 5 items in labor practices and 1 item in compliance/ethics) are outlined in Figure 10.
What matters here is not treating these disclosures as an obligation, but, rather, taking the attitude that these disclosures reveal the achievements and plans that back up the purpose and mission unique to the company, and thus help to maximize the company’s value. We will go over the key points of how to achieve this from the next section onward.

Figure 10. The 19 Items Across 7 Areas Where Disclosure Is Desirable For Human Capital Management

Key Points in Disclosure

At ABeam Consulting, we divide disclosure indicators into four types (see Figure 11). At present, companies performing disclosures of “mandatory disclosure indicators,” disclosure of which is mandated by law or regulation, likely make up a majority. However, going forward, looking into “de facto standard indicators,” “indicators related to stakeholder interests” and “value presentation model indicators” unique to individual companies is something that will help companies differentiate themselves from their competitors. We believe that by investigating, setting up and managing indicators unique to themselves, rather than just doing pro forma disclosures, companies can raise their genuine human capital value, and, by extension, their corporate value.

Figure 11. Disclosure Indicators Related to Human Capital

Summary: Towards Realizing Human Capital Management

In this article, we have looked into the background and advantages of efforts by companies to implement human capital management, approaches and key points involved in putting this into practice, and items need to be disclosed in human capital management. Implementing human capital management is essential to the success of business portfolio transformations, on which companies have staked their survival. This makes it important for them to construct human capital value creation stories that link up with their business strategies and to identify the most important HR materialities that they face. For further details, please see our publication, “HR Materialities: Human Capital Management Through Selection and Focus,” or all five articles and attached videos in our Insight Series covering the key points in putting human capital management into practice.
ABeam Consulting provides side-by-side support to clients seeking a human capital management approach. Our support begins with a process of “selection and focus” on the most important HR materialities for achieving business portfolio transformation, and extends to formulating a transformation vision and proposing and executing specific measures. Going forward, we seek to contribute to the realization of genuine human capital management as a transformation partner for business.

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