Human capital drives value
SEC focuses on how companies deal with arguably their greatest assets—their people.
It’s the “what’s next?” moment for Corporate America. Over the past several years, many U.S. companies have made statements decrying racism and discrimination in all its forms. But how do those statements manifest themselves in their corporate behavior? And from an investment perspective, is it good for the bottom line?
A new Securities and Exchange Commission disclosure could help shed light on these questions by showing whether company advocacy for diversity and inclusion is reflected in how a business behaves more broadly. The so-called human capital disclosure, adopted in August and effective as of last November, is admittedly vague. It does not actually define “human capital” and is open-ended about what measures should be reported. At its core, however, it seeks to show investors how a company thinks strategically and operationally about its employees.
The new disclosure requirement comes at a time when cries for justice in the streets are translating into demands for concrete information about how companies treat and engage their workforce and what they are doing to bring about equal opportunities for everyone, regardless of race, gender, sexual orientation, gender identity and disability.
Even companies known for inclusive advertising featuring star athletes from around the world can fall short. Nike has acknowledged its senior leadership is not reflective of the constituency that the company serves and that it needs to improve its record on women and underrepresented groups. Nike continues to work to remedy that disparity, noting among the hundreds of data points in its annual impact report that the number of female vice presidents increased by 3 percentage points between 2018 and 2019 to 39% and that the number of employees from underrepresented groups increased by 2 percentage points in the same timeframe to 21%.
While materiality may vary by industry and business model, we’d like to see companies disclose and investors consider workforce topics including:
- Diversity and inclusion data
- Terms of employment
- Health, safety and well-being
According to PricewaterhouseCoopers, up to 85% of a company’s costs can be tied up in its people and for many companies, there are a number of obstacles to such reporting—data availability, disclosure biases and sparse availability of comparative data, among others.
As stewards and investors, we take the long view. It is our responsibility through our engagements with companies and policymakers to insist on action and to help contribute to positive outcomes in the wider world. We have to believe this new disclosure requirement will foster improvements in how companies think about their employees, invest in their workforce and, ultimately, enhance the bottom line.