The S.E.C. Makes History With a Major New Rule on Human Capital

Thanks to a groundbreaking new rule from the S.E.C., we have a chance not just to elevate employee well-being, but to continue widening our idea of what sustainable growth means. In addition to disclosing their total number of employees, companies are now required to include not only a description of a company’s “human capital resources,” but also “any human capital measures or objectives that management focuses on in managing the business.” And according to the rule this should include any measures that address three areas: “attraction, development, and retention of personnel.”

Many of these terms are left vague, and the rule is meant to be “principles-based.” Among the principles is the requirement to disclose all human capital information to investors and the rule’s premise that human capital is “an important driver of performance.” As former S.E.C. Chair Jay Clayton noted, human capital is central to every organization’s success. “I cannot remember engaging with a high-quality, lasting company that did not focus on attracting, developing and enhancing its people,” he said. “To the extent those efforts have a material impact on their performance, I believe investors benefit from understanding the drivers of that performance.”

Officially called the “Modernization of Regulation S-K Items 101, 103 and 105,” the rule became effective on November 9th. It may not have the catchiest title, but it’s a historic step forward in codifying the primacy of human capital — and therefore employee well-being — as a driver of business outcomes. The new rule represents the first major update to S.E.C. human capital disclosure rules since 1977, representing a drastic change in thinking and a significant step in the direction we need to be going to build the future of work. As David Vance, executive director for the Center for Talent Reporting, notes, in 1975, 83% of the value of companies in the S&P 500 came from their physical capital. In 2015, 84% of that value came from their human capital. But our reporting standards did not truly account for how a company is taking care of its most valuable asset — its people. “What investor will buy stock in a company that refuses to disclose material human capital information, which is already the primary driver of value in many companies?” Vance writes. “What employee will go to work for an organization that refuses to share its key human capital metrics… Today, you can say you didn’t know. Tomorrow, you will know. Change is coming.”

A report on the new rules by PwC suggests that, for the first year of the rule, companies start by highlighting their human capital management in two areas: “There are perhaps no better examples of risks and challenges a company needs to address than the COVID-19 global pandemic and the need for diversity, equity, and inclusion.” The report goes on to propose several pandemic-related areas to address, including employee mental health and well-being, so that all stakeholders can “evaluate whether a business has the right workforce to meet immediate and emerging business challenges.”

In another report on the new rule, Deloitte noted how the new requirements will reward companies that look after their people. “Companies that are able to clearly communicate the material human capital measures and objectives that management focuses on may reap benefits when interacting with investors, employees, suppliers, and their communities,” the authors write. They also note how the pandemic and the social justice movement “spotlight the dependency of companies on their workforce and give them an opportunity to demonstrate how investing in human capital management drives value as a result of engagement, innovation, and productivity.”

The Deloitte report urges leaders to come to a set of clear and consistent metrics that connect to outcomes: “To demonstrate the value and effectiveness of investments in human capital, companies should inventory and prioritize measures of human capital management through a materiality lens by, for example, measuring how diversity and inclusion lead to an enhanced ability to attract talent and drive strategy; how health, safety, and wellness improve productivity; and how training enhances innovation and speed to market.” Included in the report’s own suggested metrics are work-life balance; talent recruitment, retention, and turnover; and employee engagement and empowerment.

In many ways, the new rule — as is often the case with regulations — is simply catching up to reality. A recent Harvard Law School report on well-being as an investor priority notes that employee well-being and mental health, once seen as internal matters, are now “shifting up the priority chain and becoming matters of external interest.” In other words, well-being has already become critical information for investors: “Effective corporate initiatives on emotional wellness are now valued by shareholders, as well as other stakeholders, who are recognizing how these issues affect personal and professional lives, productivity, morale, recruitment, retention, and ultimately influence a business’s ability to generate long-term sustainable value as it prioritizes employees.”

Most important, we can see the new rule as part of a larger and transformational shift in the growing role of environment, social and governance (E.S.G.) reports. The concept comes out of a 2004 initiative by former U.N. secretary general Kofi Annan. Along with the participation of the CEOs of over 50 major financial institutions, the purpose was to explore ways to integrate non-financial information into capital markets and investment decisions in a way that would allow for sustainable growth for workers, companies, societies and the planet. These ideas were consolidated — and the term E.S.G. was coined — in a landmark 2005 study called “Who Cares Wins,” put out by the U.N. Global Compact. “In a more globalised, interconnected and competitive world the way that environmental, social and corporate governance issues are managed is part of companies’ overall management quality needed to compete successfully,” the report reads. “Companies that perform better with regard to these issues can increase shareholder value… while at the same time contributing to the sustainable development of the societies in which they operate. Moreover, these issues can have a strong impact on reputation and brands, an increasingly important part of company value.” And the next year, in 2006, the U.N. consolidated these ideas into its “Principles for Responsible Investment,” which was backed by the heads of leading institutional investors from 16 countries. 

