Stakeholders are pushing companies to talk more about issues like employee engagement, health & safety and diversity, equity & inclusion, reports Tim Human
Aside from climate change, the ESG topic that has garnered the most investor attention over the last two years is human capital management (HCM). During that time, the Covid-19 pandemic and global racial justice protests have pushed social issues firmly into the spotlight.
Institutional investors, as well as other stakeholders, have demanded greater assurance that companies are caring for and managing their workforces effectively and respectfully. In response, businesses have rethought the way they report HCM information, providing greater detail and expanding the use of KPIs. But investors continue to push for additional disclosure.
History of HCM HCM is a fairly broad term that covers the different ways in which companies acquire, train, manage and look after their employees – and how those factors contribute to the performance of the business. And while there is no doubt about the value HCM provides, it has not traditionally been an area where companies provide a great deal of information externally.
Why is that? Firstly, HCM activities are competitively sensitive: they are a key part of a company’s strategy to attract and retain the best talent. In addition, companies are often cautious about releasing data on employees, such as breakdowns by gender or diversity. They may not have the data available. They may also be worried about the reaction releasing such information could bring.
But politicians, regulators and investors have helped to push HCM up the agenda, leading to more details arriving in the public domain. For example, the UK government commissioned the Hampton-Alexander Review in 2016 to increase the presence of women on FTSE boards and senior management teams.
A year later, State Street Global Advisors (SSGA) began its Fearless Girl campaign, with the aim of putting pressure on portfolio companies to add more female directors.
In 2020 the outbreak of Covid-19 threw unprecedented light on the way companies manage and support their employees. Executives began to discuss the health, safety and wellbeing of staff in a way that had never been done before. Later that year, the killing of George Floyd sparked global anti-racism protests and led to an increased focus on how companies can support a fairer and more diverse society, including through their own employment strategies.
Leahruth Jemilo, Corbin Advisors
‘Ask CEOs about their most important asset and they will say it’s their people,’ says Leahruth Jemilo, head of ESG advisory at Corbin Advisors. ‘This was true five years ago and it’s true now. But the difference is that HCM topics like diversity, equity and inclusion (DE&I) now share space in the minds of the C-suite, alongside environmental topics like greenhouse gas emissions. The days of paying lip service to HCM topics are gone.’
Ask CEOs about their most important asset and they will say it’s their people
Global practices For US companies, a notable change in human capital reporting came in 2020 when the SEC made amendments to Regulation SK. Under the changes, public companies must now disclose in certain filings:
A description of the registrant’s human capital resources, including the number of people employed by the registrant
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).
Following the update, PwC analyzed the impact on company filings. Looking at more than 2,000 Form 10Ks, it finds that 89 percent include quantitative and qualitative metrics on HCM, 75 percent mention the impact of Covid-19 on HCM and 66 percent include information on DE&I.
The researchers point out that most of the information provided on Covid and DE&I is qualitative. ‘Many companies did not include measures or objectives related to diversity at the management level, and the quantitative DE&I metrics disclosed primarily include the total number of employees and gender percentages,’ they write in the report.
Turning to the UK market, a recent report produced by creative consultancy Radley Yeldar investigates how companies disclose on DE&I. The study finds that the number of FTSE 100 companies putting out a stand-alone diversity & inclusion report has roughly doubled over the last year – albeit from a low base – from 7 percent to 13 percent.
More broadly, the research finds that companies are using a wide range of channels to disclose their DE&I information, including the annual report, sustainability report and employee business updates. Researchers also detect nervousness around the subject, however: just 53 percent of companies that report on DE&I disclose their DE&I strategy.
‘While our research uncovered several challenges around DE&I reporting, it’s clear there is a sense of hesitancy when it comes to communicating around DE&I accountability; that saying the wrong thing or publishing less-than-flattering figures may incense the general public,’ says Sharn Kleiss, head of employee experience at Radley Yeldar.
‘That’s why striking the right balance between data and storytelling, evidence and inspiration, is so important to effective communication.’
Sharn Kleiss, Radley Yeldar
With investors demanding more information on human capital, HR executives are starting to find themselves drafted in to help with not just corporate disclosure, but also investor events and presentations. ‘For investor days, HR executives have a role in the agenda to elevate the discussion on talent to be more strategic. Topics include DE&I, talent management and leadership programs,’ says Jemilo.
