The Security and Exchange Commission (SEC) chairman, Jay Clayton, believes that the increased focus on human capital disclosures can be an important driver of long-term value.
Human Capital Management
It is common knowledge that a company’s greatest asset is its employees. A company’s Human Capital Management practice focuses on adding value to its human capital and organization capital in order to optimize worker performance and realize greater company value. In this context, Human Capital Management allows companies to view their employees as valuable resources and to better understand how and why investing in them leads to achieving the company’s goals.
SEC’s Requirements for Human Capital Disclosure
The Security and Exchange Commission (SEC) regulations provide insights into a company’s human capital management, enabling investors to understand how it manages its human resources and evaluate whether it has the right workforce to meet immediate and emerging business challenges.
The SEC reviewed its Human Capital Disclosure requirements in November 2020 for increased transparency of a company’s human capital practices because previous company disclosures were characterized by data that barely scratched the surface of human capital management. The new human capital disclosure requirements are useful indicators for assessing HCM quality and making informed managerial decisions.
Specifically, the updated human capital disclosure requirements of November 2020 have yielded people-centric investors’ proposals for increased visibility in companies’ management practices. This would allow companies to demonstrate their passion for human capital to the estimated 70% of consumers and investors who factor an organization’s commitment to people into their buying, career and investing decisions. This has thus encouraged companies to be more committed to the welfare and management of their workforce. These disclosures also build investors’ confidence in a company’s plans to mitigate risks and economic challenges like the Covid-19 global pandemic, where companies with a solid human capital management structure were able to make more informed decisions to mitigate the negative effects of the pandemic. This transparency will boost a company’s reputation, brand, and integrity – attracting investors and Talent.
Disclosure Requirements
Although the SEC does not define the term “human capital,” it still requires reporting companies to disclose any human capital measure that is “material to an understanding of the registrant’s business” in the spirit of a principles-based approach. Companies are therefore expected to provide detailed data on the following as they broadly define different facets of human capital.
- Human capital resources
- Compliance and ethics
- Diversity and inclusion
- Health, safety and wellbeing
- Employee retention
- Incentives and rewards
- Organizational culture
- Talent Management and workforce planning
- Total workforce cost/human capital productivity.
The Good, The Bad, And The Ugly of Human Capital Disclosure
Companies have recognized that the best way to attract and retain employees, improve workers’ efficiency and create a positive workplace culture is by actively investing in the welfare of their employees. Disclosing information about their Human Capital Management practices has proven to be a great strategy for companies to demonstrate their commitment to their employee’s welfare, build trust, improve worker retention and boost employee performance to increase company value.
The Good
For instance, Facebook’s 2020 annual report reinforced its commitment to building a diverse and inclusive workplace where workers’ collective diversity can be used to build the best products and make the best decisions for the global community. They reported that as of the 30th of June, 2020, their global employee base comprised 37% females and 63% males. Their U.S employee base comprised of the following ethnicities: 44.4% Asian, 44% White, 6.3% Hispanic, 4% two or more ethnicities, 3.9% Black, and 0.4% additional groups (including American Indian or Alaska Native and Native Hawaiian or other Pacific Islander).
They also revealed their goals to diversify their workforce by having 50% of their human capital made up of underrepresented populations by 2024 and to increase the representation of people of color in leadership positions in the United States, including Black leadership, by 30% from 2020 to 2025.
The Bad
Despite the SEC’s updated requirements that company disclosures should evolve as companies respond to risk and challenges, many companies still consider these disclosures proprietary; hence disclosures are rarely detailed and quantitative.
In one instance, Amazon’s report for 2020 and 2021 failed SEC’s updated disclosure requirements as it only disclosed the total number of employees in its workforce. Amazon’s reports for 2020 and 2021 demonstrated their mission of being the world’s most customer-centric company, but failed to disclose how they plan to achieve this, outside of merely increasing employment levels to approximately 1,608,000 full-time and part-time employees. Their human capital disclosures for the past two years also failed to demonstrate what they are doing to improve working conditions inside their facilities or combat the negative reputation they have earned as a result of poor working conditions, worker mistreatment, and management malpractice of workers in their warehouses, in the field making deliveries, and even in their corporate offices.
The Ugly
In a second instance, while Twitter’s 2020 annual report revealed their plans for Inclusion and diversity in their workplace – highlighting their goal to have at least half of their global workforce represented by women and a quarter of their global workforce represented by underrepresented communities by 2025 – recent events, since the takeover by Elon Musk, have had the opposite effect.
Twitter’s 2020 disclosure revealed the flexible workplace strategy adopted by their company in 2018 allowed their employees to work efficiently without the need to be co-located – only to have the policy retracted by Musk’s management of Twitter 2.0 in his demand for worker to come back to the office or else. The company, pre Elon, stressed its commitment to the health and wellness of its employees in 2020 despite the unprecedented changes and uncertainty driven by the pandemic. Under Elon, many of these benefits, and the departments that managed them, have been cut.
Conclusion
It is exactly because of executives like Jeff Bezos and Elon Musk that human capital disclosures are necessary. Investors, Talent, and the public, deserve to know how workers are treated, how management behaves, and how said treatment of workers by management impacts human capital health and performance and, by association, company value.
Authored and Researched by Emma Dallmeyer
Commissioned and Edited by Hason Greene