The Holy Grail for Investors and HR? New Solution Connects Employees to Tangible Return on Equity

A collaboration of behavioral science, analytics, and financial acumen has potentially yielded a powerful roadmap for enhancing return on equity of benefit not only to investors looking for alpha but for boards and CEOs seeking a sustainable path to consistently higher levels of return on equity.
The Enterprise Engagement Alliance's ESM has written consistently about investors seeking alpha in organizations with higher levels of stakeholder engagement. What if almost any organization or its clients had a scientifically verified method of identifying the degree to which employees are enhancing or hindering the return on the equity of their own organizations; the practices that either are succeeding or failing; and even the types or locations of people for whom these efforts are working or falling short.
Irrational Capital was founded in 2017 to develop investment opportunities based on quantifying the relationship between employers and employees. The company’s “Human Capital Factor® research identifies publicly traded companies with the potential to deliver market outperformance tied to the exceptional qualities of their workforces.” It was founded by behavioral economist Dan Ariely, Ph.D. and a Duke University professor; David van Adelsberg, also Chairman, Impact Capital Strategies LLC, and Bart Houlahan, Partner, most recently a Co-Founder of B-Lab.
Irrational Capital says that it provides insights and investable indices to some of the world’s leading financial institutions and investment firms. It is now making available the Human Capital Factor ratings system for any organization to sustainably enhance its own return on equity. In fact, the HCF is based on only one key result: the impact on return on equity. (Return on equity is calculated by dividing an organization’s net income by its net worth, which is the amount that shareholders would receive if the company were liquidated and all debts paid.)
The company believes that the HCF analysis can help management determine the effectiveness of human resources initiatives both as a whole and by category of employee and on who and where. It does not specifically show how to design, monitor, and enhance strategies and tactics, but rather measures their impact, underlines Houlahan, “We really don’t compete with most of the many human resources tools out there; all we do is help organizations rate the effectiveness of their people management based on the potential for return on equity.” Companies can use their own employee engagement surveys or one supplied through a partner of Irrational Capital.
Irrational Capital believes it has found an answer both for investors and management, backed by compelling validation.
The implications.
*Fund managers have an additional tool to identify tangible opportunities and risks in the domain of human capital, which appears nowhere on any balance sheets or profit and loss statements.
*Chief human resources executives and their advisors can now demonstrate the ability to drive tangible value in terms of enhanced return on equity for their organizations as well as how to measure the effectiveness of practices in tangible terms.