What Investors Are Looking for in Human Capital Management Disclosure

by Rebecca Corbin

This year, nearly double the number of institutional investors reported placing greater emphasis on the social component of ESG when making investment decisions.

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The prolific events of the past year have marked a turning point in the acceleration of Environmental, Social and Governance (ESG). This year, nearly double the number of institutional investors reported placing greater emphasis on the Social component when making investment decisions - 45% in 2020 vs. 28% in 2018 - and 62% of this group specifically cited the COVID-19 pandemic as the leading factor, according to the latest research from Corbin Advisors.

A myriad of events have cumulated to cause this exponential demand in considering the ‘S’ in ESG. The 2020 World Economic Forum kicked off with an overwhelming focus on stakeholder capitalism and Industry 4.0, as well as upskilling and reskilling the global workforce. The outbreak of COVID-19 then raised concerns about employee health and safety, and a continued championing of diversity and inclusion in the workplace. The killing of George Floyd in the U.S. further exposed the persistence of racial inequality in the U.S. and prompted an unprecedented number of corporate CEOs globally to take a public stand against racism and racial inequality. They took to a variety of platforms to express their disdain, including on earnings calls, to which 54% of surveyed investors reported these types of social actioning positively impacted their investment decisions.

As a result, on August 26, 2020, the SEC adopted rule amendments to "modernize" disclosures of business, legal proceedings, and risk factors under Regulation S-K. Item 101(c) will now require 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." In the announcement, SEC chair Jay Clayton noted human capital resources "can be an important driver of long-term value" for companies and industries. Subsequently, a recent survey by Corbin Advisors revealed that for the first time in the survey's history, investors identified talent management among the top five topics of interest on earnings calls.

As the construct of Human Capital Management (HCM) evolves, with trailblazing public companies proactively and transparently communicating facts and figures about what they are doing to keep their employees safe, engaged, innovative, and happy, investors focused on ESG will seek increased disclosure across their portfolio, as they have done with the ‘E’ and ‘G’ sub-factors. Through the first three quarters of 2020, U.S. sustainable fund inflows reached $30.7 billion, already more than the $21.4 billion in all of 2019. A best in class approach to HCM and well-executed action plan to meet or exceed specific goals can create a powerful edge, as 67% of surveyed investors cited company culture as one of the most important competitive advantages they seek when making an investment decision.

As we approach the Q4 2020 earnings cycle and 2021 proxy season, investors will be focused on three specific aspects of HCM: 1) employee health and safety amid the precipitous increase in COVID-19 cases; 2) diversity and inclusion given a spate of decrees, proposals and actions by the State of California, ISS, NASDAQ, Business Roundtable and OneTen; and 3) training and development amid the acceleration of Industry 4.0, IoT, digital, and automation.

Companies are taking specific efforts to address issues affecting talent with a spotlight on HCM elements, such as:

Health and Safety: A recent survey of 256 companies by the National Alliance of Healthcare Purchaser Coalitions found that 53% of employers are providing special emotional and mental health programs for their workforce since the start of the pandemic. Additional services, such as access to counselors and subscriptions to mindfulness / meditation apps, are being provided to address the rise in mental health concern brought about by the pandemic and, more specifically, the lockdowns.

One such example of expanded health benefits can be found at PepsiCo (NASD: PEP), which did not offer caregiving benefits prior to COVID-19, and now offers up to 12 weeks’ pay for employees who are unable to work from home but must care for a child who cannot attend in-person school or day care. Additionally, the company increased pay for its frontline workers (i.e., those who produce, transport, or deliver its products) and provides a full 14-day salary for employees who must quarantine because of COVID-19.

Diversity and Inclusion: The killing of George Floyd and the backlash it provoked, along with the growing Black Lives Matter movement, were influential in bringing the topic of Diversity and Inclusion (D&I) even more front and center. D&I efforts are not only morally and ethically significant, but also critically important to the bottom line. Studies show that diverse management teams are 33% more likely to generate better-than-average profits and 70% more likely to capture new markets, as well as generate 19% more revenue from innovation than companies with below-average leadership diversity.

Salesforce (NYSE: CRM) recently instituted new D&I goals, specifically: a commitment to both double the U.S. representation of Black employees in leadership (e.g., VP+) and increase the U.S. representation of Black employees by 50% by the end of 2023. Additionally, the Company will spend $100 million with Black-owned businesses over the next three years and committed to a 25% year-over-year growth in spend with minority-owned businesses.

Training and Development: At a time when technological innovation is in high demand and organizations have had to abruptly adjust to a “work from home” environment, the ability to quickly train and upskill existing employees (rather than having to look outside for new talent) is paramount.

Costco (NASD: COST) is long known for its commitment to employee development and it’s promote-from-within culture; Costco boasts an astonishingly high 94% retention rate, compared to the industry average of 40%. Lower turnover translates into lower cost and can be meaningful to the bottom line.

As ESG and, more specifically, Human Capital Management continue to gain momentum, there are opportunities to get out in front and lead. The ESG concept may be relatively “new,” but many companies are doing a lot more than they are getting credit for or could be doing more to meaningfully strengthen their organization from both a margin and growth profile perspective - as what gets measured, gets done.

To kick off planning for 2021 reporting, companies should consider the following criteria:

  1. Ensure the Board of Directors has appointed a Committee to oversee the scope of human capital management. Companies typically place this responsibility upon the Compensation Committee or ESG Committee, if one exists.
  2. Evaluate internal processes and systems for monitoring and updating publicly disclosed metrics, including the annual report / 10-K, proxy statement, corporate responsibility / sustainability report and any supplemental disclosures to determine if additional information should be disclosed to comply with the amended rules.
  3. Focus on materiality. Consider both qualitative objectives and quantitative measures for each area of HCM.
  4. Continuously assess whether the disclosed human capital measures are still the most relevant for managing your business and update or change as needed. Maintaining appropriate controls and processes is critical to effective disclosure.

Without SEC-mandated disclosure metrics, companies can determine the HCM metrics most relevant to their business. With this flexibility, companies should immediately and proactively collect this information in preparation for disclosure. The trailblazers and early adopters have created the benchmark for disclosure. Organizations that embrace HCM will most certainly have a competitive advantage over companies that do not.

Rebecca Corbin is the CEO and Founder of Corbin Advisors.