11 ACTIONS TO CONSIDER FROM THE SEC’S MANDATE ON HUMAN CAPITAL DISCLOSURE

Over the past two weeks since i4cp published its initial guidance on the U.S. Securities and Exchange Commission’s (SEC) recent ruling on human capital disclosure (member only), we’ve engaged in many conversations with a cross section of senior-level business executives – including several who serve on public company boards –  to gain insight into the corporate response.

It is clear from those conversations that – while some have increased disclosure of human capital metrics (e.g., Walmart, Microsoft, Deutsche Bank, Allianz, to name a few) – awareness and strategies are in early stages at most companies. However, we anticipate this will be a topic of discussion at many corporate board meetings in preparation for upcoming earnings releases.

As part of i4cp’s continued coverage, we are reiterating our initial guidance and recommendations, while also putting forth additional information to consider.

Our initial guidance published on September 28, 2020:

  1. Create and maintain an inventory of your organization’s total talent (including and beyond full-time and part-time employees). While U.S.-based public companies remain mandated by the SEC to disclose the total number of people they employ, the SEC now encourages these companies to disclose the number of contractors and contingent workers, too.
  2. Be prepared to be called on for insights and data on any element of the workforce associated with business risk and/or readiness, specifically those related to culture, capability, and ESG (environmental, social, and corporate governance).
    1. Be Aware: In this era of stakeholder capitalism, ESG has vaulted to the forefront. ESG often incapsulates elements typically associated with human capital. An example is the September 2020 World Economic Forum white paper, Measuring Stakeholder Capitalism Towards Common Metrics and Consistent Reporting and Sustainable Value Creation. In that white paper about global ESG metrics, elements specific to diversity and inclusion, well-being, and skills for the future are prominent.
  3. Prepare now for future public disclosure specific to workforce metrics. A good start is to become familiar with the proposed International Organization for Standardization’s (ISO) 30414 Human Capital reporting standards.
  4. Understand your organization’s unique and critical intangible business value drivers (e.g., innovation, diversity, culture) and their associated indicators and measures, as well as actions being taken to improve them.

  5. Additional considerations as of October 23, 2020:

  6. As we stated in our initial guidance, the amendments will be effective 30 days after publication in the Federal Register. The publication date was October 8, 2020 and the effective date is now November 9, 2020.
  7. Any listing company on U.S. exchanges is subject to this new SEC disclosure.
  8. While human capital metrics disclosure is dependent on what is material to the business, there is no clear consensus on what companies will or should disclose. What is considered material will likely depend on the industry and the markets within which an organization operates. One indicator may be reviewing the people data that is currently elevated to the board as a baseline of what could be deemed material. This is a good time to consider benchmarking the people data that is elevated against that of other organizations (e.g., culture measures, diversity/inclusion measures, ESG, etc.).
  9. Examine current references or statements about the workforce in your recent proxy statements, 10Ks, 10Qs, earnings calls, and investor presentations. Be aware of language used that may be deemed material.
  10. It is important that HR develops a narrative for the board of directors on which human capital components matter most, what the company is doing to optimize those components, and how it is progressing against those objectives. However, to mitigate risk, we expect companies initially will publicly disclose data without detailed narrative. We anticipate this will evolve over time as organizations are likely to follow each other’s leads in the amount of detail disclosed and descriptive narrative. This would be similar to what we have seen over the last few years with more detailed diversity disclosures.
  11. It is unclear where ownership of human capital disclosure will reside within an organization. What is clear is that it’s a multi-disciplinary responsibility, and the HR function will be more involved in the reporting process.
  12. Importance of the Workforce Analytics function is increasing and that will require more collaboration with Finance, Investor Relations, and the General Counsel.

For the HR function specifically

Now is the time to better understand the leading indicators of the people and culture components of the business that have the greatest impact on business outcomes. If you say, “We have the best talent,” how are you measuring that? If you say, “Our workforce is highly engaged,” what percent of the workforce is highly engaged? What is the breakdown between executives, managers, and employees who are highly engaged? And what factors drive high engagement of the workforce? If attracting, developing, and retaining talent is key to success, what do you spend on training? What is the turnover rate by segment, geography, and employee level?

These are a small sample of questions to consider now that investors will be expecting more detailed disclosures on the workforce.

We will continue to engage in and monitor discussions related to the new SEC ruling, and human capital metrics in general, and will publish updated guidance and considerations as appropriate. In the meantime, i4cp member organizations can access the following related resources: