Expected new SEC requirements will have a lasting impact on corporate culture.
“Our employees are our biggest asset” – 18 years ago, the former CEO of Xerox, Anne M. Mulcahy, made this statement at the 2003 Life Management Conference. As we enter 2022, it might become real and CEOs and CFOs need to provide more than lip service. It is expected that the SEC will issue new rules on disclosing human capital data from publicly trading companies. This will have a significant impact on the way companies emphasize corporate culture. In the age of ESG, investors are increasingly focusing on the social aspect (“S”) in ESG. Money talks – and companies will have to take action.
A recent study from JUST Capital about the state of human capital reporting underlines the need to take action. The analysis of the human capital metrics of the 100 largest U.S. companies shows that currently disclosure on critical elements like compensation, training, demographics, and health is low across the board. According to the report, “no company has at least one disclosure within each theme, and no company has disclosure on every single metric”. There are six themes that JUST Capital refer to: Employment and Labor Type; Job Stability; Wages, Compensation, and Benefits; Workforce Diversity, Equity, and Inclusion; Occupational Health and Safety and lastly Training and Education.
But information on these six themes is important and can make a difference. It is critical for investors who need to make informed decisions in the age of ESG. But even more importantly, it is critical to employees and workers as they take decisions about their careers. Undoubtedly, it will increase the importance of human resources directors and departments who often are not taken as serious by CEOs as the quoted statement “Our employees are our biggest asset” suggests. But now, they have to take this really serious as their actions (or non-actions) will impact the performance of their stocks. This marks a new era in the age of corporate accountability.
SEC chief Gary Gensler´s tweets from last year signal an upcoming change that will shake up companies significantly when he “asked staff to propose recommendations for the Commission´s consideration on human capital disclosure”. Companies better get prepared to have clarity on key metrics. According to Gensler, those could include workforce turnover, skills and development training, compensation, benefits, workforce demographics including diversity, and health and safety.
The SEC messages come at a time when the public spotlight is on the largest employee walk-offs in history – 19 million individuals in the US since April 2020. Labor shortage has become a real issue and is keeping executives awake at night. McKinsey & Co. have published a study that shows clearly the disconnect between employers and employees. Employers need to recognize and accept that emotional criteria like “the organization values me”, “my manager values me” or “I feel a sense of belonging” are at the top of the list for employees. Employers believe that criteria like “inadequate compensation” or just “looking for a better job” are at the top of the list, but they are clearly not. If CEOs are serious about “their” human capital, they better take action and find a new balance between culture and success.
The Soul Index, a performance ranking of companies that do exactly that, shows that culture and success are actually two sides of the same coin. The top twenty companies delivered a 199% return between 2016 and 2020. That compares to 180% of Nasdaq, 83% of S&P500 and 75% of Dow Jones. Tech companies are at the forefront of those who understand the importance of corporate culture. 60% of the 2021 Soul Index are from that category with Adobe heading the ranking with Salesforce and Microsoft following suite.
The expected regulations may require companies to disclose information along the following metrics:
- Attraction: Time to fill, time to fill critical positions, percentage of positions filled internally, percentage of critical positions filled internally.
- Development: Total cost of training and development, percentage of employees who receive training in compliance and ethics, percentage of employees who receive any training, average hours of formal training per year, percentage of leaders who receive training, percentage of leaders who receive leadership development.
- Retention: Turnover, turnover for critical positions.
- Additional recommended metrics: Employee engagement score, leadership trust score, diversity by gender, age, disability, race or national origin, leadership diversity, pay equity, human capital ROI, total workforce cost, number of FTEs, contingent/contract and temporary workers.
According to Bruce Bolger, Founder of the Enterprise Engagement Alliance at TheEEA.org, a leader in helping organizations create human capital reporting, “Human capital is a business opportunity and a risk, not simply a compliance issue. When organizational leaders understand that human capital is an asset that can be managed to increase earnings and reduce risk, they recognize that having meaningful human capital management practices and metrics are a means to increase earnings, not simply satisfy regulators or investors.”
The ability of organizations to deliver these data is actually an indicator of the strength and importance of the current human resources organization. Are these data available already? HR will step up to the same level as the finance department since the data are no longer just a nice-to-have for a CSR or Sustainability Report. They are likely to become a critical element of what corporations need to file in their next K-10 statement.
As with previous SEC rules, the dynamics will rather sooner impact also not publicly traded companies. This will have a lasting effect on the quality of corporate culture across all industries. Imagine a time when employees start searching beyond the Glassdoor or Great Place to Work data about criteria such as diversity, pay equity, employee engagement or leadership trust. If their potential next employer does not share any data in those areas, guess what will happen? Employer branding will no longer be about nice slogans and perfect initiatives but about sustainable hard facts.
The entire C-suite has to deal with the impact of these regulations. Imagine the next roadshow where the CEO does not just bring the CFO but also the CHRO (Chief Human Resources Officer) or CPO (Chief People Officer). Because investors will want to know how companies are dealing with their human capital. They will want a level of certainty, why that company will be successful in the future to fill the pipeline of qualified applications. The accuracy of data will improve like never before. Corporations simply cannot afford to make a public retraction or apology for incorrect data. This will put a lot of pressures on human resources departments which in large parts will not be prepared for the task ahead already.
Anne M. Mulcahy´s statement “Our employees are our biggest asset” finally has a chance to become more than just a nice verbatim. It finally has a chance to become reality in the business world.
Written by Ralf Specht, author of Building Corporate Soul.
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