E.S.G. reporting has grown dramatically since then. In 2011, 20% of S&P 500 companies disclosed E.S.G. reports. As of 2019, that number was 90%. And that kind of transparency, and commitment to the idea that business outcomes involve all stakeholders — including both employees and the community at large — is being rewarded. A study by MSCI, the New York-based investment data company, found that 72% of investors believed that organizations with strong E.S.G. policies had weathered the pandemic with greater continuity. 

And companies are not just adopting E.S.G. reporting, they’re broadening the scope of how they define their E.S.G. responsibilities in ways that echo the new S.E.C. rule. “We’ve amplified our focus on mental health and well-being and identified systemic ways to normalize the conversation,” Uber declared in its first E.S.G. report in 2020. In its latest annual sustainability report, AstraZeneca had a “Workforce wellbeing and safety” section, based on a “holistic approach” that considers “both physical and mental health dimensions at work, in transit and at home.” Humana released an annual report on employee well-being, with senior vice president Tim State saying that well-being is “foundational” to the company’s work culture. And last fall the global asset management firm Janus Henderson issued a report on the importance of well-being for investors. While noting that mental health has been a challenge for employers during the pandemic, the report found that “our engagement with companies has affirmed our belief that businesses with good well-being and mental health policies have better employee retention, a favorable work culture and a more resilient workforce.”

This is a historic moment. The pandemic has posed unprecedented challenges to employee well-being and mental health. But at the same time, we have a once-in-a-generation opportunity ahead of us. According to a survey by Just Capital, 9 in 10 Americans believe that this time represents a chance for large companies to hit “reset” and prioritize the environment, the community, customers and employees. So the question is how to keep this momentum going — in what companies report, in how they define the metrics they’re reporting and in our thinking about what sustainable growth means for people and the planet. “This is a big exclamation point around the ‘S.’ [Social] with E.S.G.,” investment relations strategist Rebecca Corbin said about the new rule. 

This past year has seen a dramatic change in awareness about the connection between the way we work and sustainable growth. I’ve seen it firsthand in the organizations we’ve been working with — whether it’s big multinationals like Accenture and Walmart, or smaller companies like Levi’s and SAP Concur. Leaders see more clearly than ever before the connection between the personal sustainability of their employees and the sustainable growth of the company.

But we still need to widen our idea of sustainability. We need to leverage the connection between personal sustainability and planetary sustainability. Climate change demands urgent solutions — and burned out people can’t come up with the innovative creative solutions we need to stop burning up the planet. In their dissent to the new S.E.C. rule, on the grounds that it did not go far enough, acting Chair Allison Herren Lee and Commissioner Caroline A. Crenshaw also wrote about the chance we have to make even more progress. “We have an opportunity going forward to address climate, human capital, and other E.S.G. risks, in a comprehensive fashion with new rulemaking specific to these topics,” they wrote. “There’s no time to waste in setting ourselves to this task, and we look forward to rolling up our sleeves to establish requirements for standard, comparable, and reliable climate, human capital, and other E.S.G. disclosures.” Change is also widely expected to come from the new administration. “Joe Biden’s predicted regulatory changes will drive environmental, social and governance (E.S.G.) investing to become the ultimate megatrend,” writes Nigel Green, CEO and founder of deVere Group. 

The new S.E.C. rule is only the latest push in the move from shareholder to stakeholder capitalism. Last month, a coalition of 61 top business leaders, including the heads of Accenture, Unilever, Dow, and Bank of America, signed onto The Stakeholder Capitalism Metrics, created by the International Business Council and the World Economic Forum. The metrics revolve around four core pillars of people, planet, prosperity and governance. “Runaway climate change, environmental degradation and social inequality are some of the biggest problems that the world faces,” Unilever CEO Alan Jope said. “Companies’ annual reports and accounts might not be the first mechanism for change that would spring to mind, but standardized and mandatory non-financial reporting is critical to creating a new form of capitalism that tackles these problems.”

Human capital — employee well-being and sustainable productivity — have moved from the margins to the center of the conversation. And the new S.E.C. disclosure rule on human capital management will accelerate our much needed move from widespread acceptance to action.