Roadmapping Practical Human Capital Management Considerations

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. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here).

As discussed in our previous post, in order for companies to successfully manage HCM issues arising in 2020, it will be important for them to be proactive. How companies do that will be a function of each company’s profile, its available resources and its individual culture, but there will be some common themes that emerge. At the highest level, companies will need to be proficient in two ways: viewing HCM through a broader lens as a key component of the company’s strategic focus and effectively communicating ongoing efforts with stakeholders in a meaningful way.

Creative Solutions During Difficult Times

Many companies have been faced with difficult choices regarding compensation. There isn’t a right or wrong way to handle these difficult decisions—in practice, we have seen a panoply of options and opportunities for companies to demonstrate the value they place on their workforce, even if they are reducing compensation costs. These decisions depend on each company’s facts and circumstances.

In some ways the amorphous HCM construct permits companies to be very creative about how they choose to treat their workforce during this time. The critical point for companies is to ensure that the decisions, even if they are difficult, are perceived as fair, that the companies are being transparent in their decision-making process, and that the burden is shared equitably among all relevant constituencies. Prioritizing the well-being of the employees also means looking out for their physical safety and their mental health, appreciating the sacrifices that are made by workers on a daily basis and acknowledging individual efforts during these difficult times. Companies should be mindful to fully consider how these decisions will be viewed by stakeholders in the short- and long-term.

When companies communicate effectively with investors, there is a near-immediate feedback loop through stock price movements. When companies communicate effectively with employees, there are fewer mechanisms for instantaneous feedback. At the same time, employee communications missteps are magnified through viral social media and news cycles. The challenge is for companies to develop effective feedback mechanisms and metrics to measure changes in employee sentiment before they become issues. Developing two-way communication, feedback and benchmarking will not only be important in managing HCM issues, but will also provide the right information to inform the strategic plans we discussed in the previous post.

Investors and Key Disclosure and Timing Considerations

HCM-related disclosure has been a controversial issue for the last few years, as investors press companies, and the SEC to require companies, to provide disclosure. This is an opportunity for companies to move away from adopting a reactive stance by, in a piecemeal fashion, providing answers to questionnaires, releasing reports specified by shareholder proposals and answering specific disclosure requests without organized oversight. Instead, companies should think holistically about HCM, proactively come up with their own strategic plan on HCM issues and then craft disclosure and other communications accordingly.

Management will need to work to establish the information that will be useful in disclosure, which is likely to be a mix of quantitative and qualitative information. The right metrics for a company’s HCM performance indicia will vary among companies, and the mix of information will come from a complex set of sources without clear reporting lines – legal, HR, both domestic and international, are all likely pieces of the puzzle. In part, the lack of comparability across companies is one of the reasons the SEC has cited in its reticence to prescribing required reporting line items. [1]

But this lack of compulsory disclosure framework also provides a lot of flexibility for companies. The downside, however, is that the data tend not to be as rigorously captured and elevated. Each year, companies review their sustainability and ESG rankings only to find that their low scores are attributable to a failure to disclose, and not a failure to implement adequate systems and procedures. Companies should therefore ensure there is someone who is considering and recording HCM efforts, so that the full spectrum of initiatives is included in disclosure and companies get credit for their work.

Although HCM disclosure will be critical, a thoughtful proxy statement discussing HCM will be too late to convey these issues effectively in time to forestall shareholder proposals in the 2021 proxy season. Given the timing of the 2021 proxy season deadlines, shareholder proposals will be due well before companies can disclose their efforts in the 2021 proxy statement. As a result, companies should also consider the timing and distribution of “off-cycle” disclosure in order to provide stakeholders with information about the company’s strategy and investment in HCM, the board’s role in these processes and the actions the company has taken during the pandemic and thereafter.

Companies can also expect that investors will be focused on these issues in off-cycle governance roadshows. IR/communications functions should be included in information regarding HCM so that they can track efforts and assist in crafting the company’s narrative in a way that resonates with the particular areas of interest and engagement priorities of the company’s investors and other stakeholders.

Diversity Considerations

It was only a handful of years ago that investors started to put pressure on companies about their diversity efforts, focusing, predominantly, on the number of women in the boardroom. Soon after, and as many of the largest companies quickly increased the number of female directors, the focus, through policies, state laws and shareholder proposals, turned to additional diversity considerations, including racial/ethnic diversity on the board, diversity represented through board leadership roles, executive management diversity, pipeline opportunities, and diversity-based pay gaps across the workforce.

As our colleagues discuss here during a period when the workforce and workplace are being reimagined, companies need to ensure that they continue to make progress on their diversity initiatives, and further, that the decisions made during this time do not result in a backslide on investments, whether intentional or not. As companies review decisions relating to their workforce, they should consider the impact that measures, such as remote-work and expectations regarding productivity, have with respect to diversity. At the same time, it has become clear for many companies that additional efforts are necessary, and companies will need to ensure that they are not only disclosing their efforts, but doing so in a manner that does not undermine their efforts.

Companies should expect that stakeholders will continue to pay attention to diversity at all levels. It is incumbent on companies to incorporate these issues into regular review and improvement, and ensure that the responsibility for improvement adopts a multi-disciplinary approach.

Executive Compensation and the Stark Light of 20/20 Hindsight

It is incumbent on compensation committees and boards to ensure that performance-based compensation continues to serve its intended retentive and incentive purposes. However, since the start of the COVID-19 pandemic, stakeholders have been monitoring the actions companies have taken related to compensation and boards should be mindful that comparisons between executive compensation and the treatment, retention and compensation of rank-and-file employees is likely to be carefully reviewed in the 2021 proxy season.

The “best” decision will be different for each company. But all companies should thoughtfully consider longer-term unintended consequences. For instance, while a number of companies have announced significant cuts to (including foregoing all) executive cash compensation in solidarity with actions taken on employee compensation, companies that issued equity grants this year when stock prices were deflated may find themselves subject to unwanted attention when they disclose the value of those equity grants at the time of vesting if it results in an increase to overall compensation. Similar considerations apply to modifications of executive performance targets and metrics for either previously granted equity awards or the 2020 cycle grants.

In setting tone at the top, some companies have also announced reductions to annual board retainers. Glass Lewis indicated that it will negatively view companies that maintain a “business as usual” approach to executive compensation while other employees have compensation reductions. [2]

Well-counseled boards will make decisions that carefully balance the needs to incentivize executives with the fair treatment of all employees, while looking to minimize reputational damage for the company.

Endnotes

1Securities and Exchange Commission, Remarks for Telephone Call with SEC Investor Advisory Committee Members (February 6, 2019), https://www.sec.gov/news/public-statement/clayton-remarks-investor-advisory-committee-call-020619 (“Each industry, and even each company within a specific industry, has its own human capital circumstances. . . . Because of those differences and the principles of materiality, comparability, and efficiency, I am wary of jumping in with rules or guidance that would mandate rigid standards or metrics for all public companies.”). As companies focus more on HCM issues, they should be mindful of the general disclosure materiality requirements, and, in turn, ensuring that the information also filters through disclosure controls and procedures and internal controls.(go back)

2Glass Lewis, Everything in Governance is Affected by the Coronavirus Pandemic. This is Glass Lewis’ Approach (March 26, 2020), https://www.glasslewis.com/everything-in-governance-is-affected-by-the-coronavirus-pandemic/.(go back)

Trackbacks are closed, but you can post a comment.

Post a Comment

Your email is never published nor shared. Required fields are marked *

*
*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>