Human Capital: New Disclosures May Propel Values-Based Investing
For public companies, new SEC-mandated disclosures about the management of human capital resources may shape whether investors view a company as investment-worthy.
Environmental, social, and governance (ESG) reporting is one of several “hot topics” discussed in a Riveron webinar that recapped emerging themes related to accounting and financial regulations. New requirements from the Securities and Exchange Commission (SEC) direct companies to disclose matters related to human capital resources.
Such disclosures may drive socially conscious investing by showcasing whether a company’s human capital policies align with an investors’ values. For example, a company’s disclosures may demonstrate a commitment to the advancement of diversity, equity, and inclusion (DEI) or other social impacts—such as a company’s pandemic-related safety measures—that investors may find pertinent.
What the new requirements mean:
As part of changes to Regulation S-K, the SEC decided to “include, as a disclosure topic, a description of the registrant’s human capital resources to the extent such disclosures would be material to an understanding of the registrant’s business.” Previous disclosures required only the number of individuals working at the company to be disclosed. Based on stakeholder feedback requesting additional detail about registrants’ “human capital management policies, practices, and performance,” the SEC decided to update the current rule.
The SEC’s new requirements are principles-based and do not include prescriptive requirements for the information that must be contained in the disclosure. Rather, the SEC determined that each registrant should assess what is material to their business and include that information in the disclosure. The SEC also carries forward the existing requirement to disclose the number of people employed.
In response, compliance and human resources leaders will need to determine what is material to disclose and monitor how disclosures may impact investor behavior and company performance over time.
In practice, how do the disclosures impact companies?
Enhanced statements under this regulation have included further detail on employee demographics, data on diversity in the workforce, employee training and development, safety, detail on the company’s diversity and inclusion initiatives, hiring/employee lifecycle information, compensation and benefits, and information on the impact of COVID-19. Several companies have already issued disclosures; notably, Visa Inc. mentioned a commitment to increasing diversity in its senior leadership, and Starbucks Corp. outlined information related to its employee benefits.
As time goes on, conversations surrounding diversity and inclusion are becoming increasingly prevalent, and many companies included related information in their disclosures this year. Disclosures could entail specific workforce statistics on gender, race/ethnicity, sexual orientation, disability, and age. Companies may also report information about steps being taken to ensure that a company’s workforce is diverse, inclusive, and equitable. Specifics may include the diversity of a board of directors and other senior leadership or information on employee resource groups (ERGs). Designed to encourage diversity and create a space for people typically underrepresented in a workplace, the presence of ERGs may indicate a commitment to foster inclusive, supportive environments within a company.
Disclosures related to COVID-19 are also particularly important this year. The global pandemic has affected nearly every business in some way. Topics that companies may need to address are accommodations for employees to work remotely, safety precautions for employees working in person, any layoffs that occurred, or other health care and mental health considerations. Companies may also outline future intent to maintain a work-from-home system or plans for when pandemic-related disruption begins to normalize.
How can a business know that an HR policy, benefit, or standard has a material impact on the business?
This rule provides an opportunity for registrants to assess their human resources practices and decide which ones they believe are material to their financial statements. The SEC has provided registrants with space to make that determination by issuing a principles-based rule. As more investors express interest in socially conscious investing, disclosures that address how employees are compensated or other key satisfaction metrics (employee turnover rates, workforce or leadership diversity, safety measures, etc.) could be relevant. Any measures which highlight exceptional employee benefits or treatment could also have a material impact on the financial statements.
For a company to develop an effective disclosure, it is likely that the reporting team will need to work closely with the human resources (HR) department to determine the policies and programs that are important to the company and which aspects are material to investors. The HR group will also likely need to oversee data that informs metrics included in disclosures. It is important to evaluate how this data is maintained and whether there are controls in the HR process to ensure the information being provided is accurate.
Metrics other than the number of employees are not required to be included in the disclosure, but to the extent that additional metrics can provide information material to the investor, they should be included. In addition to the required disclosure showing the number of employees, registrants could provide additional information on the diversity of the workforce. Some other examples to consider:
- Employee turnover: Is the turnover rate comparatively low? Has it decreased year over year for the past few years?
- Compensation, to the extent that it differentiates the business. Is compensation higher than market standard?
- How overseas workers are compensated if the business operates abroad.
- Quantifiable benefits provided to employees such as amount spent on tuition assistance, paid volunteer hours, hours of training opportunities provided, spending related to DEI initiatives.
Each of these measures can provide investors with insights into a company’s priorities related to the employees’ wellbeing or satisfaction.
Will disclosures alter investor behavior?
As this new standard is being implemented, it will be interesting to observe whether additional insight into registrants’ human capital practices will impact investors seeking to invest in socially conscious institutions.
This change to the regulations is an opportunity for a company to present behind-the-scenes work that affects its personnel in matters related to DEI, pandemic-related safety, or other disclosed impacts to human capital resources.
The new disclosure will help companies gauge how their investors value holistic and equitable HR practices. As organizations begin to embrace this opportunity to present the quality treatment of a company’s workforce as a material factor in their success, it remains to be seen whether such disclosures will create motion in the market toward better practices overall.