Human capital hands hero

2021 Corporate Human Capital Disclosures: Where’s the Beef?

Where's the beefFollowing the Securities and Exchange Commission announcement a year ago that corporations will need to get serious about publishing human capital data, the 2021 Form 10-K disclosures are in.

And they are so 2020. The new reports are in general lengthier than years’ prior, but just as shallow when it comes to meaningful workforce data.

The evidence suggests that companies are less than eager to beef up transparency. Data from a recent Institute for Corporate Productivity (i4cp) survey of respondents representing 131 global and national organizations suggests that fewer than half of companies (41%) publicly disclose any type of workforce diversity data; 27% don’t publicly disclose important workforce metrics at all.

This shouldn’t be surprising, given that more than half of the overall respondents (51%) belong to organizations in which CEO compensation isn’t tied to human capital metrics—among those from larger organizations—those employing 1,000+ people—one-third reported that CEO compensation is tied to human capital goals.  

CEO Incentives tied to human capital

Background: Historically, corporations have been required to disclose very few—and very general—details about their HR data. Last year, under former SEC Chairman Jay Clayton, a Trump administration appointee, the SEC began the work to intensify human capital disclosure requirements, citing an increased demand for such information from investors.

Issued in November 2020, the final amendment amplified the existing requirement to report the number of persons employed with “principle-based” language, encouraging companies to describe any human capital measures or objectives that leaders focus on in managing the business to the extent such disclosures would be material to an understanding of the organization’s business.

Although many commentors on the proposed rule urged the SEC to be more prescriptive, the commission went with this honor-system approach, citing the varied and evolving nature of human capital considerations. “We believe that this approach will likely lead to more meaningful disclosure being provided to investors.  Moreover, we do not believe that prescriptive requirements or a designated standard or framework will ensure more comparable disclosure given the variety in registrant operations as well how registrants define, calculate, and assess human capital measures,” the amendment stated.

Newly appointed SEC Chair Gary Gensler has also emphasized investors’ interests in human capital issues, particularly as the #Metoo and Black Lives Matter movements continue to highlight how high-profile executive malfeasance significantly affects companies’ culture, brand, and bottom line.

The SEC’s spring 2021 Regulatory Flexibility Agenda dropped in June, outlining plans for further disclosure requirements on climate and human capital, as well as cybersecurity risks. During more than four hours of testimony before the House Financial Services committee this month, Gensler said companies and investors will benefit from clearer “rules of the road.” He has tasked staff with designing new regulations that are expected to be out for public comment in the coming months.

Why this is happening:  More than ever, corporate stakeholders, including employees, customers, board members, investors, partners, and regulators are demanding greater disclosure of information related to the “four P’s”: people, profit, planet, and purpose.

Amid the Great Resignation, countless stories of toxic corporate cultures and workplace harassment, all key stakeholders (including candidates) are paying closer attention to a company’s  purpose, brand, and culture (i.e., a new corporate currency). Furthermore, the crises of 2020 that led to the downfall and subsequent buyouts of numerous executives exposed persistent racial, social, and economic inequities in top companies.

Put simply, human capital metrics provide important cues as to whether a company’s employer brand is a liability or an asset. 

But it’s not happening: As predicted by proponents of a more prescriptive SEC disclosure rule, the 2021 10-K reports vary little from years past. Analysis of incoming forms  suggests that companies took advantage of the lax approach with relatively few providing meaningful numbers about their workforces, even when such metrics have been reported elsewhere.

In their review of  the first 100 Form 10-Ks filed by companies with at least $1 billion in market capitalization since the November 2020 revisions, Stanford researchers found fewer than half (43%) of companies reported one or more quantitative metrics beyond employee headcount. Among those, gender diversity was the most common reported (24% of companies), followed by racial diversity (14%), average employee tenure or voluntary turnover (14%), safety incident rates (12%), engagement metrics (6%), talent development (4%), and others (5%).

For example, Company X (an unnamed Fortune 500 company) provided one metric in its 2021 Form 10-K related to human capital: The number of full-time employees in the United States and internationally. Yet, its annual sustainability report included rich quantitative and qualitative data, including empirical benchmarks to diversify talent and progress toward those goals.

The latest data from i4cp found that companies that disclose workforce metrics do so in other mediums apart from the 10-K, such as annual reports (31%), environment, social, and governance reports (18%), or diversity, equity, inclusion reports (15%). This underscores the need for HR to partner with their peers in health and safety and sustainability to ensure consistency in what is being reported.

Only 15% of the 131 respondents to i4cp’s survey indicated that their organizations have a standard set of human capital metrics they consistently use for their boards of directors; the same percentage as those who indicated their organizations have no standard metrics and no plans to create them. That said, there’s hope that corporations will disclose more human capital data in general in the coming new year.

More than a third of survey respondents indicated their organizations are planning to revise workforce metrics going forward. This is a good sign that companies are paying attention to board members and investors’ increased demands for transparency in how they are managing the people side of the business equation. 

As illustrated in the chart below, among those from organizations with 1,000 or more employees, half (a combined 49%) view disclosure favorably, as an opportunity to detail all that they are doing or as a measure of accountability and earnestness.

your organizations approach toward hc data

Rewards for doing it right: The benefits of more thorough workforce disclosures are difficult to measure but include enhanced brand and reputation as well as greater consumer confidence. Increased public data also reinforces the responsibility of corporate boards and investors to hold companies more accountable for their organizational culture, including matters of diversity, equity, and inclusion. In addition, it can help attract new investors and build stock value as data highlights companies investing in their employees and their development.

Call to action: SEC investigations into disclosures are not unheard of and the SEC has surprised investors and commentators alike this fall by sending letters to dozens of chief financial officers asking for more information related to their organizations’ disclosures on the impact of climate change (as required in 2010 SEC guidelines). Interest in human capital data could ramp up in the coming months to emphasize the importance of reporting on such critical information as diversity, development, compensation, and turnover.

It’s easy to assume that corporations are dragging their feet to disclose human workforce metrics and put cultural baggage on display. But i4cp’s survey data shows a more complicated and positive picture of what’s happening during company decisions about what to disclose and where. The increased workforce disclosure requirements likely just beyond the bend should prompt organizations to bring HR into discussions about the Form 10-K report if they haven’t already. Decentralized and disbursed multinational and global organizations need to ensure they are familiar with the relevant human capital data they’ve disclosed through other mediums, such as sustainability reports, to ensure alignment with what appears in the Form 10-K.

Furthermore, leaders need to better understand the various frameworks from different governing bodies, such as the International Organization for Standardization and United Nations Sustainable Development Goals, to ensure consistency and avoid unnecessary gaps in data.

Our research found an overwhelming number of survey respondents—39% from larger organizations (those employing 1,000+)—didn’t know if their organization used one of these for human capital, talent and diversity reporting, indicating an overarching need for business leaders to amp up their knowledge about disclosure and put some more meat on those disclosure forms.

Katheryn Brekken, Ph.D., is a senior research analyst at i4cp

Kevin Martin is the Chief Research Officer at i4cp