Outcry over Proposed Human Capital Metrics Disclosure

Criticisms are abundant, but the effort is finding enough supporters to give it a fighting chance.
David McCannMay 1, 2012

The Society for Human Resource Management’s proposed standard for what companies should disclose about their human capital is not a big hit with CFOs and is getting mixed reviews from equity analysts.

The SHRM and others are concerned that the absence of publicly disclosed human-capital metrics handicaps investors from making informed decisions on where to place their money. The grand plan is to persuade investor groups and analysts to demand that companies provide the information requested by the standard (see the box at the end of this article), to which compliance would be voluntary. Depending on that effort’s degree of success, it’s possible that many or most companies would feel pressure to comply.

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The midpoint of a 45-day public comment period on the proposal has been reached, and Lee Webster, SHRM’s director of HR standards, says it’s likely there will be at least one more comment period because of changes to be made in response to some of the comments. He forecasts that the American National Standards Institute will approve the proposed standard late this year.

To date, the proposal has actually generated only a couple of dozen comments, and virtually all of those are about technical details rather than a pro-or-con stance toward the overall concept. But some CFOs and analysts who communicated directly with CFO had volatile reactions to the proposal.

CFOs tend to be blunt about their feelings on the matter. “The public disclosure of human capital information should not be pursued,” says Pete Hastings, finance chief at ISR Group, which provides technical assistance for unmanned technologies. “The effort required to pull together meaningful data will waste the time of very busy people. These metrics add nothing to the bottom line.”

Further, Hastings says, the value of the data to investors will be questionable at best. For example, companies define and calculate turnover differently. “If a generic standard is used, it may be irrelevant to a number of industries.”

Another CFO points out that having more and more information does not necessarily make investing decisions easier. “Presently, financial reports contain so much information that it is questionable if investors can digest everything,” says Phil Bolles, CFO at Global Commercial Strategies Group and former finance chief at Cavico, a publicly held company.

Bolles also worries that the disclosure proposal could be a Pandora’s Box. If human-capital disclosure became commonplace, regulatory bodies ultimately would issue rulemakings “that will standardize the disclosures but may also increase the financial reporting burden without any particular benefit to investors.”

But Dennis Milosky, CFO of Technical Instruments, generally supports the idea. It is common practice, he notes, 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 says. “If this information were disclosed, it would be far easier to evaluate the true efficiency of an organization. This is a step in the right direction.”

Among analysts, interest in the disclosures seems to be picking up. Keith Mills of Trillium Asset Management says he believes that human-capital analysis “is critical input in analyzing the probability of a company generating return on invested capital that’s above its weighted average cost of capital.” He adds that investors want companies to “build productive, ethical, and sustainable organizations over the long term. Analysts should be aware of all inputs that will contribute to this outcome.”

Others have similar views, as became clear at an off-the-record forum on the proposal hosted by UBS on April 30. But among 10 randomly selected analysts who were not invited to that event and were contacted by CFO, there was little interest. “Sorry, that’s not my area,” said one, even though any analyst seemingly could opine on whether human-capital disclosure could help him or her make better recommendations. Others too said, without further comment, that they didn’t care about such data.

The one analyst among the 10 who gave a substantive response said 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,” said Morningstar’s Peter Wahlstrom. “Although there are clearly examples of companies making human-capital-related errors, this drills down too far into the weeds to make it an acceptable industrywide standard.”

To supporters of the proposed standard, some of the criticisms may be valid but still miss the point. While general acceptance of the standard may take years or even a decade (or two), economist Laurie Bassi, chair of the SHRM workgroup that drafted the proposal, says it’s “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.”