September 21, 2021 Executive Compensation ESG & Human Capital Management QuickTakes

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ESG & Human Capital Management

The Evolving Disclosure of Human Capital

Disruptive technologies, income inequality, and the shift to a service-based economy have led to heightened competition for top talent and more investment in human capital management (HCM). When approached strategically, a focus on HCM can help companies develop the agile, innovative, and engaged workforce critical to differentiation and meeting strategic goals.  

Attention to HCM investment and reporting has also intensified in response to greater awareness of, and expectations for, a corporation’s role in promoting a diverse, equitable, and inclusive (DE&I) society. Beyond maintaining a competitive and appropriately skilled workforce, underinvestment in HCM has exposed companies to executive scandals, employee activism, and customer boycotts. In recent years, this greater societal awareness has accelerated companies’ investments in employee development, culture, resiliency, labor standards, and health and safety. 

Until recently, the elevation of HCM boardroom discussions had not led to widespread external HCM reporting. Regulators did not require HCM disclosure before 2020, and voluntary disclosure was infrequent. But, with the growing importance of human capital and intangible assets, large institutional shareholders increasingly sought integrated reporting of financial and non-financial factors to best understand a company’s business. These trends ultimately led the SEC in 2020 to amend Regulation S-K for the first time in decades, including a requirement for HCM disclosure. It requires disclosing only ‘material […] human capital measures or objectives.’ 

Over time, HCM disclosure will likely converge to industry norms, but today’s landscape is still highly dynamic and fragmented. Early returns point to the proxy statement as a popular vehicle for communicating HCM initiatives to investors. 

Earlier this year, we analyzed HCM disclosures within the proxies of 53 US corporations. Only robust disclosure mattered (i.e. specific HCM practices, metrics or initiatives); we ignored vague or boilerplate statements. 
 

Those 53 proxies showed a sudden surge in disclosure. Our findings included: 

  • 33 companies (62 percent) provided robust HCM proxy disclosure this year; only 14 (26 percent) did so last year. Those with disclosure in both years expanded disclosure length by an average of 47 percent 
  • The length, location, and selection of topics covered varied substantially, with no predominant set of norms yet apparent 
  • The most common topics were descriptions and investments addressing DE&I, culture, and employee benefits and wellbeing initiatives 
  • Overall workforce development, HCM governance, demographics and stability got less attention; perhaps companies are not ready to disclose such items robustly, or are doing so elsewhere 
  • Companies already considering HCM performance within executive pay programs, as well as those with larger workforces, were more likely to provide HCM disclosure 

If HCM follows the pattern of past new disclosure items, companies will continue to fine-tune their disclosure strategy and track how competitors approach it, quickly leading to more fulsome and consistent practices across companies over time. For the time being, many companies looking to get ahead of their HCM narratives have turned to the proxy statement.  

We expect disclosure approaches will use several communication vehicles in the long run, with the uptake of a standardized reporting framework outside of the proxy eventually becoming the norm. It will be easy to fall behind as stakeholders digest newly public HCM information, compare across companies, identify further disclosure opportunities, and ratchet up their requests. 

Companies that offer only minimum disclosure should prepare to defend themselves. Those offering greater disclosure should continue to monitor evolving practices within their industry, from proxy statements to all other forms of communications. All companies should prepare for what’s next, from measuring more HCM metrics internally to identifying additional opportunities for strategic investment.  

The goalposts for HCM disclosure may move quickly – is your company ready? 

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