A large investor group has asked the Securities and Exchange Commission to adopt rules requiring public companies to disclose information about their human capital management policies, practices, and performance.

A rulemaking petition was filed by the Human Capital Management Coalition (HCMC), comprising 25 institutional investors with more than $2.8 trillion in assets under management. The group did not define any specific metrics that it wants to be reported, instead offering nine broad categories of information deemed fundamental to human capital analysis as a starting point for dialogue:

  • Workforce demographics
  • Workforce stability
  • Workforce composition
  • Workforce skills and capabilities
  • Workforce culture and empowerment
  • Workforce health and safety
  • Workforce productivity
  • Human rights
  • Workforce compensation and incentives

At present, public companies are not required to disclose anything about their human capital other than their number of employees, unless you count the requirement to reveal the compensation paid to top executives. Investors don’t even know how much money a company spends on its workforce each year.

The HCMC, which over the past few years has worked with individual companies on voluntarily expanding their human capital reporting, is part of a broader movement to raise awareness of a connection between how companies manage human capital and their financial and stock performance. The movement has been slowly gaining steam over the past decade.

“The ability to effectively harness and apply the collective knowledge, skills, and experiences possessed by each individual in the workforce is essential to long-term value creation,” says Meredith Miller, chief corporate governance officer for the UAW Retiree Medical Benefits Trust, which leads the HCMC. That ability, she adds, “is therefore material to investors in evaluating a company’s future performance.”

There is, of course, no guarantee that the SEC will take any action on the petition beyond collecting public comments. However, the likelihood that it will may be growing.

The International Organization for Standardization (ISO) is working on a standard for human capital reporting and is expected to release it for public comment in the first half of 2018, with a goal of finalizing the standard by the end of next year. That standard will be far more prescriptive than the HCMC petition, according to Jeff Higgins, who both counseled HCMC as it prepared its petition and is a member of the ISO committee that’s drawing up the standard.

“The ISO standard will have very specific recommendations in terms of metrics to be reported,” says Higgins, a former CFO who is now CEO of the Human Capital Management Institute (a similarly named but separate entity from the HCMC). “So when the SEC, or other groups, start asking exactly what metrics and formats human capital reporting can take, [the HCMC] can point to the ISO standard.”

There are several concurrent ongoing initiatives to raise the bar for human capital disclosure, including those by the Global Reporting Initiative and the International Integrated Reporting Council. Their frameworks, like the HCMC’s, are much less specific than the upcoming ISO standard, so they too may attach themselves to it.

All of this activity may put significant pressure on the SEC to act. “The ISO creates global standards,” Higgins notes. “What if 150 countries adopt [the human capital standard]? Why would the United States not look at adopting it? While the SEC is never the first to any party, and I’m not particularly optimistic that it will act on human capital under the current presidential administration, I think a lot of leading companies will act on their own.

“After companies that want to be seen as progressive and forward-looking start to see all those initiatives starting to reference the ISO standard, they’ll want to adopt it as well,” Higgins continues. “And if a lot of companies do that, I think the SEC will have to do something. They’ll feel like their toes are being stepped on.”

In recent years, Higgins notes, companies have taken to listing several human capital-related risk factors in their annual reports, like “we may not be able to attract or retain the talent we need to be competitive.” But, he adds, “they are contradicting themselves. After putting those risk factors in, they’re not going to tell us anything else about their human capital? What’s the argument for that?”

Although, as Higgins points out, the HCMC petition is not prescriptive, the 29-page document presents a strong case.

It cites a variety of academic studies and literature reviews reporting evidence that better human capital management practices are associated with higher shareholder returns, profitability, and overall company performance against benchmarks.

Further, the petition points to research showing that investments in training and development, health and safety, employee engagement, diversity and inclusion, and workforce composition and staffing are associated with increased productivity, reduced turnover, and higher customer satisfaction.

“A company that treats human capital as a vital asset, instead of a cost to be minimized, is not just a good corporate citizen — it is a good investment,” says Tim Goodman, a director at Hermes Equity Ownership Services, which helps institutional investors monitor their investments in companies and intervene, when deemed necessary, to improve performance.

There’s been only one public comment on the petition since July 10, when it was posted on the SEC’s website. In a jointly filed letter, officials of two large institutional investors — the California Public Employees Retirement System and the California State Teachers’ Retirement System — registered their support for improved human capital management disclosure.

According to the petition, requiring human capital management disclosure would fulfill the SEC’s core mission of investor protection; satisfy congressional mandates to promote efficiency, competition, and capital formation; and serve the public interest. It gave four reasons supporting these claims:

  1. Given the key role of human capital, under current disclosure requirements investors can’t adequately assess a company’s business, risks, and prospects.
  1. 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.
  1. Consistent mandatory disclosure standards would obviate the need for issuers to respond to a multitude of investor requests for human capital-related information; make that information easier for all investors to collect and analyze; and level the playing field for investors that are not large enough to demand or otherwise access individualized disclosure.
  1. There is broad consensus that long-term investing strategies are needed to stabilize and improve markets and to effect the efficient allocation of capital. Human capital management metrics are precisely the type of information that enables investors to take the long view.

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6 responses to “Investors to SEC: Mandate People Disclosures”

  1. Some publicly traded companies and perhaps the majority of Small and Mid-sized Business (SMB) lack the tools to build sustainable talent pipelines and select the right candidates.

    Too much guesswork is involved in sifting through resumes and LinkedIn profiles during the initial selection process. About half of all resumes and LinkedIn profiles are poorly written, and most are unreliable, highly subjective, and labor intensive to review.

    Applicant Tracking System (ATS) can inadvertently weed out independent thinkers and many of the best candidates end up in the wastebasket.

    About 70 percent of companies believe building sustainable talent pipelines is important, yet only 16 percent are effective at doing so.

    To take the guess work out of hiring the right employees, CFO’s need to provide hiring managers with the tools to build sustainable talent pipelines using a data driven strategy and talent hacking.

    • As the article notes, ISO is developing a NEW standard for HR reporting. They’re doing it precisely because existing standards are inadequate.

  2. FAS 106 changed the way pension liability is reported and forever changed what was the defined benefit standard … it “created” the 401K and the defined contribution standard … just can’t wait to see how ISO determines how the value of an individual appreciates or depreciates over time

  3. The ability to maximize our human capital investment is crucial. Getting a jump on this, from on-boarding (which has been shown to effect performance), through to ongoing assessment and performance management (including the effect of change management on our human capital) makes a lot of sense. Hopefully the possibility of this ISO standard will kick start us in that direction and we’ll have the flexibility to satisfy that, if it happens, in a sensible manner.

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