By Karen Kerschke, Associate, US policy analyst, PRI
In August 2020, the US Securities and Exchange Commission started requiring general principles-based disclosure of material human capital management (HCM) information from publicly listed companies. The Human Capital Management Coalition (HCMC) defines HCM as the “collective knowledge, motivation, skills and experiences of the workforce”. This bipartisan change was welcomed as evidence grows that the treatment of employees by employers has an outsized impact on the success, or failure, of many companies. However, 18 months after the rule change, the SEC staff is reviewing if the current principles-based approach provides investors with the right information, in the right way.
As SEC staff look at this issue, the PRI has completed a review of its own, interviewing 14 US signatories in order to gather insights in advance of any rulemaking. We sought to find out what information is useful and how this information is obtained, analyzed and used in investment decision-making. We also wanted to find out how increased requirements for mandatory HCM disclosure would impact investment processes. The conclusion of our review does not represent an endorsement or exhaustive list of relevant HCM info, it’s rather a snapshot of HCM information and its current use.
Growing demand for human capital information
Social issues have been thrust into the spotlight by COVID-19, the Black Lives Matter movement and rising inequality. Corporations and investors have taken notice of these societal shifts as they are also reflective of economic shifts. For example, intangible assets including talent, expertise and other aspects directly tied to human capital, make up 90% of the S&P 500’s total asset value - a trend that was accelerated by COVID-19. Understandably, all participants expressed that HCM information can be, and often is, relevant to investment decision making, impacting risk and return assessments. Further, most participants indicated that they consider HCM information at the beginning of the investment process, alongside other relevant information such as financial statements.
There was also a consensus that the universe of HCM information is vastly inconsistent and inefficient, leading participants to use numerous unique and resource-heavy processes to gather, analyse and incorporate HCM information. While the 2020 rule change increased disclosure of HCM information, growing evidence shows that the principles-based requirements aren’t enough. One review of HCM disclosure after the 2020 amendment came into effect shows that issuers largely use boilerplate language and infrequently provide quantitative metrics. A separate analysis concluded that ‘new HCM disclosure appears to contribute to the length but not the informativeness of 10-K disclosures.’
Lack of standardized human capital information
In response to the continued lack of standardized disclosure, participants described the numerous ways they have obtained and verified human capital information. Some conduct their own analysis utilizing publicly available information gathered from issuer websites, sustainability reports and Glassdoor reviews, as well as combinations of third-party ratings and information providers. Participants were quick to explain that information from third party firms often varies and is sometimes completely contradictory, and some cited this as a reason for avoiding third-party data providers altogether.
It was no surprise that all participants agreed further changes should be made to disclosure requirements for issuers to create consistent, comparable data that can be easily accessed and assessed by investors. There was no consensus on a baseline set of mandatory metrics however, a general alignment was found between many participants on certain sets of data, for instance:
- Pay information disaggregated by race and gender stood out as a top priority for almost all participants
- Broad demand for benefits and eligibility, including leave policies, healthcare and retirement broken out by full-time, part-time and contingent workers
- Continuation of traditional disclosures such as health and safety, specifically the need for reporting on injury and fatality rates and explanations on efforts to protect workers
- Participants also wanted to see more disclosure on Diversity, Equity, and Inclusion but also metrics to show progress on qualitative information
Increasing focus on the ‘S’ of ‘ESG’
Beyond these main topics, some participants also brought up training, collective bargaining, workplace culture, workforce productivity and campaign finance. While opinions on priority metrics differed, most participants agreed that all reported HCM data should be disaggregated by race and gender, at minimum. There was also a consensus that information gathered by the Equal Employment Opportunity Commission in their annual EEO-1 report should be made public, but that any disclosure changes need to go beyond this baseline of information.
The recent increased focus on the ‘S’ of ’ESG’ has already led to many new company commitments. However, our conversations showed a need for companies to go beyond statements and show their actions with data. While we await SEC’s action on additional HCM disclosure, the PRI will continue to promote a human-centric approach to decent work – where people are seen as more than their future economic contribution - and we encourage PRI signatories to make their voice heard, to issuers, data providers and regulators, where their data needs are not being met.
This blog is written by PRI staff members and guest contributors. Our goal is to contribute to the broader debate around topical issues and to help showcase some of our research and other work that we undertake in support of our signatories.Please note that although you can expect to find some posts here that broadly accord with the PRI’s official views, the blog authors write in their individual capacity and there is no “house view”. Nor do the views and opinions expressed on this blog constitute financial or other professional advice.If you have any questions, please contact us at firstname.lastname@example.org.
 Human Capital Management Coalition, Human Capital Management Coalition Statement Re: SEC’s Regulation S-K Final Rulemaking (August 27, 2020), available at https://www.globenewswire.com/news-release/2020/08/27/2085000/0/en/Human-Capital-Management-Coalition-Statement-Re-SEC-s-Regulation-S-K-Final-Rulemaking.html.
 Aaron Bernstein and Larry Beeferman, The Materiality of Human Capital to Corporate Financial Performance, Pensions and Capital Stewardship Project, Labor and Worklife Program, Harvard Law School (Apr. 2015), available at https://lwp.law.harvard.edu/files/lwp/files/final_human_capital_materiality_april_23_2015.pdf. An analysis of 92 studies. Also http://faculty.london.edu/aedmans/Rowe.pdf and https://cep.lse.ac.uk/pubs/download/dp1605.pdf.
 Economic Policy Institute, Income Inequality in the United States, available at https://www.epi.org/multimedia/unequal-states-of-america/.
 Ocean Tomo, Intangible Asset Market Value Study, available at https://www.oceantomo.com/intangible-asset-market-value-study/.
The CPA Journal, First Look at the Human Capital Disclosures on Form 10-K (October 2021), available at https://www.cpajournal.com/2021/10/27/first-look-at-the-human-capital-disclosures-on-form-10-k/.
 Stanford Closer Look Series, Human Capital Disclosure: What Do Companies Say about Their “Most Important Asset”? (May 5, 2021), available at https://www.gsb.stanford.edu/faculty-research/publications/human-capital-disclosure-what-do-companies-say-about-their-most.