Recent Developments in Human Capital Management Disclosure

Betty M. Huber is counsel and Paula H. Simpkins is an associate at Davis Polk & Wardwell LLP. This post is based on their Davis Polk memorandum.

IAC Meeting

[In late March, 2019], the Investor Advisory Committee (IAC or Committee) to the Securities and Exchange Commission (SEC) voted to ask the SEC to further investigate and evaluate whether public companies should be required to disclose information related to human capital management (HCM), in other words, how companies manage workplace relationships including training, talent development and retention.

Over the last few decades, as the US economy has increasingly become based on technology and services, certain investors have expressed more interest in HCM disclosure.

Although the vote carried, close to one-third of the IAC members dissented. Some of the most controversial points centered on (i) augmenting current disclosures of executive compensation to include summaries of broader workforce compensation and incentive structures; (ii) measuring worker productivity; and (iii) disclosing the number of full-time, part-time and contingent workers. Certain commentators feared that this language was simply a blueprint for line item disclosure requirements.

The Committee recommended that the SEC consider requiring HCM disclosure and, to aid in its decision-making, seek input from a wide range of stakeholders, including investors, issuers, asset owners and academics.

What’s Next?

While it’s clear that the SEC is nowhere near adopting any rule changes regarding HCM disclosure, whether or to what degree it will allocate resources to explore the topic still remains unclear.

What’s the Context?

This is not the first time the SEC has been prompted to focus on HCM reporting. Most notably, the Human Capital Management Coalition (HCM Coalition), which represents over 25 institutional investors (comprising mostly pension funds and labor groups), petitioned the SEC in July 2017 for a rulemaking, which we previously discussed. The HCM Coalition, whose members represent over $3 trillion in assets under management (AUM), posits that additional mandated disclosure would help investors evaluate how well companies manage their human capital and that HCM information can be materially related to financial performance.

Private Ordering?

In lieu of public ordering, investors continue to focus on HCM. Earlier this year, BlackRock, the largest asset manager, with approximately $6 trillion under management, declared HCM a 2019 engagement priority for the companies in which the firm invests. Similarly, this year State Street Global Advisors (State Street) expressly advised companies that the firm will be focusing on “corporate culture as a driver of a company’s ability to execute on its long-term strategy.” Each asset manager encouraged its respective companies to utilize guidelines provided by the asset manager. We have previously discussed these documents.

Third-Party Metrics Being Developed.

In the meantime, third-party metrics and frameworks focusing on HCM continue to emerge. The International Organization for Standardization (ISO) issued a new standard (ISO 3414) in January 2019 focusing on human capital resources, internal and external to a company. The standard is meant to help companies not only better understand the impact of staff and maximize employee contribution, but also to provide a method of benchmarking the company’s performance against comparable companies. The standard is very broad and covers topics such as compliance and ethics, diversity and culture.

Another relatively new player in the field is a framework developed by the Embankment Project for Inclusive Capitalism (EPIC), which is backed by EY and other influential members such as BlackRock, State Street and Vanguard. EPIC creators seek a new way of valuing companies, which encourages companies to focus on the long term and to serve a wider array of stakeholders. The framework is primarily designed to aid companies in their human capital reporting and (1) enables measurement of non-financial outcomes and capabilities, (2) captures stakeholder value and (3) informs a clearer indication of future financial performance. The framework builds on the prior work of other frameworks. EPIC developers say significant progress has been made over the last 18 months, but note that it is still a work in progress.

Although it has not established a framework yet, some market participants believe that the efforts of the Workforce Disclosure Initiative (WDI) may eventually lead to one. WDI comprises over 120 investors with more than $12 trillion in AUM and seeks to help companies improve their workforce reporting. To better assist companies in disclosure, WDI, through the organization ShareAction, invited 500 companies to complete a survey on their corporate policies and practices concerning a range of workforce-related topics. According to a March 26, 2019 Financial Times article, some major US-based companies failed to respond or complete the survey. The article states that, globally, only 90 of the 524 companies responded. Companies that sent narratives in lieu of completing the survey were treated as non-responsive. According to the survey report, some companies that declined to participate cited reasons such as insufficient resources or limitations of their existing data collection process. This was the organization’s second time administering the survey after launching a pilot one back in 2017.

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