Human Capital Management
This week, we are excited to address an ever-increasingly important topic – Human Capital Management (HCM) – which is in the spotlight as of late.
Setting the Stage
Human Capital Management: The Next Frontier of Corporate Disclosure
To commence 2020 (seems like an eon ago!), I had the honor of moderating a panel at the World Economic Forum in Davos on the “Tech Factor: Why Upskilling and Reskilling are Critical to Advancing Equality in the Workplace.” Now more than ever, we believe organizations have the responsibility of − and new opportunities to − bring employees up the talent curve by helping them improve their hard, soft, and experiential skills, the critical components being upskilling and reskilling – this ensures employees see clear paths to success and companies are identifying a pipeline of talent at every level.
While we already knew the critical importance of diversity and inclusion, the nationwide #BlackLivesMatter movement and social unrest – ignited by the May 2020 arrest and death of George Floyd – placed a much-needed spotlight on this important issue. In Q2, more than 300 companies discussed social inequality and racial injustice on their second quarter earnings calls, more than six times the previous high-water mark. Indeed, we are at a pivotal moment in corporate history as companies have traditionally avoided proactively addressing sensitive and charged topics like race. It is meaningful to see executives taking a stand and, as a result, our proprietary research finds 54% of investors assert companies speaking out on racial injustice had a positive impact on their ESG opinion and investment decisions, and, importantly, no one reports it resulted in a negative view.
Subsequently, in our Q3’20 Inside The Buy-Side® Earnings Primer® − and for the first time in our survey’s history − investors identified talent management among the top five topics of interest on earnings calls. As we have been advising for many years, talent is the next area of competitive advantage and to attract leading talent, you must foster an inspired culture. ESG plays a significant role in attracting the next-gen workforce who desires to work for an organization that is a force for good and where there is a string cultural fit. The COVID-19 pandemic has intensified investors’ scrutiny of how effectively companies are managing the work-from-home dynamic, their level of empathy and compassion for employees in areas such as access to technology, and their ongoing actions and commitment to encouraging diversity and inclusion.
Recent events are meaningfully advancing the human capital focus, and it’s likely that disclosure and reporting frameworks will become more standardized across sectors and among all public companies. Key events that will continue to give shape to the Social component of ESG in 2021 and beyond include:
Given these developments, we expect investors to increasingly call for board- and executive-level accountability for human capital management. Corbin Advisors is being a part of this change by creating a summer 2021 internship program to provide opportunity to minority students.
Human Capital Disclosure Should Be a Priority in 2021
As you begin to think about advancing your human capital management disclosures, it’s important to realize the final SEC rule amendments described above do not define human capital resources and provide little guidance for companies. However, the SEC did offer examples of topics that can be discussed, such as “measures or objectives that address the development, attraction and retention of personnel.”
Under the SEC’s principles-based disclosure framework, the human capital management discussion should be tailored to the nature of the company’s business and workforce (Previously, the only requirement was to disclose the total number of employees.) Importantly, only factors material to the company need be disclosed.
To kick off planning for 2021 reporting, our high-level recommendations are to:
Ensure the Board of Directors has appointed a Committee to oversee the scope of human capital management; companies typically place it under the Compensation Committee or, if they have one, the ESG Committee
Evaluate internal processes and systems for monitoring and updating metrics that are currently disclosed publicly, including the annual report / 10-K, proxy statement, corporate responsibility / sustainability report and any supplemental disclosures to determine if additional information may be needed to comply with the amended rules
Focus on materiality; consider both qualitative objectives and quantitative measures for each area of human capital
Continuously assess whether the human capital measures you disclose are still the most relevant for managing your business and update / change as needed; maintaining appropriate controls and processes will be critical to effective disclosure
Consider board oversight of human capital management and assign HCM efforts to a specific committee (e.g., compensation, ESG); some companies are going so far as to amend board committee charters to explicitly include mention of HCM (see example in the appendix)
Some of the following metrics are relatively common in corporate responsibility reports − but again, we expect rising investor demand for deeper insights over time. Examples for consideration include:
- Number of full-time, part-time, seasonal, and temporary workers
- Measures of workforce stability, such as voluntary and involuntary turnover rates
- Board and employee diversity metrics
- Programs and initiatives related to recruitment and retention of diverse candidates
- Pay equity metrics, including gender and underrepresented communities
- Average hours of training per employee per year
- Programs for upgrading employee skills and transition assistance programs
- Information about human capital trends, such as competitive conditions, internal rates of hiring and promotion, and recruitment and retention of employees
- Implementation of new health and safety measures in response to the pandemic
- Worker productivity measures and the use of employee engagement and satisfaction surveys
- Human capital management objectives set by management − as well as progress made toward achieving those objectives
In Closing
We hope you find these recommendations insightful and actionable. ESG will continue to increase in importance and we look forward to providing our thought leadership in 2021. Please see the appendix for selected best practice examples.
Best Practices for Human Capital Management Disclosure
Visa Inc. (V), $489.85B, Financial Services
Visa’s 10-K for fiscal 2020 (year ended Sept. 30, 2020) significantly expanded its disclosure from 2019. The fiscal 2020 report discusses how human capital management and a commitment to diversity and inclusion benefit the long-term strategy and helped the company manage the impact of COVID-19. Metrics include diversity and voluntary turnover data.
Ciena Corp. (NYSE: CIEN), $7.28B, Networking Systems, Services and Software
Ciena’s proxy statement for fiscal 2020 (year ended Oct. 31, 2020) highlighted governance changes that included communicating human capital management initiatives to stockholders and updating its compensation committee charter “to reflect its practice of exercising oversight of human capital management initiatives, including promotion of physical and emotional well-being of employees.” The company outlined specific human capital management activities later in the document.
Change Healthcare Inc. (Nasdaq: CHNG), $5.43B, Healthcare Technology
Change Healthcare’s proxy statement for fiscal 2020 (year ended March 31, 2020) explained the human capital governance structure and actions taken to manage and benefit human capital.
MSCI Inc. (NYSE: MSCI), $34.88B, Financial Services
MSCI’s updated their Composition Committee Charter to include Human Capital Management, titled the “Compensation & Talent Management Committee Charter
“The Committee shall assist in Board oversight of the Company’s talent management process. In fulfilling its duties, the Committee shall: (a) annually review talent management for the Company’s CEO, other Executives and, from time to time, other key talent, as the Committee may determine in its discretion; (b) periodically evaluate open senior management roles and future talent needs; (c) at least annually review the Company’s diversity and inclusion programs including their key performance metrics; and (d) periodically review the Company’s corporate culture and learning and development programs and the results of the Company’s employee engagement survey.”