Human capital – the productive capacity that is embedded in people – is one of the most important contributors to the growth in nations’ output and standard of living. Globalisation and technological change have increased the importance of human capital in recent years, to the point that there are now only two options to sustain high profits and high wages in developed nations: escalating the skill levels of individuals or developing superior capacity for managing those skills and “human capital” more broadly. Employers have responded to these new phenomena by increasing wages for employees with more skills and by increasing their use of downsizing and other methods (such as “offshoring”) intended to reduce labour costs. There is little evidence, however, that such efforts by employers have improved profits, productivity, or stock price performance.

Employer-provided training for employees represents one method of improving the skill level of a nation’s workforce. Although long-standing economic theory suggests that existing incentives for employers and employees should naturally yield the delivery of an optimal level of training, there is new awareness of a variety of market failures that may be causing a sub-optimal level of training, despite evidence that points to a positive relationship between employer-provided training and firm outcomes (productivity, profitability, employee retention, customer retention, stock performance). Return on training investments is higher than return on other similar types of investments, suggesting that firms are, indeed, under-investing in that area. Financial reporting requirements that treat training investments as costs are one cause of under-investment in publicly-traded firms, but cannot explain training under-investment in other firms.

We suggest that employee skills are only a portion of the human capital management issues that must be solved by a firm in order to maximize its productivity and profits. Indeed, it is now possible to systematically measure the maturity of the leadership and other human capital management practices that are in place in an organisation and to determine which practices are most important in determining organisational outcomes.

Analysis of these practices points to the complexity of human capital management within and across organisations. The most important practices vary across organisations. One theme that has emerged, however, is that many organisations are lacking in leadership skills in particular. It is not sufficient simply to develop employee skills; an organisation must also have in place the leadership and management capable of taking full advantage of those skills. In firms that lack such leadership, it is reasonable to limit the provision of employee training investments since the firm is unlikely to fully benefit from those investments. Organisational capacity must be developed, not just individual skills. In light of the findings in this paper, we suggest that governments should pursue three categories of policies: (a) improving the education and skill levels of individuals; (b) improving human capital management itself, by promoting managerial capacity; and (c) addressing informational deficiencies in financial markets.