In a recent letter to the Securities and Exchange Commission, the California Public Employees’ Retirement System (CalPERS) specifically requested the disclosure of human capital investments by public companies, including spending on training and employee engagement. The comments are related to a request for comments from the S.E.C. business and financial disclosure required by Regulation S-K and could eventually lead to formal revisions.
In a lengthy response covering a variety of other issues related to these disclosure regulations, CalPERS said companies should disclose the number of employees “to effectively assess the size, scale and viability of a registrant’s operations and trends.” The letter said that “long-term value creation requires effective management of three forms of capital: financial, physical and human. The scope of human capital management includes a company’s direct employees, as well as the employees of vendors in the company’s supply chain. In addition, human capital management encompasses a broad range of corporate practices, including but not limited to: hiring and retention, training, compensation, fair labor practices, health and safety, responsible contracting and diversity and inclusion.”
Further, “Enhanced human capital disclosures are also critical to an investor’s ability to promote governance, transparency and board accountability in the effective management of human capital. Research shows that there is a correlation between investing in people – their compensation, training, health and safety – and shareholder return.”
The letter also stated: “Additionally, disclosures around workforce composition, employee engagement, health and safety and attribution would also help investors assess and compare human capital management performance, over time, at the same company and across companies.”
In the letter, CalPERs laments the lack of disclosure about how human capital is managed and measured. It cites a Mercer Human Resource Consulting study finding that companies spend over one-third of their revenues on human capital, including pay, benefits, training and development, and that only “20 percent of the largest publicly-traded companies in the U.S. report information on human capital and its contribution to the company’s strategy.”
Is This a Flash in the Pan?
In recent articles, Engagement Strategies Media at EnterpriseEngagement.org has reported on two separate coalitions of pension funds with combined assets of nearly $6 trillion that have separately begun campaigns to leading public companies to better disclose key human capital and employee engagement information to investors. Pressure by investors on public companies to invest in human capital, and specifically employee engagement, is an enormous, unexpected development in the field of Enterprise Engagement with profound implications. So are these latest efforts by investor groups a flash in the pan?
To find out, ESM checked in with Larry Beeferman, Project Director, and Aaron Bernstein, Senior Research Associate, of the Pensions and Capital Stewardship Project in the Labor and Worklife Program at Harvard Law School. The group was established in 2004 “to educate and inform workers, scholars, researchers and practitioners on issues of retirement security, including employment-based retirement plans, and of pension fund governance, management, investment and related matters.” As a result of their pension fund stewardship activities, the two have considerable insight into pension fund management issues and priorities. They began work together on human capital issues in 2008.
According to Aaron Bernstein, who spent much of his previous career in business journalism as an editor at Business Week and before that Forbes, “I would say human capital has risen to one of the top three areas of interest in the ESG community,” referring to investors interested in Environmental, Social and Governance issues.
In a 66-page report published by Bernstein and Beeferman last year entitled The Materiality of Human Capital to Corporate Financial Performance, which was cited in the CalPERS letter to the S.E.C., they concluded that there is sufficient evidence of human capital materiality to financial performance to warrant inclusion in standard investment analysis, noting “However, we also find that doing so remains a challenge for a number of reasons. These range from the fact that companies do not provide investors with comparable data to a lack of consensus over which combinations of policies have the most impact on financial outcomes.”
The report was funded by the Investor Responsibility Research Center Institute (IRRCi), a nonprofit research organization that funds “research that enables investors, policymakers and other stakeholders to make data-driven decisions” and was based on their review of extensive research in all areas of engagement. The authors determined that corporate training and other human capital policies, if implemented correctly, can enhance financial results and that ESG investors should consider human capital in their corporate analysis. They proposed preliminary ideas on what types of information investors should look for, particularly in the area of investments and training.
Efforts in the U.K.
Bernstein cited multiple examples, in addition to CalPERS and those already reported at ESM. “The Pensions and Lifetime Savings Association (PLSA) and the Investment Association in the United Kingdom both have put out several reports aimed at helping their member funds ask portfolio companies for human capital reporting,” he says. “The idea is basically the same as the approach by the U.S. Human Capital Management Coalition of maor pension funds, and the two groups have talked, but last I heard haven't begun actually working together.”
In a recent report, the PLSA advocates for the disclosure of information almost identical to that requested by CalPERs. Click here to get a copy of its most recent report on the subject: Understanding the Work of the Workforce – A Stewardship Toolkit for Pension Funds.
In a statement issued last year, the U.K.-based Investment Association said, “Many companies say that their talent is their greatest asset and that they invest significantly in their talent, but there isn't really a framework for reporting on the value of that talent. That makes it difficult for all of us – including of course investors – to assess this vital aspect of a company’s future prospects. This Investment Association initiative has the goal of moving from talk to actions, and then from actions to results on Human Capital Reporting.”
Bernstein also cited the efforts of the Maturity Institute and its OMINDEX scores for evaluating companies. “While all these investor groups want to spur corporate reporting on human capital,” he says, “they're still trying to determine exactly what they think that reporting should consist of. Larry and I are trying to help through the Pensions and Capital Stewardship Project.”
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