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Examining Year One of Human Capital Disclosures

Editor’s Note: This is the first of a six-part, monthly series in Workspan Daily produced by Korn Ferry for the benefit of our readers and to encourage further discourse on topics vital to compensation professionals. Each article will address Korn Ferry’s “Top 10 Questions for Compensation Committees in 2021,” a publication produced at the beginning of the year.  

It has been nearly a year since the U.S. Securities and Exchange Commission (SEC) finalized its disclosure rules related to human capital resources. In that time, all we have learned is that disclosures of this kind are a work in progress.   

Back in August of 2020, the SEC attempted to modernize corporate disclosures and adopt rules related to a company’s human capital resources. Under the rule, a company must include “any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel).”

The disclosure requirement was principles based and no metrics were required for disclosure. Given this, the Commission allowed for a great deal of flexibility. For example, the SEC did not adopt a definition for “human capital.” Rather, the SEC’s view is that there may be many definitions of human capital and the concept is “often tailored to the circumstances and objectives of individual companies.”

The Commission believed human capital information was important because it is a “material resource for many companies and often is a focus of management, in varying ways, and an important driver of performance.” Undoubtedly, companies’ consideration of human capital is vitally important to corporate success. And while the SEC’s intent is understandable given the criticality of human capital, the lack of guidance created uneven disclosure quality.

In late 2020, as the first human capital disclosures were being included in 10-Ks, the length and formats varied, but companies coalesced on certain topics. According to a May 2021 study by Stanford University and Equilar, the first 100 10-K filers with human capital disclosures had a median length of 782 words. Yet, some disclosures were as short as 200 words. The study also found that the most prevalent topics discussed were diversity and inclusion (61% of companies), employee training and development (55%), safety (51%), and compensation practices (37%). Less-discussed topics included employee turnover, culture, recruiting practices and pay equity.

After almost a year of reviewing these disclosures, not much has changed. The topics still focus on diversity, employee training and safety, particularly given the outbreak of COVID-19. This result is not surprising, as companies tend to flock with their peers and follow precedent. In our own consultations, clients have requested information related to peer company disclosures. Once presented with peer practices, the clients typically aligned themselves with the most prevalent topics.

While many companies seem to be focusing on the same topics, comparability is still difficult. The open-ended rule did not specify metrics to discuss or the format in which to provide information. As such, companies have taken numerous approaches leaving investors with dissimilar information. The SEC expected this outcome, but they believed that “this approach will likely lead to more meaningful disclosure being provided to investors.” 

We have found that many of the disclosures are fairly generic. While not true for all, many companies approached the new disclosure topic as a form of advertising. Companies used the new rule to highlight a commitment to employee development, diversity and inclusion — topics of particular interest in recent years. This may have been the result of consultants and 10-K drafters recommending that disclosures emphasize the positive and tell a story about the company and its values.

When the SEC introduced the rule, Korn Ferry advised that companies take this opportunity to assess their human capital strategies and describe what truly differentiates a company or industry. That analysis should then be presented in a way that resonates with shareholders and the broader set of stakeholders. In the current climate, Korn Ferry recommended pointing to current or future plans in building a more inclusive and diverse workforce.

The Korn Ferry recommendation still stands, but there is room for improvement. Based on our own overall analysis during the last year, the disclosures are interesting and lengthy, but there is not much actionable information for investors. Many disclosures affirm employee development and safety, but there are few details.

In preparation for the next round of 10-K disclosures, what can HR/total rewards practitioners do to cut through this fog and stay ready? We suggest a dual track: 1) work with HR leadership to review and refine the company’s own human capital strategy related to total rewards, and 2) benchmark peer group disclosures.

The total rewards team should focus on ensuring its compensation strategy is customized to the company’s needs: does it align to your unique strategy, is it contemporary in its design, and does it describe the company’s approach to rewards fairness? Importantly, the total rewards team should be able to articulate the metrics or measures used when demonstrating fulfillment of the strategy.

For benchmarking of peer disclosures, we recommend you review the following:

  • Human capital topics
  • Form (narrative, bullets, etc.)
  • Length
  • Generic v. custom descriptions

This benchmarking will allow the total rewards team to stay at the forefront of any changes in peer disclosures. While you may not want to lead the pack, competitors should not get too far ahead in telling a more specific story to institutional investors.

The first year of human capital disclosures had a mixed outcome. In time, however, this may change. Just as the Compensation Discussion and Analysis (CD&A) evolved since its adoption, the human capital information will continue to improve.

This development will come from inside and outside the corporations, but the SEC may ultimately realize its goal of eliciting information that will allow today's investors to make more informed investment decisions.

About the Author 

Kurt Groeninger is a senior principal at Korn Ferry.  

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