United States: New Reporting Standard For Human Capital Management

Last Updated: December 20 2018
Article by Cydney Posner

As discussed in this PubCo post, human capital management has become a significant concern of institutional investors. For example, for 2018, asset manager BlackRock identified human capital management as one of its engagement priorities, echoing the exhortation from BlackRock CEO Laurence Fink in his 2018 annual letter to public companies: with governments seeming to fall short, it is up to the private sector to "respond to broader societal challenges"; companies must look to benefit their broader communities and all of their stakeholders, including employees, and that involves investment in efforts to create a diverse workforce, to develop retraining programs for employees in an increasingly automated world and to help prepare workers for retirement. (See this PubCo post.) Some institutional investors have also encouraged companies to provide more transparency on HCM practices. But what exactly should they disclose?

What is human capital management? According to BlackRock's Managing Director and Global Head of Investment Stewardship, HCM is, among other things, "employee development, diversity and a commitment to equal employment opportunity, health and safety, labor relations, and supply chain labor standards." The EY Center for Board Matters describes HCM as comprising a wide range of topics such as attracting, retaining, training and engaging the entire range of the workforce, the relationship of company culture to hiring and retention, and diversity and inclusiveness. Specific issues include addressing the changing definition of work for millennials, technology-driven displacement of workers, worker training and broader company efforts to address projected skills shortages. (See this PubCo post.) According to SASB, HCM "addresses the management of a company's human resources (employees and individual contractors) as key assets to delivering long-term value. It includes issues—such as labor practices, employee health and safety and employee engagement, diversity and inclusion—that affect the productivity of employees, management of labor relations, and management of the health and safety of employees and the ability to create a safety culture."

But concern with HCM is not simply a response to societal challenges. Because of the intense competition for talent, BlackRock, for example, views each company's approach to HCM as an investment issue and a "factor in business continuity and success. In light of evolving market trends like shortages of skilled labor, uneven wage growth, and technology that is transforming the labor market, many companies and investors consider robust HCM a competitive advantage." That view is shared by other institutional investors. In its compilation of investors' top priorities for companies for 2018 (involving interviews with over 60 institutional investors with an aggregate of $32 trillion under management), EY identified HCM as one of investors' top five priorities. For many investors, EY reported, hiring and retention of the best talent can be key to remaining competitive over the long term, and company culture can play a role.

To encourage more transparency on HCM practices, one group of institutional investors has submitted a rulemaking petition to the SEC attempting to convince the SEC to adopt new regulations mandating more disclosure related to HCM. In a 2017 petition for rulemaking, the Human Capital Management Coalition, a group of 25 institutional investors with more than $2.8 trillion in assets under management, asked the SEC to adopt rules requiring "issuers to disclose information about their human capital management policies, practices and performance." The proponents contend that disclosures regarding human capital management will benefit investors and the public, as well as promote capital formation. The petition, however, is not explicit with regard to the details of any proposed regulation, identifying only the broad categories of information that the proponents view as "fundamental to human capital analysis." (See this PubCo post.) While the SASB sustainability accounting standards tackle HCM, the SASB standards address a broad range of sustainability topics, are not focused solely on HCM and generally tend not to take as deep a dive into HCM issues. (See this PubCo post.)

Now, as reported in CFO.com, the International Organization for Standardization (ISO) has developed a new ISO standard, ISO 30414 Human resource management — Guidelines for internal and external human capital reporting (currently shown as "under development," but apparently expected to be published in December), which may allow investors and others to benchmark companies' performance on HCM. The article reports that the new ISO standard calls for companies to publicly report on 23 specific metrics and to report internally on an additional 36 measurements.

According to CFO.com, the metrics are divided into these categories:

  • "Ethics (number and type of employee grievances filed; number and type of concluded disciplinary actions; percentage of employees who have completed training on compliance and ethics)
  • Costs (total workforce costs)
  • Workforce diversity (with respect to age, gender, disability, and "other indicators of diversity"; and diversity of leadership team)
  • Leadership ("leadership trust," to be determined by employee surveys)
  • Organizational safety, health, and well-being (lost time for injury; number of occupational accidents; number of people killed during work)
  • Productivity (EBIT/revenue/turnover/profit per employee; human capital ROI, or the ratio of income or revenue to human capital)
  • Recruitment, mobility, and turnover (average time to fill vacant positions; average time to fill critical business positions; percentage of positions filled internally; percentage of critical business positions filled internally; turnover rate)
  • Skills and capabilities (total development and training costs)
  • Workforce availability (number of employees; full-time equivalents)"

In addition, the internal reporting measurements include "succession planning" as an additional category.

As noted in this PubCo post, one of the issues often raised about voluntary sustainability reporting is that, in the absence of accepted reporting standards, the disclosure often lacks comparability and consistency and companies may engage in cherry-picking and "greenwashing," that is, filtering to portray an environmentally responsible public image. It remains to be seen whether the interest of institutional investors in HCM reporting will drive companies to voluntarily adopt and adhere to the new standard—which should provide measurement and comparability—and begin or enhance their reporting on HCM.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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