A Broader Look at Human Capital Disclosures

More news today for ethics and compliance professionals curious about what companies are including in their human capital disclosures — like, lots more news. Somebody just published a study of the disclosures made among nearly all the S&P 500. 

The report, compiled by data research firm Intelligize, examines what 427 firms included in their Form 10-K filings from last November (when new SEC requirements for human capital disclosure went into effect) through March 5. It includes a look at how companies organized their disclosures; what broad subjects were included in the disclosures; and how many firms filled in the details with actual data.

Earlier this spring I had a few posts looking at the SEC’s new requirements, mostly examining what companies said about their corporate culture and what data they reported on diversity. Those were snapshots of companies feeling their way through this first year of human capital disclosure. The Intelligize report paints a more comprehensive picture, for whatever that may be worth as companies think about future years’ disclosures and whether you want to retool what you did in Year 1.

So what did the report find? 

First, the structure and content of the disclosures was all over the map. For example, Amazon.com has 1.3 million employees around the world, and it offered precisely two vague paragraphs about its human capital issues. Meanwhile, the far smaller Extra Space Storage Corp., with 4,000 employees, served up six paragraphs that included data about employee satisfaction surveys, participation in wellness programs, and time employees spend on leadership training.

Neither company took the “wrong” approach, because the SEC’s human capital rules are themselves so vague. The rules only say that a company should provide “a description of the registrant’s human capital resources… to the extent such disclosures would be material to an understanding of the registrant’s business.” So every company can choose its own adventure, and clearly some are choosing the abridged version.

Second, few companies disclosed much data about their human capital, even though that data is readily available. For example, Intelligize found that fewer than 20 companies diclosed data about the percentage of women or minorities in their workforce — but every company in the S&P 500 does have that data, because they’re required to file it with the Equal Employment Opportunity Commission. Companies simply chose not to share it with investors.

What Disclosures Did Companies Make?

Lots of companies avoided talking about prior performance on human capital objectives. Instead, they talked about “aspirational, forward-looking goals,” as Intelligize put it. The report cited Goldman Sachs’s disclosures as typical of that form. See Figure 1, below:

I can understand the corporate impulse to talk about future goals rather than specific past actions: so that you don’t give unhappy investors or other outside critics ammunition to complain about what you’ve already done.

My question is more whether companies might be laying a trap for themselves several years down the road. That is, by defining these goals today, you’ll now have to meet them tomorrow, or else explain to investors and employees why you haven’t. For example, what is Goldman Sachs supposed to say if it doesn’t reach those goals for female VPs by 2025? What does it tell investors, and what does it tell employees? I assume Goldman included these goals because executives are confident the goals can be reached, but what happens if that turns out not to be the case?

Second, if a company spells out these human capital objectives now, how easily can the objectives be changed in subsequent years? Do you need to disclose that you’ve changed objectives? 

The SEC human capital disclosure rule does allow objectives to evolve over time. For example, the rule itself arrived in September 2019, before the pandemic arrived. Then the pandemic did arrive, and plenty of firms included human capital disclosures related to COVID-19. Almost all 427 firms at least mentioned covid in disclosures about safety, and Intelligize counted 62 firms that even busted out COVID-19 into its own section of disclosure.

I’m thinking, however, more about “evergreen” human capital issues, such as diversity, retention, or fair pay goals. The analogy that immediately comes to my mind is non-GAAP financial metrics. Yes, companies can use such metrics to convey a fuller picture of financial performance to investors — but under Regulation G of federal securities rules, you can’t keep re-inventing non-GAAP metrics one period after another, or invent new ways of calculating existing metrics, to deliver a number that miraculously shows your performance is just awesome. You need to pick a metric and a calculation method, and stick with it.

Human capital disclosures strike me as vulnerable to the same sort of manipulation. So compliance officers and corporate secretaries may want to consider the disclosure controls you have in place to compile this data. Especially since, as we noted before, you already file that same data to the EEOC. Explaining mismatch between your EEOC reports and what you include in the 10-K is not going to be a fun conversation to have with the SEC, your board, or an unhappy employee affinity group.