Abstract
Even in industrialised emerging economies, the value-generating competencies of a workforce, known as its human capital efficiency, are a key resource for commercial success. The objective of this research is to empirically investigate the relationship between human capital efficiency (as measured by value-added human capital) and the financial and market performance of companies listed on the Main Board and Alternative Exchange (ALT-X) of the Johannesburg Stock Exchange. Return on assets, revenue growth and headline earnings per share were used as financial performance indicators; while market-to-book ratio and total share return were used to measure market performance. Multivariate regressions were performed, with panel data covering 390 companies in the financial, basic materials, consumer services, consumer goods, industrial and technology industries from 2001 to 2011. First, human capital efficiency was found to have no effect on the market performance of listed companies in South Africa. Secondly, higher human capital efficiency was found to result in the extraction of greater returns from both tangible and intangible assets in all industries. Thirdly, higher profitability was found to be associated with higher human capital efficiency in almost every industry in South Africa, with the exception of the technology industry, where human capital efficiency was found to be independent of headline earnings per share. Finally, higher revenue growth was found to be positively associated with human capital efficiency in those industries which are not consumer-driven. In the consumer-driven industries, human capital efficiency contributes to bottom line profitability even though it is not a driver for revenue growth. Overall, the results of this study confirm that human capital efficiency enhances a company’s financial performance, whether it be through a greater capacity for production and service delivery, tighter cost controls or better use of company resources. Management in all South African industries are encouraged to develop the value-creating abilities of their employees through employer-driven personnel enrichment and training programs and by incentivising workers to pursue further education.
Highlights
In an industrialised economic environment, such as that in South Africa, the effective use of physical resources is considered to carry more weight than that of human and other intellectual resources in the production of goods and services (Firer & Williams, 2003:357)
Higher human capital efficiency was found to result in the extraction of greater returns from both tangible and intangible assets in all industries
While the median ROA was fairly high at 17.5%, the median Value-Added Human Capital (VAHU) clearly indicates that South African companies on the Johannesburg Stock Exchange (JSE) were able to generate value from their human capital
Summary
In an industrialised economic environment, such as that in South Africa, the effective use of physical resources is considered to carry more weight than that of human and other intellectual resources in the production of goods and services (Firer & Williams, 2003:357). Companies may take less care in the development and management of their human capital assets than they do in managing the efficiency and productivity of their tangible assets. Human capital is the essence of innovation and is crucial to the development of commercial products and the improvement of business processes (Stewart, 1998:76; Sullivan, 2000:9). The validity of this assertion may, differ from industry to industry. The corresponding drop in South Africa’s ranking in both Higher Education and Training, and Labour Market Efficiency implies a connection between these factors. To be truly competitive in the long run, whether locally or in the global arena, it is clear that South African businesses will be forced to cultivate their knowledge-based intangible assets, starting with their human capital
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