The responsibility of investors for management
September 2026 | SPECIAL REPORT: HUMAN CAPITAL & EMPLOYMENT
Financier Worldwide Magazine
September 2026 Issue
It is no surprise, at least in the Anglo-Saxon world, that business leaders take their cues from investors. In part this is because the way we reward and manage leaders in public companies is based on how their companies perform in financial markets, and that performance is driven by investors and their views.
If we were to ask why so many business leaders seem to make decisions and indeed hold views about management for which there is no evidence, we should include looking to the investment community for answers.
This problem is most acute in managing employees who are both the largest expense and – less acknowledged – the main factor in business success. There is little that distinguishes most organisations from their peers other than the people in them and the way they are managed, so people issues are fundamental.
Before diving into some examples, it might help to explain why there might be a disconnect between the views of investors and those who are close to the action in management. To be clear, the issue here is simply what is good for the business qua business, not what is good for employees or for society.
The disconnect starts with the language of investors and the way they keep score, which is based on financial accounting. Despite the lip-service paid to the idea that people are crucial to our operations – our most important asset as the cliché goes – the fact is that financial accounting does not allow a role for or indeed any measure of human capital value.
Specifically, assets have to be something owned, and short of slavery (slaves literally were graded and reported as assets), employees cannot be assets even in firms where they are the only relevant value. In turn, it is not possible to ‘invest’ in employees through training and other practices because we can only invest in assets.
Therefore, training is only an expense but not one that is reported for investors to see. What is reported and tracked carefully are employment costs, including those that create financial obligation like pensions, as they create liabilities on our financial accounts. In short, we see and track all the costs of employees and none of the value.
Sophisticated investors have long known this and have on occasion pressed for reporting that would help them price the value of the human assets in organisations. Technology companies, in particular, come to mind as otherwise challenging. Accounting institutions like the US Financial Accounting Standards Board have resisted this as it would disturb the purity of the accounting system.
Corporations have also resisted efforts to get the government to mandate even simple reporting on measures like employee turnover and training expenditures, as such reporting would require work from them and raise lots of potential questions.
The distortions that financial accounting and the pressures from investors who rely on them create soon become obvious. If we cannot demonstrate the value of having better employees, why pay to get them?
If training only adds to the appearance of unrecognisable expenses, why do it? Why not be as cheap as possible as that is one thing about employees that investors can recognise easily. The quirkiness of ‘per employee’ measures of financial performance creates even more distortions. We can raise profit per employee and revenue per employee figures by replacing employees with contractors and ‘leased’ workers who cost more per unit of work and are much more difficult to manage. But doing so improves our apparent financial performance so much by reducing the denominator that we cannot help but shift our workforce in that direction.
Those of us who assume that businesses always try to choose the most cost-efficient methods of production should be puzzled by the common corporate tool of ‘headcount budgets’ that constrain how many employees can be hired for a project independent of the financial budget. Even if it is cheaper to hire than use consultants, that headcount budget keeps managers from doing so in order to retain the benefits of lower headcount.
Beyond that general problem, below are three specific management practices that are aimed at pleasing investors yet are dysfunctional for the operations of businesses and ultimately their financial performance.
Downsizing and job cuts
The most important issue at this moment may be downsizing – something much easier to do in the US than anywhere else, but not impossible elsewhere, either. There are many ways to cut headcount, the simplest is just to avoid replacing employees who leave.
Average turnover across Organisation for Economic Co-operation and Development countries is a surprising 20 percent per year, so even holding off replacements would cut workforces quickly. Why do we have layoffs then, which are immediate cuts, noting that layoffs come with additional costs of severance pay and other accommodations?
Cuts and savings can come faster, but it is hard to ignore the conclusion that layoffs – which are often announced well in advance – are popular as a signal to the investment community of bold cost-cutting.
The issue about the effects of layoffs are not in the context of when a business is in a financial crisis and will otherwise fail, it is whether preemptive layoffs in an effort to improve productivity are useful, which is what we are seeing in 2025 and 2026.
Layoffs prove that employment costs are not ‘fixed’, something often assumed in economic analysis. More importantly, the evidence is clear that preemptive layoffs to get ‘leaner’, or indeed for any other reason, cause subsequent financial performance to be worse. Why would that be? There are two reasons.
First, when employees are laid off, the work remains. These layoffs are not accompanied by ‘work-out’ programmes made popular a generation ago whereby the remaining employees were empowered to figure out what work to stop doing and focus on efficiency. What we see instead is that workflows are simply disrupted because tasks either do not get done at all or are done poorly. The person who did task ‘B’ in an ‘“A, B, C’ sequence is no longer there. Initial claims that layoffs in 2026 were because artificial intelligence tools have taken over jobs have been walked back, as they appear to have been preemptive layoffs to please investors.
The second reason, which became very noticeable following the Great Recession, is that when business picks back up, companies that cut early and hard struggle to rebuild their capacities while those that held off raced ahead, grabbing new business in the process.
Running lean
More generally, the idea that running ‘lean’ is good for business does not hold up to evidence. ‘Lean’ in this context means aggressively squeezing all employment costs, not just cutting head count but also delays in filling vacancies, cutting back on training and holding a tight leash on pay.
Detailed studies in retail, where this view is widespread, found first that the most important drivers of sales were being able to find a store employee and then to find the product on the shelf, both of which are driven by staffing levels. The ‘leaner’ stores ran, the harder it was to do either. Researchers found that increasing each $1 in payroll was associated with from $4 to as high as a $28 increase in sales depending on the store. Adding staff, paying them more and training them paid off in a huge way.
Agile
The new mantra for many business leaders is to make their organisations agile, which means the ability to change directions quickly. It tops several surveys of chief executive goals.
Change is challenging for most of us, especially if we do not know what the change will be, and that is one of the main problems of a change mantra: we cannot tell you when, we cannot tell you what it will look like, but just get resilient so that you can absorb the change when it happens, including possibly losing your job.
IBM in its era of lifetime employment had the same goal and claimed that job security allowed the company to change quickly because employees did not feel they were at risk of change. Few if any employers take this view now. Instead, the model is to adjust quickly by cutting operations and employees, and then buy new operations and hire new employees.
That approach is creating enormous stress among employees and is arguably the main contributor to rising mental health problems at work. One of the worst practices in this regard is when businesses float proposals about restructuring and layoffs that they may have no real intention to carry out to see the reaction from investors, panicking their employees in the process.
These practices cost real money in terms of lost worktime, lower levels of performance when employees are distracted by the possibility of changes, and contribute to more direct expenses, such as the costs of providing mental healthcare. They also contribute to ‘change fatigue’ – the growing reluctance of employees to support new initiatives by their employer.
The ‘cut and buy’ approach as opposed to a retrain and redeploy approach to agility is costly in other ways. It is much more expensive in terms of compensation and related costs to hire outside talent than to relocate and retrain existing employees. It also takes much longer for outside hires to learn how an organisation functions and become productive than employees who are relocated.
These employee costs, which should include turnover, can be enormous, and they can also be measured, albeit with some difficulty. Although they are real, investors do not see them, and for that reason, employers ignore them. They rarely track even the most important measures, such as the cost of turnover, which means that such costs are effectively treated as zero in making decisions.
They do matter, though, and they affect the financial performance of companies in the longer term as many careful studies have shown. It would be incumbent on self-interested investors to make the companies they follow report information on those costs because it helps them predict future success but also because it helps remove some of the distortions that otherwise plague contemporary business.
Peter Cappelli is the George W. Taylor professor of management at the Wharton School and director of its Center for Human Resources.
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