Â© Jirsak / iStock / Getty Images Plus
Just over seven months ago, the Securities and Exchange Commission (SEC) announced an important new 10-K disclosure requirement: describing human capital resources and the goals or metrics used in running the business that are important for the understanding of a business activity.
In addition to the obligation to make the number of employees mandatory (an already existing requirement), the new principle-based rule leaves it up to the company to apply considerable judgment to describe “any measure or objective of human capital on the which the incumbent concentrates in the management of the company â. It doesn’t even define human capital or manage the business. The omissions were intentional.
The goal, said Jay Clayton, then chairman of the SEC, is “to achieve disclosure tailored to each company’s industry and business model, while being flexible enough to continue to allow full disclosure as companies continue to disclose. evolve in the future. (For more information, see How to Approach the SEC’s New Human Capital Disclosures.)
Faced with a blank canvas last August when the rule was announced, many companies formed cross-functional teams to review, among other things, what to disclose, the length of disclosures, and whether (and how) to include disclosures. quantitative measures. Of course, most companies wanted to avoid disclosing too much or too little information.
Our review of the 10-Ks of approximately 150 S&P 500 companies – filed from November 8, 2020, when the rule came into effect, to February 15, 2021 – paints a first directional picture of how companies have integrated the new requirement. While the results are only a snapshot of part of the S&P 500, the takeaways may prove useful for future filings.
So where is this wave of first responders, representing 11 industry sectors coming from?
Our analysis revealed trends in the nine broad categories, or themes, of human capital disclosure that industry sectors have chosen to focus on. At the same time, we saw big differences between individual companies in the tools and treatment they used to present their information.
Certainly, this new field is still in its infancy and the evolution is a certainty, in large part due to the growing interest of investors, who see human capital as a key driver of long-term value. term.
For now, here’s what the canvas looks like when it’s blank.
The long and the short of it. Some reporters provided only one paragraph to describe their human capital resources. Some took up to three pages. The average length was about a full page.
Qualitative versus quantitative. Companies had to decide how much of the disclosure should be narrative discussion and how much metrics. The majority of first responders chose a primarily qualitative approach, with some using a small number of parameters to highlight and explain one or more parts of the story.
About two-thirds included at least one measure in addition to the number of employees. Some included a breakdown of employees by geographic area, the number of part-time and full-time employees, the number or percentage of employees covered by collective agreements, or a breakdown by gender. Others have included attrition rates and employee engagement survey results, as well as injury incident rates, to share information related to employee safety.
Key themes. The top nine themes that were in the repositories are listed in the table below – the bigger the slice of the pie, the more often this theme was discussed.
The most frequently discussed topic was diversity, equity and inclusion (DE&I). The majority of respondents submitted at least one qualitative discussion on this topic, with more than a quarter using a metric disaggregating employees by gender and / or including figures on ethnic diversity. The frequent emphasis on this theme reflects in part investor concerns about diversity issues related to proxy voting and stewardship policies.
Other frequently cited themes include:
- Social advantages, especially when it comes to attracting and retaining talent
- Employee learning and development, with many companies describing, in narrative form, training programs leading to improved skills and some adding a dollar amount for training investments
- Employee safety, highlighted in particular by companies with manufacturing and industrial activities, some citing incident rates or specific safety goals and others describing higher level policies and procedures
- Employee engagement / surveys, as a tool to assess employee satisfaction and identify areas for improvement, although most companies omitted specific results
- COVID-19 impact / response, encompassing welfare, health and safety, as well as home working arrangements
- Compensation philosophy, managed mainly at a high level
Our review revealed a number of trends across industry sectors:
- Four topics were addressed by at least one company within each industry group: DE&I, employee safety, COVID-19 impact / response, and employee learning and development.
- The greatest variability between sectors was in discussions of compensation philosophy and employee engagement / surveys. These two themes were covered by around 80% of respondents in the communication services and real estate sectors, but by 0% in the materials and utilities sectors.
- Across all sectors, less than 40% of reporters disclosed monitoring / management issues.
- On average, the greatest number of topics were addressed by companies in the real estate, industrial, energy, materials and communications services sectors. The fewest topics, on average, were discussed in the utilities sector.
For more details on industry trends and other aspects of our review, please see How do you enhance your social and human capital? 2020 10-Ks Human Capital Disclosure Results.
The great disparity of topics and treatment in the first wave of human capital disclosure is a natural consequence of a principled SEC rule. But given the potential for increased investor oversight, as well as the continued interpretation of regulations, we expect this information to evolve and be refined, with greater adoption of leading practices.
Already this year, investor pressure has intensified and the SEC has signaled that broader environmental, social and governance (ESG) disclosure is a priority. In response, we expect companies to improve their ability to collect data and to consider other controls and processes in this area. It will certainly be interesting to continue to monitor the human capital disclosures contained in the next wave of 10-Ks.
Marc Siegel is a partner in the financial accounting consultancy firm (FAAS) of Ernst & Young LLP and a member of the Sustainability Accounting Standards Board (SASB). The views expressed by the author are not necessarily those of Ernst & Young LLP or other members of the global EY organization.