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A prominent HR group wants companies to disclose detailed information about their human capital.
David McCann, CFO Magazine
June 15, 2012
A proposed standard for corporate disclosure of human-capital information has provoked mixed reactions from CFOs and analysts. But the group behind the standard, the Society for Human Resource Management (SHRM), believes that it can convince investors to demand such disclosure — and that companies will ultimately provide it.
The standard was drafted by the SHRM's Investor Metrics Workgroup and released in April for a 45-day public review. "A significant portion of the value of organizations remains unaccounted for in investment communications," the group wrote of the standard's purpose in its executive summary. The guidelines are intended for public companies; compliance would be voluntary.
The SHRM aims to win approval of the standard from the American National Standards Institute (ANSI), something it doesn't expect to happen until late this year. After that, the society hopes to persuade investor groups and analysts to insist that companies provide the information.
Laurie Bassi, a human-capital management consultant who chaired the workgroup, predicts that companies already known to be leaders in human-capital management will be the first to embrace the standard. "When it catches on, some of the laggards will come along," she says. "They probably won't do so with great enthusiasm in the beginning, but that's how standards can begin to change things."
Six Degrees of Disclosure
Currently, few companies disclose anything about their human capital other than succession plans for top executive positions and broad summaries of human-capital-related risks. The proposed standard asks companies to provide information in six areas: spending on human capital, ability to retain talent, leadership depth, leadership quality, employee engagement, and a narrative human-capital discussion and analysis (see "People Talk" at the end of this article). Bassi says most companies already have most, if not all, of this information on hand.
But the standard does not go into great detail about the requested information or how it should be disclosed. That was intentional, says Bassi. "One of our objectives was that the standard be easy to love and that it not create unnecessary work," she explains.
A consequence of that stance could be that companies' disclosures would lack comparability, at least at first. But that may change over time. "As investors gain experience interpreting the data and a historical track record is created, the metrics will become increasingly useful," the workgroup predicted in its executive summary.
It remains to be seen whether the SHRM can convince analysts and finance chiefs to pay attention to the standard. Peter Wahlstrom, an equity analyst at Morningstar Investment Services, says the disclosures wouldn't help him arrive at investment decisions. "I don't think the value extracted from receiving this information, at the proposed level of detail, will outweigh the incremental cost incurred by the company to provide it," he says.
On the other hand, Keith Mills, an equity analyst at Trillium Asset Management, says that human-capital analysis "is critical input in analyzing the probability of a company generating its return on invested capital that's above its weighted average cost of capital." Investors want companies to "build productive, ethical, and sustainable organizations over the long term," he says, and "analysts should be aware of all inputs that will contribute to this outcome."
A recent CFO.com article on disclosing human-capital information drew similarly polar reactions from finance chiefs. "The human-capital disclosure requirement should not be pursued," commented Pete Hastings, finance chief of ISR Group, a private company that provides technical services to unmanned vehicles. "The effort required to pull together meaningful data will be significant and will waste the time of very busy people."
But Dennis Milosky, CFO of Technical Instruments, a microscopy products and services supplier, called the idea "a step in the right direction." It is common practice, he noted, to replace full-time-equivalent employees with outside contractors in order to get around head-count budgets. "Those costs are all too often buried in other categories," he said. "If this information were disclosed, it would be far easier to evaluate the true efficiency of an organization."
To backers of the proposed standard, the criticisms miss the point. While it may take years — or even a decade — before the standard is generally accepted, Bassi says the proposal is "a good first step, and in fact almost any standardization effort starts this way. It will be revised over the years and gain acceptance. Let perfect not be the enemy of good."