A recent paper by Equilar and Stanford University reviews early HCM disclosure choices and evaluates the information companies provided about their workforces. The authors found that while some companies provided transparent disclosures with meaningful insights, most disclosures lacked quantitative data.
The paper reviewed the first 100 10-Ks filed by companies with at least $1 billion in market capitalization following the SEC rule revisions of November 2020. Some specific insights include:
- The typical disclosure increased nine-fold, from 84 words to 782 words (approximately the length of a newspaper op-ed).
- 20% of companies did not materially change their disclosure.
- Disclosure areas included:
- Diversity and inclusion – 61%
- Employee development – 55%
- Safety – 51%
- Compensation practices – 37%
- Employee engagement – 25%
- Turnover or tenure – 22%
- Culture – 19%
- Recruiting – 12%
- Mental health – 7%
- Pay equity – 5%
- Succession planning – 5%
- 43% of companies included at least one quantitative metric beyond employee count and union representation, such as:
- Gender diversity – 24%
- Racial diversity – 14%
- Tenure or voluntary turnover – 14%
Stanford looked at several other disclosure areas to approximate the “value” a company places on HCM and talent development as strategic initiatives, though caution is recommended in interpreting some of the items discussed. For example, the report found only 10% of companies included a CHRO as a named executive officer, but this has more to do with pay variations and the number of executives at a company than the importance a company places on people initiatives. Further, the report found 25% of companies included human capital metrics in incentive plans in some fashion, but only 11% included it as a weighted metric. In line with historical trends, safety is the most common human capital metric (12% of the total) while diversity & inclusion was used by 8% of companies in the sample.
Overall, the authors seemed critical of early disclosures, noting that “while newly issued reports are substantially longer than historical disclosure, they are characterized by a general lack of informativeness. The emphasis appears to favor qualitative language over quantitative metrics, whereas informativeness would improve if the reverse were true.” However, the analysis fails to consider the newness of the requirement. That newness requires caution. It is understandable that board will take measured, considered steps into HCM disclosures. This is especially important given the intense scrutiny such disclosures are receiving and the very real possibility of the SEC enacting prescriptive rules to mandate HCM disclosures in the near future.
