Public companies may soon be required to complete human capital disclosures in the United States.
The U.S. Securities and Exchange Commission, which made the proposal in August 2019, says current disclosure requirements are outdated. Existing requirements focus on business assets but not human capital, which the SEC says needs to change.
Here, we look at the proposed changes to Regulation S-K and what this means for public companies in the U.S.
Why the SEC Is Concerned With Human Capital Management
Human capital management refers to how a company manages its workers. This includes matters of recruitment, retention, talent development, training, health and safety, productivity, diversity and inclusion, and culture, as attorney Thomas Asmar at Baker McKenzie explains.
The employees in a company create value for that business while also boosting its longevity and mitigating risks. Investors and shareholders are therefore interested in a company’s human capital management practices.
The SEC, then, thinks publicly traded companies should offer investors a more transparent glimpse into how they manage employees and what impact this has on turnover, productivity and company performance.
What the Proposed Rule Would Mean for Companies
The SEC’s proposed changes pertain to Regulation S-K, which describes a public company’s reporting requirements in its SEC filings.
The change would necessitate the registrant or public company to disclose its human capital resources. This includes details such as what human capital measures or objectives management relies on to run the business. This also includes what measures companies take to attract, retain, motivate, and develop staff, Doreen E. Lilienfeld and Max Bradley at global law firm Shearman explain.
“This description would be required only if material to an understanding of the company’s business as a whole; the proposed rule is purely principles-based and leaves it to company management to determine the human capital resources and measures or objectives that are so material that they must be disclosed,” Lilenfeld and Bradley write.
Sanjay Shirodkar and Deborah Meshulam, attorneys with DLA Piper, suggest that companies under the rule change would likely report on employee mobility and turnover, average time to fill vacant positions, and how many positions are filled internally.
Shirodkar and Meshulam note that companies would also need to include information on profit per employee, employee reward schemes recognizing individuals’ innovation, and productivity. Further details would include how many workers were at the company and the nature of their work, along with their total costs (e.g. payroll, training, and additional expenses).
Such a change by the SEC would be significant, especially for those working in human resources. David Vance at Workforce.com says this is welcome news for many in the profession, who have tried for a long time to increase the visibility and use of human capital metrics.
Now, it appears, we could be entering a world in which shareholders hold companies accountable to those metrics.
The Lesson: People Are a Company’s Biggest Asset
Current disclosure requirements refer to a time when companies used “plant, property, and equipment to drive value,” says SEC chairman Jay Clayton. These days, human capital plays a significant role in generating an organization’s value.
“It is clear that, in certain cases, such as a growth-oriented data sciences company, understanding a company’s approach to human capital may be material to an investment or voting decision,” Clayton explains.
Indeed, institutional investors have argued that human capital and company culture engagement should be priorities. BlackRock’s annual letter to CEOs made this a priority in 2019, says Gail Glazerman, CFA at the Sustainability Accounting Standards Board. The letter states that “workers, not just shareholders, can and will have a greater say in defining a company’s purpose, priorities, and even the specifics of its business.”
Steve W. Klemash and Jamie C. Smith at EY argue that companies that already disclose human capital data voluntarily are reaping rewards. Doing so shows a readiness to enhance their reputation with stakeholders by determining what they are doing right and wrong to attract and retain talent, along with developing and disclosing KPIs that measure those activities.
Making human capital disclosure mandatory would bring positive results. It would provide clarity to investors and external stakeholders about how a company is focusing on human capital and culture for long-term growth.
Why the Rule Would Make Business Sense
Currently, the Generally Accepted Accounting Principles used to document the goings-on of modern businesses are inadequate. They don’t include information about human capital, only capital investments. The proposed SEC rule would bring much needed change, says Ethan Rouen, assistant professor in the Accounting and Management unit at Harvard Business School.
The GAAP used to make sense when businesses would open a new plant and need to hire employees to work there and operate the new machinery on site. “The costs and benefits of a machine are easier to estimate than the costs and benefits of training those employees, so the machine went on the balance sheet, and the employees’ costs were expensed as incurred,” Rouen explains.
Work has changed, though, and human capital disclosure needs to be a part of that change. Rouen says this will help to encourage investment in workers. When human capital is measured, it can be rewarded.
Socially minded investors would also gain from this rule, as it would help to direct their money into companies that are boosting their workers through training and reskilling initiatives, or companies that are trying to eradicate income inequality.
The rule also reflects a changing appetite in U.S. business, public policy, and academia, Patrick Oakford at JUST Capital argues: “Companies that invest in their workforces have greater long-term value than those that don’t; therefore, it is in investors’ interest to have access to greater information on companies’ human capital practices.”
Human Capital Disclosure Reporting: A CHRO’s Next Steps
The SEC’s proposed rule would mean people-management teams will need to be more transparent about certain aspects of their talent acquisition and management strategies and data. Having tools in place to help HR teams cope with these requirements is key.
If and when new reporting requirements take effect, the best prepared companies will already be tracking average time to fill vacant positions, the number of positions filled internally, employee mobility and retention rates, and how individual employees contribute to an organization’s productivity and innovation.
The Eightfold platform helps companies realize 80 percent faster times to candidate interview stages, 60 percent cheaper actual hiring costs, and cuts in attrition rates. With AI, hiring managers are also able to eradicate unconscious biases so that they find the best possible candidates for each vacancy. They will also be able to identify the best pathways for those candidates’ internal development. This is the type of information that will be of keen interest to investors and shareholders.
The proposed rule by the SEC will be a welcome change for many in business — particularly investors who are eager to see their money plugged into socially minded enterprises that favor diversity and career development for employees.
Workers will benefit, too. They know their value. The compulsory disclosure of the measures taken to attract, retain, and develop them will help to cement this value in the mind of employers and investors alike. It’s up to people-management teams to implement the tools and processes to make a success of human capital disclosure requirements.
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