‘We are also starting to see more instances where they discuss company culture and highlight it as a key differentiator or competitive advantage. More broadly, when we look at investor presentations, HR executives are weighing in on some of the content that is collected. For instance, if there is a section on talent management or CSR, our clients often have HR weigh in on key strategic initiatives and proof points.’
There is a sense of hesitancy when it comes to communicating around DE&I accountability
Making changes Given the varied ways companies think about this issue, there is no obvious best practice approach for reporting on HCM. Even the SEC’s rules for public firms on the topic are vague, leading to a wide range of reporting techniques.
For companies that want to improve their approach, there are two broad areas that really matter, says Jemilo. The first is the details. ‘To go beyond ‘checking the box’ on human capital, companies should put pen to paper and craft specific, measurable, meaningful, forward-looking goals – for example: by 2025, we will increase the number of women in executive leadership from 19 percent to 25 percent,’ she suggests.
The second is accountability. ‘Companies should consider how they are going to reach those goals and who is going to be held accountable,’ Jemilo continues. ‘Board and executive-level accountability is critical – for example, hiring people to head up DE&I, having them report directly to the CEO and having them provide regular updates to the board about DE&I goals and progress toward those goals.’
Speaking at the IR Magazine ESG Integration Forum – US in December last year, Jana Croom, chief financial officer at Kimball Electronics, offered advice to companies about getting started with their human capital and DE&I reporting.
‘You have to think about where you can have movement,’ she said. ‘What might be a quick, easy win? What might constitute some longer-term goals?’
Croom said a good place to begin is by making sure you have a diverse candidate pool for different roles, describing this approach as easy to implement and measure. Next, companies should record, in cases where there was a diverse candidate pool, how many times a diverse candidate got the job. Third, businesses should plan changes over the long term, while being mindful of which goals are truly achievable.
For example, Croom said a business might aim for a certain proportion of diversity within the senior management team over a five-year period. ‘But if you have an executive team that is set, doing a great job and not ready to retire – and you’re not going to fire the members – you won’t hit that goal,’ she said.
Another simple way to assess progress is looking at your ‘say-do’ ratio, noted Croom: ‘What did you say you were going to accomplish as an organization? And did you accomplish it? That’s really binary – either you did or you didn't. If your say-do ratio is low, go back and examine what you are saying.’
HCM topics like diversity, equity and inclusion now share space in the minds of the C-suite, alongside environmental topics like greenhouse gas emissions
Growing demands Investor expectations on HCM continue to grow, a fact underlined by the annual letters released by some institutional investors in January this year. The relationship between a company and its employees got a special focus in the closely watched 2022 letter to chief executives from BlackRock’s Larry Fink.
‘No relationship has been changed more by the pandemic than the one between employers and employees,’ he writes, saying staff now have different expectations, such as additional flexibility, higher pay and more meaningful work.
Fink included in the letter a series of questions for CEOs to ask themselves about the way in which they manage their workforce, indicating the information the world’s largest asset manager would like to see in future corporate disclosure.
‘What are you doing to deepen the bond with your employees?’ he asks. ‘How are you ensuring that employees of all backgrounds feel safe enough to maximize their creativity, innovation and productivity? How are you ensuring that your board has the right oversight of these critical issues? Where and how we work will never [again] be the same as it was. How is your company’s culture adapting to this new world?’
SSGA also has a special focus on human capital in its 2022 letter on proxy voting.
Penned by CEO Cyrus Taraporevala, the letter says the investment giant will expand its existing gender diversity policy in two ways: in the 2022 proxy season, all holdings will be expected to have at least one female board member; and in the 2023 season, boards will be expected to have at least 30 percent female directors where the company is listed on a major index in the US, Canada, UK, continental Europe or Australia.
‘In each instance, we are prepared to vote against the chair of the board’s nominating committee or the board leader should a firm fail to meet these expectations,’ writes Taraporevala.
The best defense against activism over social issues is to build and report on ESG programs that truly enhance corporate value, says Jemilo. More broadly, companies need to be ‘offensive-minded’ on human capital issues, given the topic’s unprecedented strategic importance.
‘Corporate valuations are increasingly driven by people-led innovation and there is a war for talent,’ Jemilo says.
‘In such an environment, companies have to rethink their hiring strategy. Many are forced to go back to the drawing board and ask how fulfilling the corporate purpose can be linked with team members’ own life purpose, and what makes them happy? The answer often helps them build a lasting hiring brand.’
