David McCann, December 18, 2018
Will the new ISO standard prompt companies to begin voluntarily reporting an assortment of human capital metrics?
A lengthy global effort to create standards for reporting human capital metrics is expected to finally bear fruit this week.
The International Organization for Standardization (ISO) was scheduled to issue its guidelines for human capital reporting on Tuesday, although insiders say the document might not be released until later in the week.
Depending on the extent to which companies voluntarily adopt the new standards, stakeholders — investors, analysts, customers, and current and prospective employees — would have a new category of data with which to assess organizational value and the prospects for financial and non-financial returns from investments in human capital.
But the conversation around human capital reporting standards has shifted somewhat over the past years. Rather than being seen as primarily a means to measure corporate value, such reporting is also considered a response to the public’s increasing desire for corporations to act as good citizens.
“This is a watershed moment,” says Jeff Higgins, a former CFO and the lead U.S. representative on the ISO task force that created the standard. “Some countries are going to adopt this as a regulation for public companies. In the United States, I’ve talked to more than a few companies that want to be in compliance ahead of others in order to demonstrate ethical and social credibility.”
There’s a fairly good case to be made that many companies will indeed pay attention to the ISO standard.
For one thing, the institutional investor community is a strong advocate for human capital reporting. The Human Capital Management Coalition — a group of 26 institutional investors with aggregate assets of more than $3 trillion, led by the UAW Retiree Medical Benefits Trust — last year petitioned the U.S. Securities and Exchange Commission to require public
companies to disclose information about their human capital management.
The SEC officially accepted the petition and is currently reviewing the matter.
The coalition didn’t specify any particular metrics that should be required. However, the new ISO standard certainly provides the SEC with at least a good starting point for deciding on requirements (see below), should it decide to move forward with human capital reporting regulations.
Other organizations behind the push include Principles for Responsible Investment, a United Nations-supported network of institutional investors with an aggregate $70 trillion in assets; and BlackRock, the world’s single largest asset manager, with more than $6 trillion under management.
Also, attention to human capital is part of the Sustainability Accounting Standards Board’s Global Reporting Initiative, a framework for organizations to report on their environmental, social, and governance (ESG) activities.
Over the past few years, most large U.S. companies have begun voluntarily issuing SASB-compliant sustainability reports.
However, what SASB has to say about human capital “is all philosophical,” says Higgins, CEO of the for-profit Human Capital Management Institute (which is unaffiliated with the Human Capital Management Coalition).
The standard, for example, calls for companies to treat their workers fairly, which should be reflected in employee engagement. It says that a company’s employee attrition rate should be at or below the norm for its industry and that the company should spend adequately on training.
“But it does not call for any metrics,” notes Higgins, who has been directly involved in the effort to create human capital reporting standards since at least 2010. “The SASB standard gets a lot of lip service, but there’s nothing you can benchmark to see what companies are doing better or worse” when it comes to human capital.
Now, though, SASB likely will revise its Global Reporting Initiative to specify that companies should include ISO-approved metrics in their ESG reports, according to Higgins. “If companies want to be fully compliant, they’ll need to conform to the new ISO standard in one way or another,” he suggests.
Of course, the more specific, detailed information companies are asked to provide, the more they might push back. It’s one thing to issue a report that subjectively describes ESG activities. It’s quite different to publicly report on 23 specific metrics, as the ISO standard calls for.
The 23 metrics are divided into 10 categories:
Ethics (number and type of employee grievances filed; number and type of concluded disciplinary actions; percentage of employees who have completed training on compliance and ethics)
Costs (total workforce costs)
Workforce diversity (with respect to age, gender, disability, and “other indicators of diversity”; and diversity of leadership team)
Leadership (“leadership trust,” to be determined by employee surveys)
Organizational safety, health, and well-being (lost time for injury; the number of occupational accidents; the number of people killed during work)
Productivity (EBIT/revenue/turnover/profit per employee; human capital ROI, or the ratio of income or revenue to human capital)
Recruitment, mobility, and turnover (average time to fill vacant positions; the average time to fill critical business positions; percentage of positions filled internally; percentage of critical business positions filled internally; turnover rate)
Skills and capabilities (total development and training costs)
Workforce availability (number of employees; full-time equivalents)
The standard also says companies should make an additional 36 measurements but report them only internally. These include several in an additional category — succession planning.
Higgins says there was a wide range of sentiment on the task force, ranging from corporate members who wanted to report very few metrics, to policy hardliners who advocated for public disclosure of dozens more metrics.
“At times I had to be the voice of reason,” he says. “I’ve worked with enough companies to tell them that if they wanted 60 metrics to be publicly disclosed, it would never happen. The industry would not support that. We needed a good basic starter set, and we’ll work up from that over time.”
Higgins opines that compiling the metrics for public disclosure should not be a major burden — for most companies, at least. He does note that he met with an executive of a Fortune 500 company who said it would take two years to get into full compliance.
Does any of this mean anything to U.S. companies in the short term? Quite possibly so. Given the ardent involvement of so many institutional investors, Higgins suggests that companies may soon begin receiving requests for human capital metrics — even during earnings calls.
“If the CEO or CFO doesn’t have the numbers, they might have to dance,” he says.
That poses a problem. Asked about his sense of the level of awareness about the new standard among even Fortune 1000 companies, let alone smaller public firms, Higgins says, “I think it’s safe to say that 90% of them are not aware.”
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