Scan pretty much any proxy statement and you’ll find that boilerplate line that says something like “our people are our most important asset” or some such. But keep reading and you’re equally likely to see little else about how the company actually engages with this crucial “asset,” let alone any meaningful metrics to help investors understand and compare performance.
Expect that to change. Led by big institutional investors like Blackrock and Vanguard—and amid a near-historic low unemployment rate—companies are coming under increased pressure to pay more than lip service to the inhumanely-named practice of “Human Capital Management.”
Speaking at the annual Society for Corporate Governance meeting in Washington last week, Michelle Edkins, Managing Director, Global Head Investment Stewardship Team, BlackRock, was blunt. If every company says it is “in a war for talent” these days, why is it so hard for investors to figure out “how you are positioning yourself to be the most attractive employer?”
Easier said than done, of course. What metrics should you report? Which ones are investors actually looking for? Is qualitative disclosure good enough? And is any of this required by the SEC?
The answer, at least to the last question, is no, and it will likely remain that way. The only 10-K disclosure related to human capital is number of employees. That requirement was added in 1973—and no additional requirements have been added since.
There is a proposal from the agency from the Human Capital Coalition looking for more required reporting on issues like pay disparity and culture, but it seems unlikely to move forward anytime soon, said Adam Kanzer, Managing Director of Corporate Engagement, Domini Impact Investments.
That, said Kanzer, has a downside for companies. “There is information out there on you, but none of it is in context,” he said. Without standardized reporting, investors looking to sniff out the state of talent at a company are left to troll through government data and media reports for clues. “This stuff tends to be the negative stuff,” he said, making his pitch for more SEC requirements.
“Its very hard to argue that human capital is not core to the business.”
So what are investors looking for? Ning Chiu, Counsel, Davis, Polk & Wardell, has come up with a “top ten” list for boards that Kanzer and Edkins agreed covered most of the issues they’d be looking for. It includes:
- Basic Data on Employees. Full time, part time, outsourced, by region.
- Comings and Goings. Hiring, recruitment, retention.
- Diversity and Composition. Race, gender.
- Skills. Training and development programs, how many, how much?
- Culture. Engagement, governance process, wellness programs, work life balance programs, etc.
- Labor/Bargaining. More important for some companies than others.
- Health and Safety. Clearly more important for an oil company than a software company.
- Productivity. This, she said, is the least reported piece of information among all the companies she’s looked at. Is it because it’s hard to do, or just not done? She doesn’t know, she said.
- Wages and Benefits.
- Supply Chain. Who is in it, what are their practices and are they aligned with the company’s practices.
“Getting to a top ten makes it a little more manageable,” she said.
Seems simple enough. So why aren’t more companies disclosing? A few reasons, they said, including: fear that investors will expect impossible-to-meet hockey-stick improvements on the metrics; fear of getting out ahead of rivals and getting dinged on numbers others don’t report; fear that competitors will use the numbers against the company in some way.
Regardless, Edkins said, whether the SEC requires it or not, companies should expect large investors to be paying a lot more attention in the years ahead. For a simple reason: “Its very hard to argue that human capital is not core to the business,” she said.
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