Government and labor pension funds, other investors and academics voice wide support for adding human capital disclosures to Securities & Exchange Commission S-K regulations.
The push by investors for a more strategic approach to human capital management and engagement across the enterprise is demonstrated by the wide support for adding human capital disclosures to the information public companies in the U.S. must disclose under Securities & Exchange Commission (SEC) S-K Regulations. Of the more than three dozen responses from multiple types of asset managers and interested parties in human capital management, the key points raised were generally supportive. There was only one negative response, which is included below as well.
In 2017, the Securities & Exchange Commission requested comments on the potential need to update business and financial disclosure requirements by public companies under Regulation S-K. At that time, ESM reported on petitions filed by the Human Capital Coalition, an alliance of pension funds, and CalPERs, reportedly the largest U.S. pension fund, in support of requiring the disclosure of human investments and outcomes (see: “ESM: Momentum Grows for Human Capital and Employee Engagement Disclosures by Public Companies”). The concept of human capital reporting requirements by public companies received almost unanimous support from leading pension funds and unions, investment advisor groups and government pension funds. Below is a summary of comments showing the consistent themes. Click here for a link to all the comments, or click on the name of the organization to see the full transcript of its comments.
The key implication is that this new interest in human capital reporting will increasingly drive not only organizational priorities, but the very nature and qualifications of the CEOs named to run the next-generation of organizations. Based on the comments, the new CEO will need to have a complete understanding of the principles of Enterprise Engagement and how to connect the dots between all the organizational silos standing in the way of implementing a strategic and measurable approach to human capital management.
Here are key responses organized by type of organization: Private Investors & Managers; Unions; and Other Interested Parties, as well as the one negative comment.
Allan Emkin, Founder and Managing Director
Key point: Investors need better data about human capital investments and outcomes because of growing risks and need for capital market efficiency.
“Founded in 1988, Pension Consulting Alliance is an independent investment consulting firm that provides nondiscretionary investment advisory services to institutional investors. PCA’s advisory services span all asset classes. PCA serves a mix of clients that include large U.S. public plan sponsors, endowments, Taft-Hartley funds and 529 college savings plans. Presently, PCA has 34 clients representing over $1 trillion in plan sponsor investment assets. Our clients range in size from the largest U.S. public defined-benefit pension fund, at $341 billion in Assets under Management (AUM), to a foundation with $130 million in AUM. This letter expresses PCA’s opinions, not necessarily those of its clients. From PCA’s perspective, HCM risks have become a growing concern, as a key component of larger Environmental, Social and Governance (ESG) risks. PCA advisory services that can be impacted by HCM issues include: investment beliefs and investment policy development, manager selection and monitoring, education and analysis on macro and micro issues, and proxy voting and engagement. We strongly believe that standardized, material, and decision-useful HCM information could help investment advisors such as PCA provide more useful and effective investment consulting services. Industry research indicates that much of the basic data identified in the petition is already gathered by many corporations, although it is not being publicly disclosed. We believe that the sooner the SEC standardizes the disclosure of HCM information, the sooner the capital markets will become more efficient in identifying and pricing these risks.”
Richard A Bennett CEO and President and Nell Minow, Vice Chair
Key points: Accounting principles no longer reflect true organizational assets; The inability of an organization to provide key human capital data is, in and of itself, a red flag.
“As you know, GAAP (Generally Accepted Accounting Principles) data came out of an era when a company's primary worth was based on real property, equipment, and its inventory of tangible products. We now live in a time when companies’ primary assets and liabilities are all human capital, the abilities, knowledge, and relationships of its employees. You can hardly find an issuer’s annual report that does not claim the company’s primary assets are its people. And yet, you would not know that from looking at balance sheets, which are skimpy when it comes to information we find essential for evaluating investment risk. Just as important, it is information corporate executives themselves must have in order to develop strategy and evaluate operations. We strongly endorse the position of the Human Capital Management Coalition (HCM) as outlined in their comment letter of July 6, 2017, that better disclosure of an issuer’s record on human capital is achievable at very low cost, and of enormous value to investors, analysts, and the issuers themselves.
The kind of information we would like to see includes employee turnover, employee training, and opportunities for advancement. It is important to emphasize that this is not in any way a political agenda. It reflects concerns raised by respected institutional voices like BlackRock’s Larry Fink and the Sustainability Accounting Standards Board (SASB), which produces reports like Human Capital in the Age of Fintech. As noted in the HCM letter, ‘SASB has identified one or more human capital issues as material for accounting purposes for at least some industries in each of its 10 sectors. It has characterized human capital as a cross-cutting issue.’ Such disclosure will not inhibit capital formation. Quite the contrary, it will make capital allocation more efficient, and any such claims should be closely examined for proof. And it will not impose any additional costs. The information needed for disclosure is already available and relied on by executives and managers or, if it isn't, they are overlooking critical data and that in and of itself is of vital interest to investors. If part of what investors need to do is evaluate risk, it is far more significant to know how much a company is investing in employee development and whether employees are satisfied enough to stay in their jobs, keeping crucial institutional knowledge in-house, than to know what the depreciation schedule is for some forklifts. There is hard data, readily available, about employee capabilities, training, and treatment... We request that hearings be scheduled…”
Please note that unions generally oversee the management of the pension and other funds of their members.
