Human Capital Management: The Mission Critical Asset

Pamela L. Marcogliese is a partner, Elizabeth Bieber is counsel, and Thomas Lair is an associate at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields memorandum.

Human capital management (HCM) is one of the most significant corporate governance themes emerging in 2020, shining a spotlight on a topic that had already been a growing focus for many stakeholders. HCM sits at the intersection between investors, the workforce and consumers, it tugs at many deep-rooted social and political societal values, and it can be a polarizing issue for regulators and legislators. But as we have moved toward a talent-based economy, human capital is not only a key asset for companies, but rather, it is a “mission critical asset”. [1]

Over the last few months, many companies have had to make very difficult decisions that directly impact their workforce. Against this backdrop, the basis for evaluating company performance with respect to HCM considerations will be a multi-faceted review over a long horizon, where short-term foot faults will reverberate with a company’s stakeholders over the long-term. At a time when there are many critical, competing demands on a company’s time, the temptation to backburner HCM must be resisted. Companies that should take the time to thoughtfully implement and communicate their HCM efforts will be recognized by their stakeholders.

A Strategic Opportunity

Challenging conditions present an opportunity for management to demonstrate leadership and for companies to define their culture. The steps a company takes today with respect to its workforce will impact its current and future employee base, impact the reactions of investors and other stakeholders, and be subject to both viral criticism and praise. The companies that will get HCM right are those that view HCM as a critical component of their long-term strategy and prioritize these considerations in the recruitment, retention, training and promotion of diverse and inclusive top-tier talent, rather than a check-the-box exercise characterized by short-term reactive actions.

Framing the Issue for External and Internal Buy-In

HCM-related disclosure has been a controversial issue for the last number of years. Investors have been increasingly asking companies to provide additional HCM disclosure through shareholder proposals while also pressing the SEC to adopt rules mandating HCM disclosure through amendments to reporting obligations. For example, a recent Morrow Sodali survey found that 71% of investors currently are seeking additional disclosure on health and safety indicators. Since March, an investor coalition representing more than 300 investors managing over $9 trillion in assets was formed to focus on how companies are responding to the current environment, including with respect to workforce management and safety. This heightened focus on HCM is also impacting shareholder proposals. Already, in the 2020 proxy season, proposals (which had largely been submitted prior to the COVID-19 crisis) related to social issues increased significantly, along with the percentages of shareholder support. Diversity considerations have moved from a review of diversity in the boardroom, to a focus on executive management and pipeline opportunities and gender and racial pay equity issues of the entire workforce. If the rising interest in HCM follows the pattern of other recent governance trends, companies that are not currently providing HCM disclosure will soon be pressured to provide diffuse and detailed information.

Some companies are likely feeling pressure from the challenging market and business conditions requiring them to expend their energy on maintaining the core aspects of the business, and from the ever-increasing scope of ESG demands. It will be a mistake for companies to take a reactive stance by simply responding to the overlapping, and at times conflicting, stakeholder requests, including stakeholder-developed questionnaires, shareholder proposals and specific disclosure requests, without top-down organized oversight. This is an opportunity for companies to lead and think holistically about HCM, proactively come up with their own strategic plan on HCM issues and direct stakeholders to the aspects of HCM that are the most significant drivers for the company. Proactivity permits companies to lead the narrative.

Setting up the Board for Success

As companies learned from the #MeToo movement that swept through boardrooms a few years ago, board oversight is necessary to create “tone-at-the-top.” In its 2020 stewardship priorities, BlackRock said that “[g]iven most companies identify their employees as their greatest asset, we expect boards to oversee human capital management strategies.” [2] BlackRock will hold board members accountable absent some disclosure about the board’s role in overseeing the company’s HCM efforts. [3] State Street noted that it will focus on more “immediate” ESG issues, such as employee health. [4]

To create the right level of oversight, management will need to do three things: (a) provide the right information to the boardroom to enable oversight, (b) determine how best to involve boards at the right level of decision-making and (c) strategically deploy directors, individually and in the aggregate, to demonstrate the company’s genuine commitment to these issues.

The Costs of Ignoring HCM

Although it will take a significant investment of time and attention for companies to create a system to effectively oversee and manage HCM at a time when there are also other pressing needs, failure to do so can have devastating consequences. Focus on HCM issues is not going away and, if anything, the events of 2020 have underscored the significance of the issue for every stakeholder. When a company does not communicate a thoughtful strategy, it leaves open the opportunity for others to fill-in the blanks, forcing the company into a worse position than today and to do more on a compressed timeline.

HCM missteps will open the door for (a) institutional investors to vote against directors at companies that do not demonstrate sufficient progress on these issues, (b) increased shareholder proposals during proxy season and, if the current trends hold, increased shareholder support levels, (c) increased employee activism and (d) consumer boycotts and protests.

In addition, just as activists often leverage other ESG considerations to develop support among a broad stockholder base for their campaigns, they will also incorporate HCM concerns into their theses and hold boards and management accountable. Companies can expect there will be a natural inflection point for theses to develop when activists re-emerge at a time when HCM concerns are top of mind for company stakeholders.

Now what? Stay tuned for Part II, which will focus on the practical elements of developing an effective HCM strategy and steps companies can take to demonstrate commitment to these issues.

Endnotes

1At the annual general membership meeting of the Investment Company Institute on May 2, 2019, Chairman Clayton said, “Forty years ago, our rules said: ‘Tell us about your plant, property, and equipment. Tell us about your sort of hard capital asset and what they mean to your business.’ If I am an investor looking at businesses today, I want to know what you are doing with your human talent, how you are growing your human talent, how you are accessing new talent, how you are retaining existing talent.” Thomson Reuters, Chairman Clayton: Companies Should Provide More Disclosure on Human Capital Management (May 6, 2019), https://tax.thomsonreuters.com/news/chairman-clayton-companies-should-provide-more-disclosure-on-human-capital-management/. In addition, in his remarks to the SEC Investor Advisory Committee, on March 28, 2019, Chairman Clayton said, “Turning to human capital, I believe that the strength of our economy and many of our public companies is due, in significant and increasing part, to human capital, and for some of those companies human capital is a mission-critical asset.” Securities and Exchange Commission, Remarks to the SEC Investor Advisory Committee (March 28, 2019), https://www.sec.gov/news/public-statement/clayton-remarks-investor-advisory-committee-032819 (emphasis added).(go back)

2BlackRock, BlackRock Releases 2020 Stewardship Priorities for Engaging with Public Companies (March 18, 2020), https://www.blackrock.com/corporate/newsroom/press-releases/article/corporate-one/press-releases/stewardship-priorities.(go back)

3Id.(go back)

4State Street Global Advisors, Stewardship Engagement Guidance to Companies in Response to COVID-19 (March 31, 2020), https://www.ssga.com/us/en/individual/etfs/insights/stewardship-engagement-guidance-to-companies-in-response-to-covid-19.(go back)

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One Comment

  1. CHANDRASEKAR VENKATA
    Posted Tuesday, June 30, 2020 at 10:57 am | Permalink

    If organizations can grow and leverage human capital, there will be significant enhancement of stakeholder value. Coupled with artificial intelligence and other disruptive technologies, human capital can play a very important role in alleviating the world’s many challenges.

    Chandra

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