Unlocking the Black Box: Human Capital Metrics in Public Disclosures

Human capital is a company's most valuable asset. Yet, the current disclosure requirements set by the Securities and Exchange Commission (SEC) offer minimal insights into this crucial aspect of business operations. While there have been some recent developments, we have yet to settle how much to disclose. In this blog post, I will dive into the current state of SEC requirements, examine proposals for change, and analyze arguments for and against expanded disclosure.

What the SEC Currently Requires

Despite widespread belief, the SEC's current mandate requires public companies to disclose only their number of employees in both annual and quarterly reports. Established in 2020, this initial step towards greater transparency remains the only required metric. Before this regulation took effect in 2020, public companies did not disclose ANY specific data about their workforce, making the new rule a significant change, albeit minor within the more extensive reporting requirements.?

The SEC's human capital disclosure requirements are principles-based, which means that companies have flexibility in deciding what information to disclose. The SEC believes this approach is the best way to ensure investors have the information they need to make informed investment decisions.

Proposed But Not Adopted

The SEC made waves in 2021 by proposing expanded human capital metrics disclosure, which would have included:

• Turnover metrics - turnover rate, retention rate, and internal hiring rate.
• Diversity data on gender, race, and ethnicity among the workforce.
• Information on any human capital measures or objectives the management focuses on.

However, these proposals still need to be finalized due to substantial resistance from various groups.

The Case for Expanded Disclosure: A Deeper Dive

Advocates for broader disclosure argue that a comprehensive set of human capital metrics would empower investors by giving them a fuller picture of a company's workforce management, potential risks, and overall business health. According to a?report by McKinsey & Company, human capital often turns out to be a company's most valuable asset. Their research indicates that companies with strong human capital management see better financial performance and lower risk profiles. In the book?People Economics, Laura Queen shares the image below that illustrates that intangible assets make up 90% of the S & P market value.?

Further strengthening the case for more expansive disclosure is a?study by Harvard Business Review, which suggests that transparent human capital metrics can indicate a company's strategic alignment with its stated purpose, thereby enhancing investor confidence. Additional metrics like employee engagement and training expenditures could also serve as leading indicators of a company's future performance and stability. This kind of in-depth data could be invaluable for investors to assess a company's intangible yet critical aspects, such as its corporate culture and the efficacy of its leadership.

The Opposition's Point of View

Conversely, critics argue that additional disclosures could prove burdensome and financially draining for companies. A?study by Deloitte?echoes these concerns, particularly for smaller companies with limited resources. Moreover, too much disclosure could provide competitors with an unfair advantage.

One Way Forward

The SEC mandates that public companies disclose only their number of employees, but conversations about broadening this requirement continue to evolve. Though the SEC's proposed changes for 2021 have yet to be adopted, they could signal a trend for the future.

Striking a balance between providing meaningful investor information and minimizing the burden on companies is a complex task that warrants further attention, especially given the pivotal role of human capital in modern business. Increased human capital required reporting would foster more investment in companies that focus on human capital, increase human capital programs, a leveling up of the HR profession, and more HR folks on boards.