It is sometimes said that "People are everything." A company cannot do business without people. Without people, companies cannot open factories, stores or offices. Without people, companies have no employees, customers, suppliers or investors. Despite the rapid growth in automated systems and artificial intelligence, people remain at the core of creation and innovation. The global pandemic served as a reminder of the core role people play in all companies and forced companies to grapple with new challenges in managing this important asset, including employee health and safety, remote work, virtual management, and in certain industries, labor shortages and organized labor activity. But yet, until a year ago, public companies in the United States were obligated to tell their investors very little about the people that work for these companies and enable them to operate and grow. With the introduction of specific human capital resource management disclosure requirements, U.S. public companies have entered into a new dialogue with their investors, employees and regulators regarding the management, retention, support and sustainability of their employees and other human service providers.
WHERE WE WERE
Prior to the adoption by the SEC in August 2020 of specific disclosure requirements under Regulation S-K regarding human capital resource management,1 the only employeefocused disclosure required in describing a company's business was to indicate the total number of persons employed by the company.2 Although some companies would provide voluntary disclosures on information, such as employee location and the use of unionized workforces, this disclosure was neither consistent across companies nor generally robust. Investors and other stakeholders could thus tell how many people worked for a company, and perhaps where such individuals were located, but not how the management of employees (or even the number of employees) fit into the business objectives and strategies of the company. It was as if you knew how many people lived in your neighborhood, but not who they were, what they did, their backgrounds or whether they were safe, happy or wanted to be there. With such limited numerical information, would you have the material information to understand your neighborhood?
The perspective that broader workforce policies, practices and strategies are material to shareholders has been an area of ongoing discussion. With the introduction of specific human capital resource management disclosure, public companies in the United States, including foreign private issuers, are now required to disclose, to the extent material to an understanding of the company's business taken as a whole, the company's human capital resources, including the number of employees and any human capital measures or objectives that the company focuses on in managing the business. This rule requires companies to determine for themselves the human capital resources, measures and objectives that are material to their business. This is a difficult task. First, companies have not been required previously to make this assessment for disclosure purposes. Further, each company may determine a different set of issues that are material to its human capital management, making it difficult to benchmark against peers.
With a year of public disclosures responding to the new human capital resource management disclosure rule available for review, have we learned anything about what aspects of human capital are material to U.S. public companies? One striking feature of disclosures thus far is their range with respect to detail. Some companies have included no more than a paragraph, hardly more than what was provided under the prior rule. On the other hand, some companies have included many pages of disclosure, which in some cases refer to even more information provided in other reports on corporate social responsibility, diversity or human capital management. What should we glean from this range? Are people material to these companies in different ways? Perhaps. But the range may tell us more about which companies had systems in place that could be leveraged to respond to the new disclosure rule than it does about the relative importance of people to their business. Such systems include existing human capital management data and measurement tracking tools, already established executive teams and board committees responsible for human capital management development and oversight and employees and advisors in place and ready to translate this information into meaningful human capital resource management disclosures. In the first year of required disclosure, many companies were likely unprepared for the new rule. As we move into the second year of mandated disclosure, companies should increase their readiness for comprehensive and effective human capital resource management disclosure. Our suggestions for this preparation are below.
WHERE WE ARE NOW
A review of human capital resource management disclosures by the Top 100 Companies is instructive. The Top 100 Companies focused on a relatively consistent range of topics in their disclosures, with certain topics heavily emphasized. By far, workforce demographics and diversity and inclusion were the most discussed topics. Employee health and safety was also a leader. Relatedly, a significant number of the Top 100 Companies described their response to the COVID-19 pandemic as it related to employees. Other topics addressed include the general compensation structure applicable to the broadbased employee population, employee benefit offerings, information with respect to employee surveys and other measures of employee engagement, employee training and development and the executives and board committees that are responsible for human capital management and oversight.
Disclosures by the Top 100 Companies were largely qualitative, not quantitative.3 Despite this, quantitative data was provided. Nearly all of the Top 100 Companies provided the total number of employees. Beyond that measurement, the leading topics where quantitative measurements were disclosed by the Top 100 Companies are set forth on the following page (for a listing of the most discussed topics, whether qualitative or quantitative, see page 44).
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Footnotes
1. Item 101(c)(2)(ii) of Regulation S-K requires that companies "[d]iscuss the information specified [below] with respect to, and to the extent material to an understanding of, the registrant's business taken as a whole, except that, if the information is material to a particular segment, you should additionally identify that segment... A description of the registrant's human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as depending on the nature of the registrant's business and workforce, measures or objectives that address the development, attraction and retention of personnel)."
2. Under Item 402 of Regulation S-K, companies have been required to describe in great detail the compensation of their named executive officers (a group consisting of specified executive officers as dictated by the disclosure rules). This is important information but, because of its limited scope, does not necessarily shed light on the management of the much larger employee population. It should also be noted that companies have been required to disclose certain information relating to employees to the extent it directly impacts financial statements (for instance, valuation and liability matters with respect to pension plans) and, further, some companies have been providing voluntary disclosure of human capital matters to varying degrees in corporate social responsibility reports and other publications, including their websites.
3. This is of particular interest because in connection with the adoption of the new disclosure rule, former-SEC Chairman Jay Clayton underscored the fact that the new disclosure rule is principles-based, but also noted that he did "expect to see meaningful qualitative and quantitative disclosure, including, as appropriate, disclosure of metrics that companies actually use in managing their affairs" and that "as is the case with nonGAAP financial measures, [he] would also expect companies to maintain metric definitions constant from period to period or to disclose prominently any changes to the metrics used or the definition of those metrics."
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