Proposed Standard Calls for Human Capital Disclosure

“A significant portion of the value of organizations remains unaccounted for in investment communications,” advocates of the proposal contend.
David McCannApril 10, 2012

A proposed standard for what information public companies should disclose about their human capital, issued late yesterday for public review, could ultimately have a profound impact on investors’ understanding of why companies succeed or fail.

Or it could have no effect at all.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

It all depends on how investors, analysts, and companies react to the standard, should it be approved by the American National Standards Institute (ANSI). That’s what the Society for Human Resource Management is hoping for. The proposal was drafted by SHRM’s Investor Metrics Workgroup, which has been busy with the task for more than a year. “A significant portion of the value of organizations remains unaccounted for in investment communications,” the group wrote in its summary of the standard’s purpose.

The grand plan for the standard is indeed grand. It calls for winning the ANSI approval (following a 45-day comment period, consequent revisions to the document, and formal submission to the standards-setting body) and then convincing investor groups and analysts to demand that companies provide the information. Depending on the success of that effort, companies may feel obligated to go along.

“It’s proposed as a voluntary standard, but it could create pressures on companies to develop some uniformity in what they report,” says Laurie Bassi, a labor economist and CEO of human-capital-management consulting firm McBassi & Co., who chaired the workgroup. Currently, few companies disclose anything about their human capital other than succession plans for top executive positions and, occasionally, human-capital-related risks.

The information that the proposed standard asks companies to provide is fairly comprehensive (see box at the end of this article). But Bassi says most companies already have the information on hand — with the notable exception of “total amount spent in lieu of employees,” which mainly refers to costs for independent contractors, consultants, and temporary workers. Large global companies, though, might find it quite a chore to gather all the information and assemble it into the format the standard proposes.

Bassi envisions that companies already known to be leaders in human-capital management will be the first to embrace the public disclosure as being in their best interest. “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.” There is currently no plan to lobby regulatory bodies to require adherence to the standard, but if making the disclosures were to become commonplace, one can imagine the Securities and Exchange Commission and the Financial Accounting Standards Board getting involved.

The effort could get a big boost if, in addition to the ANSI approval, the standard is accepted in some form by the International Organization for Standards (ISO). Shortly after work on the U.S. standard began early last year, ANSI, on behalf of SHRM, proposed to ISO the idea of an international standard for human-capital management. ISO agreed to look into the matter and chose SHRM to be the secretariat of a committee formed for that purpose. It is a departure for ISO, which until now has mostly issued standards for manufacturing and other technical processes.

Still, the draft standard does not go into great detail about the requested information or in what manner it should be disclosed. That was purposeful, says Bassi, in order to tame potential adverse reaction. “One of our objectives was that the standard be easy to love and not to create unnecessary work that wouldn’t be the helpful thing,” she says.

One consequence of that stance could be that companies’ disclosures might not be too comparable to one another. But, again through investor pressure, they may conform over time. “As investors gain experience interpreting the data and a historical track record is created, the metrics will become increasingly useful,” the workgroup wrote in its executive summary of the proposed standard.

Bassi notes that many members of the workgroup were corporate human-resources officers, who provided input on what they could report confidently and meaningfully. The proposed standard “wasn’t created in a vacuum,” she says.