[This article has been revised from its original version to remove an unintentional conflation of ESG initiatives put forward by two separate organizations, the Sustainability Accounting Standards Board and the Global Reporting Initiative.]

A lengthy global effort to create standards for reporting human capital metrics is expected to finally bear fruit this week.

The International Organization for Standardization (ISO) was scheduled to issue its guidelines for human capital reporting on Tuesday, although insiders say the document might not be released until later in the week.

Depending on the extent to which companies voluntarily adopt the new standards, stakeholders — investors, analysts, customers, and current and prospective employees — would have a new category of data with which to assess organizational value and the prospects for financial and non-financial returns from investments in human capital.

But conversation around human capital reporting standards has shifted somewhat over the past years. Rather than being seen as primarily a means to measure corporate value, such reporting is also considered a response to the public’s increasing desire for corporations to act as good citizens.

“This is a watershed moment,” says Jeff Higgins, a former CFO and the lead U.S. representative on the ISO task force that created the standard. “Some countries are going to adopt this as a regulation for public companies. In the United States, I’ve talked to more than a few companies that want to be in compliance ahead of others in order to demonstrate ethical and social credibility.”

There’s a fairly good case to be made that many companies will indeed pay attention to the ISO standard.

For one thing, the institutional investor community is a strong advocate for human capital reporting. The Human Capital Management Coalition — a group of 26 institutional investors with aggregate assets of more than $3 trillion, led by the UAW Retiree Medical Benefits Trust — last year petitioned the U.S. Securities and Exchange Commission to require public companies to disclose information about their human capital management.

The SEC officially accepted the petition and is currently reviewing the matter.

The coalition didn’t specify any particular metrics that should be required. However, the new ISO standard certainly provides the SEC with at least a good starting point for deciding on requirements (see below), should it decide to move forward with human capital reporting regulations.

Other organizations behind the push include Principles for Responsible Investment, a United Nations-supported network of institutional investors with an aggregate $70 trillion in assets; and BlackRock, the world’s single largest asset manager, with more than $6 trillion under management.

Also, attention to human capital is part of frameworks issued by multiple global standards-setting organizations for reporting on environmental, social, and governance (ESG) activities. Such organizations include the Sustainability Accounting Standards Board and the Global Reporting Initiative. Over the past few years, most large U.S. companies have begun voluntarily issuing sustainability reports.

However, says Higgins, those organizations call for far less human capital information than the ISO standard does. “If companies want to be fully compliant, they’ll need to conform to the new ISO standard in one way or another,” he suggests.

Of course, the more specific, detailed information companies are asked to provide, the more they might push back. It’s one thing to issue a report that subjectively describes ESG activities. It’s something quite different to publicly report on 23 specific metrics, as the ISO standard calls for.

The 23 metrics are divided into 9 categories:

  • Ethics (number and type of employee grievances filed; number and type of concluded disciplinary actions; percentage of employees who have completed training on compliance and ethics)
  • Costs (total workforce costs)
  • Workforce diversity (with respect to age, gender, disability, and “other indicators of diversity”; and diversity of leadership team)
  • Leadership (“leadership trust,” to be determined by employee surveys)
  • Organizational safety, health, and well-being (lost time for injury; number of occupational accidents; number of people killed during work)
  • Productivity (EBIT/revenue/turnover/profit per employee; human capital ROI, or the ratio of income or revenue to human capital)
  • Recruitment, mobility, and turnover (average time to fill vacant positions; average time to fill critical business positions; percentage of positions filled internally; percentage of critical business positions filled internally; turnover rate)
  • Skills and capabilities (total development and training costs)
  • Workforce availability (number of employees; full-time equivalents)

The standard also says companies should make an additional 36 measurements but report them only internally. These include several in two additional categories — organizational culture and succession planning.

Higgins says there was a wide range of sentiment on the task force, ranging from corporate members who wanted to report very few metrics, to policy hardliners who advocated for public disclosure of dozens more metrics.

“At times I had to be the voice of reason,” he says. “I’ve worked with enough companies to tell [task force members] that if they wanted 60 metrics to be publicly disclosed, it would never happen. Industry would not support that. We needed a good basic starter set, and we’ll work up from that over time.”

Higgins opines that compiling the metrics for public disclosure should not be a major burden — for most companies, at least. He does note that he met with an executive of a Fortune 500 company who said it would take two years to get into full compliance.

Does any of this mean anything to U.S. companies in the short term? Quite possibly so. Given the ardent involvement of so many institutional investors, Higgins suggests that companies may soon begin receiving requests for human capital metrics — even during earnings calls.

“If the CEO or CFO doesn’t have the numbers, they might have to dance,” he says.

That poses a problem. Asked about his sense of the level of awareness about the new standard among even Fortune 1000 companies, let alone smaller public firms, Higgins says, “I think it’s safe to say that 90% of them are not aware.”

, , , , , , , , , , , , , , , , , , , , , , , , , , ,

4 responses to “Human Capital Reporting Standards Finally Arrive”

  1. If this is anything to judge the ISO ‘standard’ by “Skills and capabilities (total development and training costs)” they have completely missed the point of human capital reporting. At the Maturity Institute we link measurement of human capital directly to the measurement of the Total Stakeholder Value of the company, which incorporates market/book value. ISO failed on HR reporting standards and has failed again to understand the problem we are all trying to resolve.
    Paul Kearns, Chair, Maturity Institute

    • Paul, including Market or Book Value would be much more of a financial measure than a human capital one. However your point is well taken that if HC metrics do not link to or drive market/book value then we miss the mark. The metrics you are looking for that meet this test would be Human Capital ROI Ratio and Total Workforce Costs, both of which have been shown to link to and in fact drive market value and stock price. There is a white paper on http://www.hcmi.co called Linking Human Capital to Business Results that highlights the research. Also, Laurie Bassi of McBassi and Co. has done extensive research showing that companies which invest more in training relative to industry peers outperform in terms of stock price over time.

  2. Organizational culture may in fact be better linked to organizational risk and performance than any other metric. And yet, the ISO standard recommends that any cultural assessments conducted by companies need not be disclosed. Prospective employees never ask about governance issues, but they do want to know about culture. On the human capital front, employee engagement would be the most encompassing and useful metric for investors to know. A company needs to get a lot right to ensure people are inspired to give their best efforts. Engagement metrics offer the best read on whether a company is getting a lot of those things right. In fact, most of the human capital metrics the ISO standard is demanding could probably be eliminated by simply demanding reliable engagement data.

  3. Jeff great work. I would love to see some accounting experts look at treating wages as an investment rather than an expense. As I see it, human “capital” is one of the only appreciating assets we have in business, yet we treat all our HR/HC spending as an expense to be minimized (including wages). I wonder if there’s any interest in pushing this forward. Here’s what I’ve written on the topic.

Leave a Reply

Your email address will not be published. Required fields are marked *