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Big Leap Forward for Human Capital Disclosure

Updated: May 23, 2023

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Institutional investors lean on retailers to disclose people metrics and plan to take on other industries. But how useful will the information prove to be?

Big Leap Forward for Human Capital Disclosure

After many years marked by varied, mostly unsuccessful initiatives to prod companies to disclose more information about their human capital, the movement appears to be finally gaining some traction. What’s not yet clear is whether these efforts will, in the end, matter much.

At least two groups of institutional investors representing trillions of dollars in assets under management (AUM) have piloted programs in which they’ve engaged directly with companies to elicit such information. Both groups say that to date, they’re pleased with the results.

Both have so far focused their efforts on large retail companies. One of the groups, Principles for Responsible Investment (PRI), is a United Nations-supported network of about 1,500 institutional investors worldwide. Over the past two years, a subset of 24 PRI members with collective AUM of $1.5 trillion have conducted engagements with 27 global retail enterprises — 22 of which have improved their public human capital disclosures as a result, according to Fiona Reynolds, managing director of PRI. “We’re quite happy with where we’ve gotten to on this,” she says.

The other group, the Human Capital Management Coalition (HCMC), comprises 25 U.S.-based institutional investors totaling $2.5 trillion AUM. The group, which seeks enhanced disclosure as one of several goals for elevating human capital management as a critical component of company performance, has engaged with eight U.S. retailers.

Several of those have provided the coalition with non-public information deemed valuable on how they address human capital issues, says says Meredith Miller, chief corporate governance officer or the UAW Retiree Medical Benefits Trust, which is leading the coalition. “The response from the retailers has been great,” she says. “They have great stories to tell and have been willing to share a lot of data.”

Information Gap?

That these investor groups are having some success with their initiatives may not be very surprising. “If people with trillions of dollars of investments are pushing companies for something, you might expect they’d get it,” notes Jeff Higgins, CEO of the Human Capital Management Institute (not to be confused with the similarly named coalition), a longtime leader of efforts to spur greater disclosure.

Still, it’s not clear what these successes will lead to, from a practical standpoint. The investor groups have publicly divulged virtually no specifics on the additional disclosures and have identified only a few of the companies they’ve engaged with (none of which agreed to speak with CFO for this article).

PRI, for example, will only say it asks for increased disclosure on employee turnover and absentee rates, training programs, and employee engagement scores. Several human capital experts interviewed by CFO suggest that such general information may not prove very helpful to investors unless it’s sufficiently granular.

On the other hand, it’s early days for these institutional investor efforts, and any disclosure of such information is a fairly big stride forward. Historically, few companies have disclosed anything related to human capital beyond head count, executive compensation, succession plans, and the identities of top executives and board members.

(Fairly recently, more companies have started including in their risk factors a statement that they may not be able to acquire sufficient talent. How much value that provides to investors is questionable, however.)

Active equity firm Martin Currie, a PRI member that led an engagement with Russian food retailer Magnit, did release a bulletin that described some results of the interaction.

Following the engagement, Magnit appointed its investor relations leader to the task of improving human capital disclosure and for the first time published key performance indicators (KPIs) relating to employee relations, including turnover and training. “This is a fantastic outcome for the engagement and a positive step forward for Magnit,” says Andrew Mathewson, Martin Currie’s portfolio manager for global emerging markets.

Meanwhile, the institutional investors are trying to get the analyst community involved in the quest for more human capital disclosure. The HCMC, for example, is in discussions with some analysts to prepare a guide that will outline questions that could be asked during earnings calls, says Miller.

Observes Higgins, “The conversation is changing. I’ve been taken by surprise by how many big investors are getting on board and the speed with which momentum is building.”

A Question of Value

Reynolds says PRI is pushing for human capital disclosure because metrics on things like turnover, employee engagement, and training can suggest how well managed a company is.

Agrees Tessie Petion, vice president of responsible investment research at Domini Social Investments, which is currently looking into joining the HCMC, “It tells you something about priorities in managing the business and is an indicator for whether we want to invest in that business.”

But a former finance and marketing executive waves off the notion that such data is a good barometer of management quality.

“I don’t like that,” says Tom McGuire, who is now talent strategy leader at Talent Growth Advisors, which helps companies devise people strategies through a finance lens. “Whether a company is well-run is a good question, but a more relevant one is, how do its people impact its value? To understand that, you need to look at the company’s intellectual capital — patents, brands, and proprietary technologies and methodologies. The only source of any of those things is people.”

For that reason, McGuire also quarrels with the idea that disclosure about a company’s entire work force has much value. “You want to know about the turnover and engagement of critical talent,” he says. “At a pharmaceutical firm, those are people in the research area. At a consumer products company, it’s people in consumer research and marketing, and some innovation areas. You don’t really care if an accounts payable clerk turned over.”

