Corporations are now starting to file their annual reports for 2020, and this is the first year that most of those businesses need to include new disclosures about the importance of “human capital” to their operations. I wondered whether those disclosures would include anything about ethics and compliance efforts, so today let’s take a look.

First, some background for anyone who needs it. The Securities and Exchange Commission adopted rules last year requiring publicly traded companies to include a discussion of their human capital issues in their annual reports, typically in Item 1 of the 10-K (“Business Description”). Those rules went into effect on Nov. 9, so a handful of companies with Sept. 30 year-ends started making human capital disclosures at the end of last year. 

Many more businesses, however, have Dec. 31 year-ends, and the largest of them began filing their annual reports within the last 10 days. So now we have enough filings on hand to start poking around.

And exactly what is a company supposed to include in those human capital disclosures? That’s vague. The SEC didn’t include a precise definition of the term, nor any specific metrics that a company should disclose. The disclosures only need to address: 

  • Total number of employees, and employees per business segment when those segments are material to the business;
  • Any “human capital metrics or objectives,” such as employee turnover, tenure on the job, or percentage of employees in unions; and
  • Any information the business deems material about diversity and inclusion, either among employees as a whole or management specifically.

Ethics and compliance aren’t expressly mentioned as something a company should include, but they could fit into a discussion of corporate culture if the company wanted. So I jumped over to Calcbench.com and searched for references to “culture” in the Business Description disclosures of firms that have filed their 10-Ks since Nov. 9. Let’s look at what I found.

Examples of Culture Disclosures

Scotts Miracle Gro, in a filing from Nov. 24, mentioned ethics and values in a discussion of training and professional development: 

Training is an integral part of developing and retaining our associates and creating a culture of leadership within the Company. As part of our standard onboarding program, associates take more than 10 hours of training covering our commitment to leadership, ethics and our values. We also train our associates on important environmental health and safety topics to help ensure we protect our people and our environment as we operate our business…

This was one of the only references I found to a specific amount of training devoted to ethical conduct. 

Another example came from Sanmina Corp. on Nov. 13, this one included in the human capital disclosures. See if you can find the potentially troubling part:

The principles of the Responsible Business Alliance (RBA) are fundamental to our corporate culture and core values and are reflected in our commitments to our customers, stakeholders, employees and communities in which we do business around the world. These commitments drive us to provide a safe and positive work environment for our employees that emphasizes learning and professional development, respect for individuals and ethical conduct, and that is facilitated by a direct management-employee engagement model.

For over a decade, we have tracked human capital metrics that we consider to be key to our business, including health and safety, career growth and development, turnover, hiring, and diversity and inclusion. Management regularly reviews these metrics and seeks to improve them.

Kudos to Sanmina for naming a specific industry alliance as the source of its corporate culture and values — but that second paragraph gives me pause. The company lists various human capital metrics it does track and seek to improve, but ethics and compliance metrics are not among them. Still, Sanmina’s disclosure is more extensive than many others I’ve seen.

Another example is Kansas City Southern Corp. Its filing from Jan. 29 outlined did outline how ethics and compliance behaviors are tied to employee performance and compensation:

KCS’s Vision, Values and Culture (“KCS Culture”). – The KCS Culture is critically important to KCS’s success and is a set of guidelines, beliefs and behaviors that help define KCS and create a foundation for growth and success. KCS’s strong culture and core values should allow KCS to fulfill its vision and continue to endure in times of stress. The KCS Culture helps guide how employees make decisions, treat each other and serve customers. All employees are responsible for upholding the KCS Culture and conformance with the KCS Culture statement is 25% of the annual performance appraisal process for all management employees. Management uses performance evaluations as a tool to help strengthen relationships with employees and KCS’s Culture.

Bravo on tying 25 percent of the annual appraisal to corporate culture!

ShiftPixy, in a filing on Nov. 30, included a discussion of corporate culture in its human capital disclosures, although perhaps a bit more vague than our prior examples:

We expect all of our corporate employees to observe the highest levels of business ethics, integrity, mutual respect, tolerance, and inclusivity, and encourage our clients to demand the same from worksite employees. Our Corporate Employee Manual, and those employee manuals that we prepare on behalf of our clients, set forth detailed provisions reflecting these values, and also provide direction for registering complaints, (including through an anonymous hotline jointly administered by our General Counsel and the Chair of our Audit Committee), in the event of violations of our policies. Our executive officers and supervisors maintain “open door” policies, and any form of retaliation is strictly prohibited.

And we have this discussion of ethics, culture, and integrity from Boeing filed on Feb. 1:

Safety, quality and integrity are at the core of how Boeing operates. We aspire to achieve zero workplace injuries and provide a safe, open and accountable work environment for our employees. We provide several channels for all employees to speak up, ask for guidance, and report concerns related to ethics or safety violations. We address employee concerns and take appropriate actions that uphold our Boeing values.

I think I’ll just leave that right there. 

Other Observations About Human Capital

First, we should stress that I only looked at a handful of companies, and specifically for the word “culture.” We could just as easily search for the words “integrity” or “ethical” and get a different set of results to discuss here. 

Indeed, I did search for disclosures that include the word “integrity,” and found plenty. Most of those results, however, were the vague, boilerplate language that any firm would use to say that it conducts itself with the utmost integrity. I’m sure plenty of firms have said as much in a filing even while disclosing a misconduct settlement. 

I was looking for disclosures that offered specific examples of ethics and compliance metrics, or training requirements, or core ethical values; and where those things came from. Those disclosures were harder to find.

All that said, we should also remember that the SEC human capital rules don’t require any specific ethics and compliance discussion at all; and that this is only the first year of these filings. We’re likely to see these disclosures evolve with time, and hopefully become more fulsome and nuanced. 

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