Investors are asking more about a company’s workforce, and companies may be forced to tell them.
Last fall, the U.S. Securities and Exchange Commission proposed several changes to disclosure requirements for public companies, among them a provision to enhance disclosure about “human capital.” The rule has not been finalized.
Investors are beginning to press for details on how a company manages its workforce. A recent SEC investor advisory committee recommended the regulator consider expanding workforce disclosure, including details on workforce safety measures, turnover, average hours of training per employee per year, employee satisfaction surveys and diversity.
Although the SEC isn’t yet proposing that granular detail, it is considering that as an option. Influential investors such as BlackRock and State Street Global Advisors ask companies about issues such as human capital and company culture, according to a report from accounting and consulting firm Ernst & Young. Forty eight pension funds from different states have sent letters to S&P 500 companies asking for more HR disclosure, according to Semler Brossy Consulting Group. The motivations of these different groups vary.
But the investment theory is that companies are increasingly dependent on their workforces as a source of value creation. “As the U.S. transitions from being an economy based almost entirely on industrial production to one that is becoming increasingly based on technology and services, it becomes more and more relevant for our corporate disclosure system to evolve to include disclosure regarding intangible assets, such as intellectual property and human capital,” wrote the Investor-as-Owner Subcommittee of the SEC. The group cited an analysis that found intangible assets represented about 87% of the market value of companies on the S&P 500 in 2015, up from 32% in 1985.
The assets of a manufacturer or real estate firm are quite different compared to those of a software company. The value of Microsoft Corp. literally walked out the door every night and went home, according to a quote attributed to co-founder Bill Gates.
Disclosure of HR issues in proxy statements is growing, but metrics still are few and far between, according to an Ernst & Young review of 2019 proxy statements for Fortune 100 companies. Half of those reviewed reported commitments to workplace diversity and inclusion. A third reported on key practices related to compensation of the broader workforce, including pay equity or minimum wage increases. Another 22% reported on training or leadership development programs, although the level of detail varied.
The changes are in their early stages, but more companies will likely divulge details on their human capital across a variety of reports, including sustainability reports, with greater consistency in terms of metrics, EY says. Boards may also develop stronger relationships with their firms’ chief human resources officers as a result. The benefits of such developments could be substantial, EY says.