Heather Slavkin Corzo, Director Corporations and Capital Markets AFL-CIO
Key point: There is relevant and useful data organizations can publish today.
”We have submitted comments to the Commission in the past regarding the importance of clear, consistent and comprehensive disclosure to investors and markets.
1 We have also reported extensively on the importance of strategic Human Capital Management (HCM) as a key driver of corporate performance and an essential indicator of value creation strategy and long term viability.
2. There is both significant and growing research demonstrating this link, as well as clear and growing investor demand for this information, most recently in the form of the petition for rulemaking. Given the connection to performance and the broad call for disclosure, the Commission should require robust human capital disclosures including, but not limited to, the nine fundamental HCM issue areas identified in the petition. Investors need human capital management data to make informed decisions about their investments. HCM data supports identifying long-term investment strategies, stabilizing markets, and encouraging employers to invest in their workforces. The Commission should, in the interests of capital formation and efficient markets, as well as for the protection of investors, begin the rulemaking process immediately.
For all these reasons, we urge the Commission to require disclosure of HCM-related metrics, to consider the various metrics and frameworks being developed by stakeholders and practitioners, and specifically to require metrics including but not limited to:
• Investment in workforce training and education
• Annual employee turnover, voluntary and involuntary
• Total amount spent on third-party human resources, both third-party contracts and independent contractor expenditures
• Labor standards in the supply chain
• Health and safety violations
• Gender pay disparities
• Percentage of employees that are represented by a union
• Benefits and incentive structures available to employees
• Strategies and goals related to HCM, and
• Legal or regulatory proceedings related to employee management.
This information would enable investors to make informed investment decisions based on the trends in a company’s workforce and to better assess the competitiveness and productivity of companies. Currently, company disclosures vary greatly, making it virtually impossible to compare employment trends between companies in the same industry.”
Ken Hall General Secretary-Treasurer
Key point: Some flexibility is needed, but there is valuation information organizations can disclose now.
“The Teamsters Union agrees with the petition that disclosure requirements may need to be tailored and not necessarily be uniformly applied across all companies, but also agrees with the petition that certain categories of information are fundamental to human capital analysis and some disclosures, whether quantitative or qualitative (or both), should be required.
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), 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) and
9. Workforce compensation and incentives (bonus metrics used for employees below the named executive officer level, measures to counterbalance risks created by incentives). We understand the importance as outlined in the petition that quantitative and qualitative disclosures must complement each other and that the Commission will need to strike an appropriate balance on what are the right human capital management metrics and disclosures.”
Kathy Seabrook, Chairperson
Key Points: Poor human capital management carries substantial risks to employee engagement, innovation, supply management, and reputation, as well as to customer and talent recruitment and retention.
“Current corporate reporting practices are ineffective and inefficient. Corporations are being deluged with requests for nonfinancial, corporate social responsibility-related information, including human capital management information. Companies are experiencing so-called ‘survey fatigue’ from responding to multiple sustainability frameworks and ratings and rankings organizations requests…
The evidence in support of the recognition of human capital-related information as meaningful and material to investors is compelling. Research has shown that poor human capital management practices may hamper a corporation’s ability to attract and retain talented employees; negatively impact employee engagement, innovation…disrupt the organization’s supply chain; and damage the corporation’s reputation to investors and customers. Ultimately, poor human capital management practices negatively impact a corporation’s ability to create and maintain value for its shareholders and other key stakeholders. The new recognition of the importance of human capital is being driven by changing expectations of key stakeholders:
• Consumers: Consumers are showing an increased interest in supporting socially responsible companies. In the Nielsen’s 2015 global corporate social responsibility survey of 30,000 consumers in 60 countries, 66% of the respondents indicated that they were willing to pay extra for products and services from companies that are committed to positive social and environmental impact, an increase of 11% since 2014.
