SEC Chair Gary Gensler Wants To Know How Companies Are Treating Workers


Regulators are homing in on the most important intangible assets: people. Intangible assets—skilled workers, brands, client relationships, organizational processes, and client relationships—generate most corporate growth and represent 90% of the market value of the S&P500. Since people are not capitalized on the balance sheet and are instead deemed as an expense, investors have struggled without standardized human capital disclosure to measure the contribution of human capital to corporate strategy and performance. Earlier this year, this column explored how investors can benefit from the inefficiency of inconsistent human capital disclosure requirements and outdated accounting standards by harnessing wellbeing of corporate workforces and how employees feel about their work to drive risk-adjusted returns. 

To address this issue, the Securities and Exchange Commission (SEC) is laying the foundation for more comprehensive and consistent human capital disclosure. On August 18, SEC Chairman Gary Gensler tweeted: “Investors want to better understand one of the most critical assets of a company: its people. I’ve asked staff to propose recommendations for the Commission’s consideration on human capital disclosure….This could include a number of metrics, such as workforce turnover, skills and development training, compensation, benefits, workforce demographics including diversity, and health and safety.”

Historical Human Capital Disclosure Requirements

This is not the SEC’s first attempt to illuminate  how companies treat employees. Historically, companies have been required to disclose the number of employees. Effective January 2017, the SEC mandated public companies to disclose the ratio of compensation of their CEOs to the median compensation of their employees. While this disclosure certainly helps inform shareholders when voting on executive compensation, it only indirectly addresses a small portion of human capital management. 

In addition, in November 2020 as part of a broader attempt to modernize annual Form 10-K business, legal proceedings, and risk factor disclosures, the SEC overhauled human capital management disclosures. Since then, companies have been required to include a description of their human capital resources, including any human capital measures or objectives that companies focus on in managing the business. 

Falling Short of Their Goals: The SEC’s 2020 Revisions of Human Capital Disclosure Requirements

The 2020 human capital management rule changes did not go far enough. New Stanford and Equilar analysis of the first 100 Form 10-Ks filed by companies with at least $1 billion in market capitalization following the SEC rule revisions of November 2020 indicates that although disclosure length has increased nine-fold, the disclosures are characterized by a general lack of informativeness. 

First, the emphasis of early disclosure is on qualitative language over quantitative metrics. Informativeness would improve if there were more quantitative metrics. 

Second, comprehensive frameworks for human capital management cover all aspects of human capital management, including recruitment, development, retention, satisfaction, safety, and compensation. While much of this information is useful to shareholders, Stanford and Equilar analysis showed that companies tend to cherry pick the categories of human capital management that they disclose, and the disclosure is rarely detailed and quantitative. 

Third, many companies state that employees are their most important asset. However, only 10% of companies list their chief human resources officer as one of the three most highly compensated executive officers, or named executive officers. 90% of companies do not, and chief human resources officers are often paid less than other executives in the C-suite. Similarly, only 25% of CEOs have human capital metrics in annual incentive programs. 75% of companies do not. It would be helpful for investors to be able to determine through standardized disclosure whether companies are prioritizing investment in human capital management practices. 

Toward a Systematic Understanding of Workforce Turnover, Skills and Development Training, Compensation, Benefits, Workforce Demographics, Health and Safety

A Harvard Law School survey of 92 empirical studies on the relationship between HR policies and financial results concluded that human capital is material to financial performance and should be included in standard investment analysis. Let’s delve one level deeper into what research tells us about each of the potential human capital metrics that Gary Gensler listed. 

Workforce turnover. According to Harvard Business Review research, in skilled and semi-skilled jobs, the fully loaded cost of replacing a worker who leaves (excluding lost productivity) is typically 1.5 to 2.5 times the worker’s annual salary. Also, during expansions, when there are tighter labor markets like there are today, strong employee relations reduce new issue bond yields, perhaps by facilitating recruiting and retaining top talent.

Skills and development training. Good Companies/Good Jobs research at the Aspen Institute finds that employees who have opportunities to advance, good wages, and benefits are more productive and stay in their jobs longer. Internal promotion is critical, and companies like Costco have committed to 100% internal promotion. 

Compensation.  Approximately half of the S&P 500 and FTSE 100 companies use an ESG measure when setting targets for executive pay. According to Willis Towers Watson research, 32% of the S&P500 uses people/human resources metrics, while 16% use employee health and safety metrics. 

Benefits. New research on the adoption of state-level Paid Family Leave (PFL) acts in the US between 2002 and 2018 demonstrates that requiring firms to provide paid leave to employees for medical or family events increases productivity by 4.6%. As the coronavirus pandemic continues, tens of millions of uninsured and underinsured Americans may avoid medical attention because they cannot afford it. In addition, National Institutes of Health (NIH) research shows that allowing employees with influenza to stay home for one or two days reduced workplace infections by 25% and 39%, respectively. Because lack of healthcare insurance and sick leave increase the spread of pandemics and other illnesses, they increase systemic risk in the US economy. The largest investors cannot diversify away system-level risks. 

Workforce demographics, including diversity.  According to Institutional Allocators for Diversity Equity and Inclusion (IADEI), there is a growing body of academic research highlighting a connection between greater levels of diversity among decision-makers (i.e. senior management and board members) and financial outperformance.  In particular, recent McKinsey & Co. research highlights the benefits of greater levels of diversity and inclusion as companies and society broadly navigate and emerge from the coronavirus pandemic. In addition, Credit Suisse research describes an additional 3.5% compound annual growth rate for portfolios of companies stating that gender diversity is an important factor in their strategy. 

Health and safety.  Employee health and safety has historically been material for nine of the Sustainability Accounting Standards Board (SASB)’s eleven sectors and has become important across the board due to COVID-19. This change is a concept called dynamic materiality. One study quantified the cost per employee—not per sick employee—of various illnesses to American employers: $392 for hypertension, $368 for heart disease, and $327 for arthritis. Presenteeism costs, or the reduced productivity of working through illness, generated 18%-60% of total costs and in most cases exceeded medical costs.  Mental health is also an integral part of health. Companies that invest in employee mental health reap attractive rewards: studies show that every $1 spent on evidence-based care for depression and anxiety returns $5. According to Harvard Business Review, recent research identifies workplace culture is the biggest roadblock to employees feeling healthier and happier.

According to the WHO, the safest enterprises are the most competitive, and effective occupational health and safety measures can…


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