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Understanding the impacts of a pharma company’s investment in employees: Eisai Co., Ltd.

Eisai has explored impact accounting to measure the impacts of its investments in human resources, including wage quality, employee opportunity, diversity, and contributions to local communities.

Eisai is a global pharmaceutical company, headquartered in Japan, that develops innovative pharmaceutical products in areas such as neurology, oncology, and global health.

Objective

Companies in Japan have sought to demonstrate the value of various business activities and intangible assets, such as social and environmental impacts, that are traditionally excluded from the financial statements. By showcasing these hidden sources of corporate value, companies can enhance their appeal to investors. Impact accounting has emerged as an effective solution to demonstrate these sources of value, offering a methodology to quantify and articulate the monetary value of specific business activities that conventional accounting overlooks. 

At the same time, leading Japanese firms are looking to assess and progress on certain human capital issues, such as the representation of women in senior positions and the gender pay gap, which is high in Japan compared to other OECD countries. Eisai was interested in how an impact accounting assessment would demonstrate these societal concerns. 

In 2021, Eisai began collaborating with the Impact-Weighted Accounts Project at Harvard Business School (IWA) to utilize impact accounting to measure the impacts of its investments in human resources, including wage quality, employee opportunity, diversity, and contributions to local communities. While traditional accounting treats organization’s investments in human capital as an expense, Eisai recognized the potential to view them as value-creating activities – provided there was a reliable method to measure this value.

“In Japan, impact accounting is well-received by investors and widely seen as simple and comparable. Together with the Yanagi Model, it is expected to trigger an expansion of investment in human capital.” 

Aya Tokunaga, Head of Investor Relations, Eisai

Application

Eisai began with its salary data, including its total number of employees (3,207) and total salary expense for the year 2019 (JPY 35.8B). Eisai then leveraged impact accounting to calculate the employment impact across various elements, in alignment with IWA’s Employment Impact Methodology: 

  1. Wage quality: Eisai’s salary data was adjusted for marginal utility based on annual income and gender-based wage differences, ensuring an accurate representation of wage quality. The salary data was also analyzed against living wage benchmarks; however, no negative impact was assessed since all employees were paid above the relevant level. 
  1. Employee opportunity: The gender gap in promotions and salary increases was factored in through the employee opportunity impact metric, reflecting the goal of equitable opportunities within the organization. 
  1. Diversity: Gender representation at Eisai was compared to Japanese national statistics to provide a contextually relevant assessment of diversity at the company. 
  1. Contributions to local communities: Eisai’s impact on local communities was calculated by determining the incremental impact of job creation based on local unemployment levels. For example, Eisai’s employment of individuals located in prefectures with high unemployment contributes to Eisai’s positive impact along this dimension. 
Table 1: Eisai employee impact accounting (non-consolidated).
Source: Ryohei Yanagi, “Monthly Capital Market” September 2021 issue, “Disclosure in the integrated report of employee impact accounting”

To place its employment impact in a broader financial context and compare it with the performance of other firms, Eisai contextualized its impact accounting results with other financial metrics, developing novel metrics such as Human Capital Investment Efficiency and adjusted versions of EBITDA. 

Eisai’s metric called “Human Capital Investment Efficiency” was developed to assess the effectiveness of dollars spent on employees and to evaluate how much translates to impact on employees. The metric also allowed Eisai to review its employment impact against other companies. This metric measures the human resource investment at a company as a ratio, creating a metric that was comparable across companies.  

Human Capital Investment Efficiency = Employment Impact / Total Salary Expense 

Eisai advanced the power of their findings by connecting them to their financial results, through the development of an adjusted EBITDA (Earnings Before Interests, Tax, Depreciation, and Amortization), which integrates corporate impact on environmental, social and governance (ESG) elements into EBITDA. 

Findings and Outcomes

  • Eisai found its investments in its employees and communities created net JPY 26.9 billion of impact in 2019, equating to 44% of EBITDA and 11% of revenue.  
  • Eisai generated the most positive impact through the quality of its wages for its employees whereas its diversity measurement produced the most negative impact.  
  • Eisai’s Human Capital Investment Efficiency was determined to be 75%, positioning it in the top tier when benchmarked against other companies. For example, Eisai compared favorably with Accenture PLC and The Bank of New York Mellon Corporation (See Figure 2).  
  • Based on the diversity results showing room for improvement, Eisai implemented efforts to increase gender diversity. As a result, Eisai’s measure of Human Capital Investment Efficiency improved to 80% in fiscal 2022.  
    • Aiming for an even higher level of Human Capital Investment Efficiency, Eisai has set targets of 82% and 87% respectively for fiscal 2025 and 2030.  
    • To achieve these impact levels, Eisai is proactively driving initiatives to improve the ratio of female employees, the ratio of female managers, and the number of female appointments to organizational heads. Eisai has also established a DE&I Promotion Committee led by the CHRO and a DE&I steering group at the Board level.  
  • Eisai found that an adjusted EBITDA (adjusted for ESG elements) increased by up to 144% when the employment impact results were included. This increase solidified internal confidence that Eisai’s strategy to invest in and prioritize employees created value that could result in material gains. 
    • Moreover, using the “Yanagi Model” regression analysis, Eisai proved the positive correlation between increased Personnel Expense and PBR (Price to Book-Value Ratio) as well as corporate valuation. Providing evidence that investing in employees can drive long-term corporate value allowed Eisai to cement its commitment to greater investment in human capital. 
  • Utilizing impact accounting also yielded additional benefits, including:  
    • Improved quality of meetings with global investors, where insights were shared using impact accounting; 
    • Enhanced engagement with and increased confidence from its labor union; 
    • Additional strategic insights for its management team regarding investments in human capital. 

Eisai management reported these results as an Employee Impact Statement in their 2021 Value Creation Report (pg 59) and continues to refer to these results in subsequent reporting, such as the 2023 Value Creation Report (pg 53, 66), the 2023 Human Capital Report (pg 4) and the 2024 Human Capital Report (pg 110-112) .

Table 2: Employment impact with cohort.
Source: Impact-Weighted Accounts Project at Harvard Business School.

Future Work

  • Encouraged by these positive outcomes, Eisai expanded its use of impact accounting through additional pilots.  
    • For example, see the Eisai Neglected Tropical Disease case study in the 2023 Eisai Value Creation Report (pg 50) and Eisai’s case study on the impact of DEC tablets. 
    • Eisai is continuing to test product impact accounting on other product lines. For example, in connection with the value-based pricing of a cutting-edge Alzheimer’s treatment, the social impact was assessed utilizing impact accounting principles. (See page 32 of 2023 Eisai Value Creation Report.) 
  • This initiative marked a pioneering moment in Japan, upon which wider interest and adoption of impact accounting has grown. Multiple efforts are now supporting the growing ecosystem of practitioners and adopters, including Japan’s Financial Services Agency’s (FSA’s) Impact Consortium with membership including investors and financial institutions, governmental bodies and corporations. 

“With Eisai’s application of impact accounting, our engagement with stakeholders has become much more persuasive and supported by quantitative data rather than qualitative, often ambiguous dialogue. Utilizing impact accounting allowed us to gain trust from not only global investors but also Eisai’s employees. Sayaka Kobayashi, a chair of Eisai Labor Union said their stakeholders are further motivated by Eisai’s use of impact accounting. Ultimately, it made a huge difference at Eisai.” 

Ryohei Yanagi, Advisor, Eisai

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