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S.E.C. Petitioned to Mandate Disclosure of Human Capital Investments, Engagement

Leading coalition of investors says understanding human capital investments and outcomes is material to investors.

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The pressure for public companies to disclose investments in human capital, including engagement, continues to mount. The Human Capital Management Coalition (the HCM Coalition) recently petitioned the Securities & Exchange Commission to adopt or amend existing rules related to Rule 192 “to require issuers to disclose information about their human capital management policies, practices and performance. There is broad consensus that human capital management is important to the bottom line, and a large body of empirical work has shown that skillful management of human capital is associated with better corporate performance, including better risk mitigation. We view effective human capital management as essential to long-term value creation and therefore material to evaluating a company’s prospects.”
 
The HCM Coalition describes itself as “a collaborative effort among a global group of institutional investors to further elevate human capital management as a critical component in company performance and in the creation of long-term shareholder value.” For early accounts of HCM’s activities see ESM: Investor Coalition Sees Link Between Human Capital Management and Shareholder Return.  
 
The growing demand by investors for human capital investments and disclosures could fuel increased investment in formal practices to engage all people critical to organizational success and to measure the results on an ongoing basis. 
 
In the petition, filed earlier this month, the HCM Coalition wrote: “Requiring disclosure regarding human capital management would fulfill the Commission’s core mission of investor protection; satisfy Congressional mandates to promote efficiency, competition and capital formation; and serve the public interest, for the following reasons:
While leaving it to the S.E.C. to determine the best disclosure frameworks, the petition cites several already under development as reference and recommends the disclosure of the following types of information:
  1. Workforce demographics (number of full-time and part-time workers, number of contingent workers, policies on and use of subcontracting and outsourcing.)
  2. Workforce stability (turnover, voluntary and involuntary, and internal hire rate.)
  3. Workforce composition (diversity, pay equity policies/audits/ratios.)
  4. Workforce skills and capabilities (training, alignment with business strategy, skills gaps.)
  5. Workforce culture and empowerment (employee engagement, union representation, work-life initiatives.)
  6. Workforce health and safety (work-related injuries and fatalities, lost day rate.)
  7. Workforce productivity (return on cost of workforce, profit/revenue per full-time employee.)
  8. Human rights commitments and their implementation (principles used to evaluate risk, constituency consultation processes, supplier due diligence.)
  9. Workforce compensation and incentives (bonus metrics used for employees below the named executive officer level, measures to counterbalance risks created by incentives.) 

The Economic Imperative

The bulk of its 28-page petition, available here, is dedicated to demonstrating the financial and other justifications for human capital disclosures. Among its many references:  

The Impact of Employee Engagement

Along with other issues related to human capital management, including training and organizational culture, the petition cites the material benefits of engagement. “Employee engagement, which many employers measure, has also been found to have a positive association with firm performance. Definitions of employee engagement vary, but it is generally agreed to include the strength of an employee’s commitment to the employer and the employee’s willingness to expend effort in his or her role. The reciprocal nature of employee engagement—its dependence on employer as well as employee commitment--differentiates it from employee satisfaction.” The petition refers to the work of consultant Aon Hewitt, which has “emphasized the need for senior leaders to create a ‘culture of engagement.’”
 
The petition asserts that "human capital management also provides the means to reduce risk. Material risks related to human capital management can create substantial risks for companies and investors, damaging corporate reputation, generating legal liabilities and undermining relationships with key stakeholders.” The petition also addresses the issue of supply chain managemen: “Major shifts in the organization of work over the past several decades, including the rise of outsourcing, subcontracting, franchising and complex global supply chains, have multiplied those risks. When a company’s products or services are made or provided by its employees, that company has control over the work and, as a general matter, liability for legal violations related to it. As employment relationships are increasingly supplanted by contractual ones, there is a growing concern that the incentives of the company’s contracting partners are not necessarily aligned with those of the company. This misalignment may lead to financial and reputational damage.” 
 

Investors Want Human Capital Disclosures

To make its case for formal disclosures, the HCM Coalition says, “A wide range of investors have shown interest in obtaining information that will enable them to analyze the effectiveness of companies’ human capital management practices. Investor appetite for human capital disclosure should be understood within the larger context of concern over short-termism. In a widely publicized letter to CEOs at S&P 500 companies, BlackRock chief Larry Fink advocated ‘resistance to the powerful forces of short-termism’ and investment in long-term growth. To that end, he urged CEOs to develop a strategic framework for long-term value creation and disclose more about their vision and plans for the future, including how they are ‘developing [their] talent.’” See ESM article: "Blackrock Joins Ranks of Big Investors Focused on People.” 
 
The HCM Coalition also cites:
 
The HCM Coalition petition asserts that investors can use human capital disclosures to help manage their investment strategies, including creation of stock indices and investable products. “Investment managers are using those types of human capital data that are currently available for that purpose.” See the EEA’s Engaged Company Stock Index at TheEEA.org. HCM also sees disclosures as providing investors the means to better compare companies to one another and reduce material risks. 
 

The Need for Comparable Data  

The petition laments the lack of transparency and comparability related to disclosures of human capital. “Despite the importance of human capital management to company performance, human capital is nearly invisible in the Commission’s disclosure rules. Regulation S-K, which sets forth disclosures required in registration statements and various reports under the integrated disclosure system, contains one item related to human capital…’the number of persons employed by the registrant.’” 
 
The petition asserts that some companies “do not respond to reasonable requests for information at all.” Relying on web sites such as Glassdoor.com or other ratings web sites, the petition cites, does not provide adequately objective information, and that “investors do not currently have the ability to obtain comparable human capital data from U.S. issuers.”
 
The petition says that S.E.C. rules are not static and that the materiality of human capital reporting warrants change. “Last year the Commission solicited comments from investors on a wide variety of potential changes to both the substance and format of disclosures as part of its Disclosure Effectiveness initiative. Commissioner Kara Stein noted last year: ‘Materiality evolves. It changes as society changes, and it also changes with the availability of new and better data. To achieve effective disclosure, we must understand what is important to today’s investors.’”
 
The petition concludes: “Human capital disclosure would strengthen both our financial markets and the U.S. economy. More transparency about human capital management would improve investors’ decision- making and lead to more efficient capital allocation. And greater transparency, at least in financial reporting, has been found to be economically beneficial. As well, disclosure could promote a longer-term orientation. At present, a variety of factors, including short-term earnings pressures, accounting policies and compensation structures, create incentives for corporate managers to produce short-term results, which may lead to underinvestment in the workforce.” 
Article Sponsor 
 
EGR International
A full-service engagement agency
 
Contact:
Rob Legge
rlegge@egrinternational.com
 

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