• Employees: The 2016 Cone Communications Millennial Employee Engagement Study concluded that meaningful engagement around corporate social responsibility…is a business – and bottom line – imperative, impacting a company’s ability to appeal to, retain and inspire Millennial talent. More than any other generation, Millennials see a company’s commitment to responsible business practices as a key factor to their employment decisions:
‣ 75% say they would take a pay cut to work for a responsible company (vs. 55% U.S. average)
‣ 83% would be more loyal to a company that helps them contribute to social and environmental issues (vs. 70% U.S. average)
‣ 76% consider a company’s social and environmental commitments when deciding where to work (vs. 58% U.S. average)
‣ 64% won’t take a job from a company that doesn’t have strong CSR practices (vs. 51% U.S. average)
‣ Millennials will soon make up 50% t of the workforce and companies will have to radically evolve their value proposition to attract and retain this socially conscious group.”
Stanford Graduate School of Business; Professor of Law (by courtesy), Stanford Law School; Director of the Corporate Governance Initiative; and Senior Faculty of the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford.
Key point: Public disclosures will push boards to select CEOs with human capital management capabilities.
“I am very supportive of the theme of this petition. The disclosure of human capital measures will allow investors to better assess firm performance and valuation. Moreover, the inclusion of human capital measures in executive evaluation and compensation packages have the potential to substantially improve the choice of corporate strategy and the long-term value of firms. I believe that requiring firms to disclosure human capital measures will improve corporate governance for public companies. Research conducted by the Stanford Rock Center for Corporate Governance and the Corporate Governance Research Initiative clearly show that human capital measures do not play an important role in evaluating CEOs.
Talent development and succession planning were given a very low weight in CEO evaluation relative to financial measures of firm performance. If talent development and assessment is a key driver of long-term firm performance (which I believe to be true), it is disturbing that human capital measures are given so little weight by boards when conducting CEO evaluations. The development and public disclosure of reliable and valid measures of human capital would be invaluable to boards of directors and investors for assessing the intangible asset commonly referred to as human capital. Our present level of knowledge regarding human capital measures (as well as other measures of intangible assets such as the customer asset, corporate culture, corporate governance, and ability to innovate) is somewhat modest. It would be highly desirable for firms and regulators to collaborate with researchers to develop comparable measures based on institutional knowledge and rigorous statistical testing. This type of work would address the common critique that the required disclosure of human capital measures is costly for firms and of limited value to investors. Overall, I believe that it is important for companies to publicly report insightful and comparable data on human capital.”
Josh Zinner, Chief Executive Officer
Key Point: Human capital investment practices can lower the cost of capital and significantly reduce risks.
“We are writing in strong support of the Human Capital Management Petition filed with the U.S. Securities Exchange Commission by the Human Capital Management Coalition...The Interfaith Center on Corporate Responsibility (ICCR) is a coalition of more than 300 faith- and values-driven institutional investors collectively representing over $400 billion in invested capital. For over four decades, we have engaged hundreds of multinational corporations on a host of environmental, social and governance topics in order to promote improved long-term financial performance and greater sustainability. As such, ICCR members underscore the importance for companies of meeting investor requests for the disclosure of meaningful information beyond current financial reporting requirements.
We believe more robust human capital disclosures would assist investors in evaluating risk, and would help companies in evaluating operations, mitigating risk, and creating long-term value. As long-term investors, we have seen the value of providing investors with an improved ability to ascertain information important to their investment decisions. We also recognize that the 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.
Investors need more complete information on human capital management to adequately assess the performance of the companies they own and hold boards accountable for oversight of the legal, reputational, and financial risks related to human capital management. Greater transparency would allow investors to more efficiently direct capital to its highest-value use, thus lowering the cost of capital for well-managed companies. Developing consistent and comprehensive standards would give investors the best “window” into a company’s performance and future prospects (both HCM performance and overall performance).”
In the interest of full disclosure, here is the one negative replay. Note that ESM has reported on this organization in the past (see “ESM: Human Capital Rating System Available at No Cost”).
Paul Kearns, Co-Founder
Key points: The recommendations as stated in the human capital coalition could lead to a total confusion; the S.E.C. should consider an “open source” metric the Maturity Institute has created.
“I respectfully write as the chair of the Maturity Institute (MI) in relation to the above petition submitted by the Human Capital Management Coalition. MI was specifically established in 2012 to provide evidence of the value of effective human governance and human capital management practice. Our methodology can be viewed as the antithesis of conventional ‘HR metrics’ used in conventional company reporting, which we believe are able to reveal a true and complete picture. We willingly admit that the debate still rages in this new field but that a start has to be made towards better reporting. In our considered opinion the HCM Coalition is still undecided on the best way forward and so their petition should be viewed with great caution.
The main issue for MI today is one of responsibility. This petition sets in motion an initiative that may now go down a road that ultimately leads to total confusion. If the petition is accepted, we will all be in a fundamentally different realm of company reporting where companies will need clear guidance on what and how to report. This process of reporting, in MI’s view, should actually increase the value of the company, if done effectively. It does not need to be a bureaucratic check box exercise from a reluctant audience…I am happy to respond further to any questions or inquiries.”
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