Why do we need human capital metrics and reporting in company disclosures? Can we agree that the Coronavirus crisis is a human crisis requiring people-centric measurement and solutions? The last great crisis in the US was the financial crisis of 2007-2009. If the pandemic is a uniquely human crisis, the most powerful driver in our economic recovery from this crisis is what we do around human capital and how people choose to respond.
The late great comedian, George Carlin, once said, “The reason I talk to myself is because I’m the only one whose answers I accept.” The history of human capital metrics shares a similar shortcoming. Human resources professionals often create metrics that are meaningful to them but do not inspire interest or action from other organizational stakeholders. Believing that quantity paves the road to respect within their companies, workforce analytics scribes eagerly generate hundreds of calculations, pivot tables and 3D graphics to describe both the simple and the sublime features of their workforces. Yet, despite recent interest by the SEC, other ESG bodies and related metrics, HR still gropes for a truly attractive and compelling way to calculate and communicate human capital metrics. Carlin would say “we are still speaking to ourselves.” So how do we free ourselves?
So far it has been a mixed bag at best as the US finds itself with the largest number of open jobs in recorded history (10.9 million in the US as of December 2021 per US BLS) while at the same time seeing over 4.0 million people leave existing jobs each month (4.3 million December 2021 per US BLS, also a record. From an organizational perspective, something seems missing unless this is truly the best organizations can do. Then again, how would we know?
Are organizations treating their workers more as their most valuable asset and most critical driver of success that CEOs say their workers are? The truth is that even with the many positive things many companies both large and small have shared with the media, we truly don’t know because companies today are not required to disclose much of anything regarding people. That leaves companies free to loudly trumpet any perk, program, or success while sweeping failures, poor decisions, and lack of planning under the rug without a word.
One simple way to think about whether human capital or people data should be measured and disclosed publicly is this: If CEOs and leaders continue to believe in and state “Our People are our Most Valuable Asset” then don’t companies owe their investors and stakeholders adequate insight and reporting on this most valuable asset? Given the clear impact of people and human capital practices in organizations, does it not make sense that such a critical resource, a primary source of value creation, be included in public disclosures?
New 2020 SEC rules mandating human capital disclosure attempted to solve the disclosure issue but left a big hole, allowing each company discretion on what to disclose and how to report it. Back in November 2020, publicly-traded companies in the U.S. were officially required by the U.S. Securities and Exchange Commission (SEC), Regulation S-K, to disclose information on the impact of human capital on the company’s performance. A key part of the new rules was that detailed human capital data/metrics were required where human capital is considered material to the business and its performance. The disclosed information should include details for each area of talent management deemed material (i.e., talent attraction, talent development, talent retention, productivity).
Throughout 2021, investors and stakeholders have been watching, tracking, and reporting on what additional workforce-related metrics public companies have been including in public reports such as 10Ks, annual reports, ESG reports, sustainability reports and even specific people reports. The consensus from investors and stakeholder advocates has been disappointment with the lack of additional information disclosed by companies since the new SEC Reg. S-K rules became effective. A notable exception has been increased disclosure of basic diversity metrics, although with inconsistent metrics and definitions.
In the eyes of stakeholders like institutional investors, there has been an underwhelming lack of specificity and compliance with the new SEC rules, particularly by US-based companies. What has become increasingly clear to markets, investors, and the SEC is that what is really needed is a basic requirement or standard to measure and report workforce metrics, or better, something closer to “Generally Accepted HR Principles (GAHRP)” in measurement and people reporting. “New public company disclosures will be at the forefront of upcoming and pending rulemakings,” explained by new SEC Chair Gary Gensler in public comments on July 16, 2021.
Without human capital metric standards, everyone is flying blind, not just investors but employees, insurers, investors, policymakers, and even corporate executives who seek benchmarks to compare themselves. Human capital risk is a new focus for companies, and a topic frequently mentioned in legal industry newsletters, but it has seen little action beyond companies still relying on boiler-plate risk language that is soon to be inadequate. Even companies themselves would agree, that making up metrics to report opens the company to a risk of misinterpretation or worse, shareholder lawsuits or SEC investigation.
While critical for investors, human capital reporting is just as important for employees. Think about a person deciding where to work. Wouldn’t they want to understand key human capital metrics in making their decision, like workforce diversity, the amount invested in employee training, company turnover rate, and culture measures like leadership trust or employee engagement.
Even experts acknowledge that the value of human capital is not always easy to measure. Nevertheless, there is already a global standard in human capital reporting that many organizations need to be aware of: ISO30414 Human Capital Reporting Guidelines-December 2018, which was created by a global ISO technical committee (TC260). However, even with a unifying, objective global standard easily available, little has been disclosed publicly by most U.S. companies although some global companies such as Deutsche Bank AG, are moving to adopt the ISO standard.
“We may not always want to know what the data tells us,” said one ISO TC260 member. As we have seen with the COVID-19 crisis, not wanting to know what the data tells us can be a recipe for disaster and certainly not one that leads to higher productivity and performance.
Reliable human capital metrics are often lacking yet the raw data is readily available, thanks to modern digital, web enabled SaaS based HR systems and the proliferation of data from these powerful systems. Turning people data into metrics and decisions requires skill, effort, discipline, and budget, which are lacking in many strapped HR departments. Priorities have often been elsewhere in building employee engagement and experience metrics, along with other “hot” technology-driven vendor offerings. The enhanced usage of people data and analytics overall has been a positive business trend long before the COVID-19 pandemic. But stakeholders, including executives and investors, have not always had people data, according to CFO magazine.
SEC-mandated human capital disclosure metrics are coming now that the SEC has gone back for another bite at the apple announcing it will be coming out with specific human capital metrics and reporting disclosure requirements for which all public companies must comply in early 2022.
These new rules will require a significant change in what and how U.S. companies report on human capital going forward and could be a landmark change moment for organizations regarding the importance and impact of people data.
The need for transparency has never been greater. Moving forward, enhanced transparency around workforce management and human capital measures will be needed. Without such data, organizations will have a difficult time adapting to changing markets and workforce needs or building critical partnerships.
Those organizations that invest strongly in their workforce, for example through employee training and career development, will increasingly outshine and outcompete their peers. In fact, this may already have been happening for decades yet without adequate human capital disclosure, such distinctions have been all but invisible except for increased financial results that one CEO attributes to talent investments, while another says the same but without equivalent action.
Increasingly, as organizations collect more data about their workforce, employees want to benefit from that data.
“We saw less concern about privacy when we saw the workforce data was shared and being used to protect the workforce,” said one ISO TC260 member.
Investing in and developing the workforce has never been more important. Stakeholders and employees deserve to know which companies back up their flowery people statements with actions, investment, and results, while others say much and do little. In a future world in which human capital data is more transparent, it will become increasingly obvious which companies truly treat their employees as a strategic most valuable asset versus those who treat them as disposable resources to be used up and discarded.
Lastly, it is important to note that organizations disclosing more about their human capital have historically performed better in the market, Epic research shows.