The SEC will require public companies to disclose human capital metrics. What does it mean for you?

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The SEC will require public companies to disclose human capital metrics.

Imagine you were investing in a company—let’s call it Company X. You would probably want to know enough about the business to determine if it’s a good investment for you. Among other things, you’d want to know how they handle talent acquisition and management—after all, people are an essential, and expensive, part of doing business! You might ask: do they hire qualified people who will make the business better? Do the people they hire stick around and learn how to do their jobs well at Company X, or do they leave shortly after they’re hired to go somewhere else? Does Company X hire a diverse group of people, or does everyone there share the same background and personal characteristics? Are people happy and productive working there?

You’d be smart to ask these questions; businesses who hire, retain, and train a qualified, diverse set of people are more successful financially, and as an investor, that’s important to you! But until August 2020, there was no guarantee that you’d be given any information about Company X’s human capital, aside from how many people worked there. That’s because the only human capital reporting required by the U.S. Securities and Exchange Commission (SEC) was the number of employees. That changed in August 2020 when the SEC amended its business reporting regulations to expand the human capital reporting capital requirements.

Recently, Recruiting Toolbox’s team of consultants had a conversation with Gerry Crispin, an expert in talent acquisition, who explained that the implications of the SEC’s changes go beyond just providing more information to investors. Gerry notes that for much of the 20th century, physical assets were more important to businesses than human capital. Today, the numbers are reversed—human capital rules. And while those of us working in the realms of talent acquisition, human resources, and people analytics know just how essential talent is to business success, the updated SEC regulations give us an excellent opportunity to showcase this value for business leaders and investors. 

So… what did the SEC actually change?

In August 2020, the U.S. Securities and Exchange Commission (SEC) voted to amend Regulation S-K, updating the required disclosures regarding business, legal proceedings, and risk factors. The SEC’s press release noted that these amendments were made “to reflect the many changes in our capital markets and the domestic and global economy in recent decades.” Essentially, the way business works has changed since the 1970s, when many of these regulations were written, and the SEC updated them in order to give investors a better picture of the businesses they invest in. The final rules took effect as of November 9, 2020.

What kind of things will companies have to report publicly now?

Of primary interest to talent acquisition departments, item 101(c) was amended to specify that all publicly traded U.S. companies must disclose “a description of the registrant’s human capital resources to the extent such disclosures would be material to an understanding of the registrant’s business.” The language in the amendment to 101(c) is intentionally vague; no new specific metrics are required. Instead, it talks about what’s “material” to the company:

“Under the final amendments, Item 101(c) will require, to the extent such disclosure is material to an understanding of the registrant’s business taken as a whole, a description of a registrant’s human capital resources, including any human capital measures or objectives that the registrant focuses on in managing the business. We believe that, in many cases, human capital disclosure is important information for investors. Human capital is a material resource for many companies and often is a focus of management, in varying ways, and an important driver of performance. The final amendments identify various human capital measures and objectives that address the attraction, development, and retention of personnel as non-exclusive examples of subjects that may be material, depending on the nature of the registrant’s business and workforce. We emphasize that these are examples of potentially relevant subjects, not mandates. Each registrant’s disclosure must be tailored to its unique business, workforce, and facts and circumstances.” (Final Rule: Modernization of S-K Items 101, 103, and 105,  p. 49)

To summarize, the SEC isn’t telling companies what to report, so much as telling them that they need to identify which human capital metrics are relevant to their business and of interest to their investors, and report accordingly. In an August 2020 discussion of the SEC’s efforts to update human capital reporting rules, David Vance described material as meaning “anything that an investor would want to know before buying or selling a stock, bond or derivative.”

What does it mean for HR, and more specifically, for Talent Acquisition, now that investors will be seeing key human capital metrics?

Because of the way the SEC chose to word the final amendment to article 101(c), companies have the flexibility to identify which human capital metrics are most relevant to their investors, and report accordingly. However, determining what human capital metrics are material to the business is no small task! The International Organization for Standardization’s (ISO) guidelines describe 58 distinct human capital metrics, including those related to costs, diversity, leadership, organizational culture, recruitment, mobility and turnover, and more.

Effectively, the SEC has put a reward system in place that directly links what we do in TA/HR to the business. It’s an opportunity to identify the key human capital metrics that move the dial for the business, and then to invest in making sure these metrics are good. This is great news for people involved with the human side of business – especially those in talent acquisition, people analytics, and strategic HR, as it’ll raise the visibility of what we do and how we do it. But, it can be bad news for companies that haven’t invested in the people practices needed to show above-average and improving metrics. 

As John Vlastelica, Managing Director of our firm, Recruiting Toolbox, adds, “Picture the implications of the CFO explaining to investors that employee turnover is 35% and got worse last quarter, that the number of women in senior leadership positions has been stuck at 20% for two years in a row, that the company missed its hiring targets by 25%, or that the employee engagement ratings for an org are dropping quarter over quarter.”  He adds, “There’s no question the CHRO will play a bigger role in investor calls, that they’ll need to be thinking more about the implications of having many people-goals publicly available and reported on.” There may be a whole new level of accountability and investment headed to the HR function. Get ready. 

As an industrial-organizational psychologist by training, my education and experience have always emphasized the connection between talent and bottom-line business success. Now, this new SEC ruling ensures that the people-focused aspects of business will be formally recognized, tracked, and reported to investors. There is a stronger incentive than ever for businesses to invest in the people and processes that result in strong human capital metrics – the recruiters, data scientists, and HR leaders and their work. In the last 50 years, business has shifted to rely heavily on talent, rather than physical assets. And now, thanks to the SEC’s update, there will be increased recognition of talent professionals’ roles in bottom-line business success moving forward.

 

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