Similarly, Higgins points out, if you lose 20% of management in a year, that’s way too high. If you lose 20% of your call-center workers, that’s OK. It’s also fine if 20% of a retailer’s customer-facing staff is lost. But it’s disastrous if a professional services firm has 20% turnover among its customer-facing professionals.

The metrics that come out of the investor groups’ engagements with retailers may be used to compare the companies with one another, but it’s unknown how granular the information is, so therefore it’s unknown how useful such comparisons will be.

“We still have to go back and huddle with our coalition members, so we’re not in a position at this point [to talk about that],” says Miller. “What we’re trying to do is distill out of the metrics the kind of information that would really get at drivers of long-term shareholder value and that is measurable and could be standardized.”

Lisa Disselkamp, a director in the HR transformation practice at Deloitte Consulting, is skeptical that companies can actually provide the kind of information that would allow such efforts to bear edible fruit.

“I’m not a big fan of KPIs and benchmarks,” she says. “Most employers don’t embrace them much, from an actionability standpoint. They may have turnover data, but what’s actionable is the root cause of something.”

For example, Disselkamp points out, turnover is a symptom of many things that go on in the organization, like how flexible schedules are, employees’ satisfaction with supervisors and management, and what kind of career paths are available. “Turnover is just the result,” she says.

Even a great advocate for human capital disclosure like Higgins, whose for-profit firm, the Human Capital Management Institute, provides tools and advisory services for quantifying the value of work forces, suggests that the investor groups’ approach needs refinement.

“They’re getting what they want — a number for turnover and a number for engagement — but then what do they do with that?” says Higgins, a former CFO. “And of course, a company’s management knows they’re not going to be able to do much with it.”

Higgins says he’s encouraging PRI to at least ask for information segregated by basic job groups, like management vs. non-management, STEM workers vs. non-STEM, or sales vs. service. “It’s very much about the context,” he says.

Another problem with disclosure of human capital data is that it’s frankly not too difficult to fudge. “The fudge factor is consistently a problem for things that aren’t regulated,” says Petion, although she adds that sometimes there are clues as to whether a company is shading the truth, such as changing a metric or methodology without explanation.

Still another potential issue, if the goal is to motivate such disclosure on a broad scale, is the administrative burden it might place on companies. For their part — and perhaps to Higgins’ point — both Reynolds and Miller say the information they’re asking companies for is easily gettable. “These are metrics that currently exist and are important in running a company and planning,” says Miller. “I don’t think we’re looking at anything that would impose additional costs or reporting.”

Looking Ahead

The HCMC started with the retail industry partly as a result of the extreme attention focused on the tragic fires at retailers’ factories in Bangladesh and Pakistan in 2012, notes Miller. “We decided it was important to also address the kinds of issues that could come up state-side,” she says. “The retail industry is so labor-intensive and ripe for these kinds of issues.”

As for PRI, Reynolds says its interest in retailers was based on the fact that they’re often in the headlines with respect to employee relations. But both groups are planning to target other industries. PRI has already begun some discussions with mining companies, and Miller says the HCMC may opt to look next at the health care industry.

Ultimately, the investor groups, as well as other interested observers like Higgins, hope that pressure from investors and analysts will result in the emergence of de facto standards for human capital disclosure.

“We want to identify a suite of important metrics on which we could engage with companies across all industries and sectors,” says Miller.

That begs the question: might de facto standards, if they do come about, evolve into formal regulation?

“Hopefully it won’t need to be regulated,” says Reynolds. “Maybe it can be just a norm, as other areas have become. We see reporting in different countries around diversity and pay gaps, for example. Some of those are engrained in regulation, and some aren’t — there’s just investor demand, so companies do it. But I think at the end of the day that if companies aren’t [increasing their human capital disclosure], investors will start going to regulators about it.”

Miller is somewhat more strident. “I do think there is a clear opportunity to explore with public regulatory agencies,” she says. “Having gone through a number of disclosure movements with the SEC and FASB, once there is a public record we can move toward showing that this is a corporate governance best practice and helps the market value companies.”

Higgins, too, thinks the climate is right for an accelerating movement toward regulation. One big reason for that is the developing “gig economy,” with more people doing contract work and fewer employed by a single employer full time. Many human capital experts believe that the newer scenario is on its way to become the more commonplace one.

“That’s got to prompt a regulatory response,” Higgins says. “If you’re disaggregating your work force, you probably have a responsibility to tell your shareholders about what you’re doing, who’s an employee and who is not, and why. That’s where these investors are going. They’re concerned that companies are going to use this as merely a cost-savings methodology as opposed to a way to build sustainability for the long term.”


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