For the first time in more than 30 years, the U.S. Securities and Exchange Commission has modified its disclosure rules, requiring that public companies provide a far greater window into their human capital management than ever before.
Previously, organizations only had to disclose their number of employees. Now, they must divulge human capital metrics considered to be material to an understanding of the company’s business. They include employee attraction, development, retention, diversity and inclusion, engagement, employee satisfaction, and health and safety.
The newly adopted rule is a clear indication the SEC recognizes that human capital represents an increasingly large portion of an organization’s value, according to Greg Harris, CEO and co-founder of Quantum Workplace. In 1975, 83% of the value of an S&P 500 company was tied to physical assets, according to Chief Learning Officer. By 2015, human capital represented 84% of a company’s value, with physical assets accounting for just 16%.
“Fifty years ago, when every company traded on the basis of their physical assets, it made sense that our accounting structures and our reporting mechanisms were tied to those metrics,” says Harris. “Today, we are a service economy, an innovation economy. Our biggest asset starts at 8 and leaves at 5 every day.”
Investors have been clamoring for insights into workforce management, and organizations like the Human Capital Management Coalition have been lobbying the SEC to require its disclosure for years. As for why it finally became a reality in the waning months of 2020, SEC Acting Chair Allison Herren Lee speaks openly about the role that recent challenges played in convincing the commission that the time had come to begin requiring the disclosure.
“Recent events have provided a real-time case study on the need for many of these disclosures,” says Lee. “It has never been more clear that investors need information regarding, for example, how companies treat and value their workers, how they prioritize diversity in the face of profound racial injustice and how their assets and business models are exposed to climate risk as the frequency and intensity of climate events increase.”
Support for the rule was broad, but now that it’s become a reality, many CHROs find themselves scrambling to figure out what to report and how, says Harris. In large part, that’s because the SEC chose not to provide specific disclosure requirements, instead opting for principals-based guidance when it came to what metrics to disclose.
“It’s a scrambling moment,” says Lisa Buckingham, executive vice president and chief people, place and brand officer at Lincoln Financial Group. “If there was a clear delineation of what we needed to report, that would be terrific, but the SEC can’t ask for something so gray that you are spending thousands of man-hours and then you get it marked against you because it doesn’t help further what they’re asking for. It needs to be clear.”
For those HR professionals left confused by the lack of a prescriptive approach, David Vance, executive director of the Center for Talent Reporting and author of The Business of Learning, suggests they seek guidance from the December 2018 Guidelines for Internal and External Reporting, published by the International Organization for Standardization.
“The ISO standards are voluntary, but for an organization that says, ‘I wish the SEC had been more prescriptive; I don’t know what to do,’ they can start by looking at the ISO recommendations of 59 metrics for organizations to share from both an employee and investor point of view,” says Vance. “They’re a good starting point for companies needing to create their reporting strategy for meeting the SEC disclosure requirement.”
Fortunately, says Harris, most medium and large companies already have much of the requisite information at their fingertips, in the form of employee engagement data and performance management data, to fulfill the requirement and build confidence among investors. That assumes organizations have sophisticated HRIS systems and data analytics. Those who don’t “are going to be in a world of hurt,” says Buckingham.
Telling a Story
Rather than merely regurgitating data, Buckingham recommends companies strive to tell their “story and narrative, rather than just reporting what is required.” Increasingly, she believes, that will see organizations blending their HR disclosures with their corporate social responsibility reports, which speak to “the heart of the company–what you’re doing, what you’re giving back and how you’re impacting your employees through volunteer hours and helping people in times of crisis.”
Regardless of how individual companies decide to meet the disclosure requirement, there’s no denying the new rule represents a recognition of the importance of human capital programs and the role of people in creating value.
“This acknowledgment by the SEC changes everything; it says this idea that people matter is here to stay,” says Harris. “These two things don’t compete with each other. They’re interwoven; they’re inextricably linked.”