The SEC’s disclosure rule means CHROs must be able to report
on human capital in new ways. Here’s how.
In August 2020, the SEC adopted a new disclosure rule requiring
public companies to describe, to the extent material to an
understanding of the company’s business taken as a whole, the
company’s human capital resources, including the number of
employees and any human capital measures or objectives that the
company focuses on in managing the business.
This new disclosure rule reflects the increasingly accepted view
that the modern business environment is one in which human capital
resources are a fundamental source of company value and that the
effective management of human capital resources is material to
company success. Only public companies need comply with the new
disclosure rule, but these basic principles apply to both public
and private companies.
In this environment, the management and disclosure of human
capital resources requires a roadmap. This article surveys the
basic components of such a roadmap, with a particular focus on the
role of the CHRO in its development and implementation.
Form a Team
Companies need a system in place to tackle human capital
resource management and disclosure—a system of people to
manage human capital resources, data collection and analysis. The
individuals that are responsible for managing human capital
resources, including the CHRO, are crucial to the process of
preparing meaningful disclosure or being ready to do so in the
future, and they should be identified and integrated into the
disclosure preparation process.
Companies should also determine how the human capital management
team will address human capital matters with the company’s
board of directors. Boards, together with management, should decide
how the board will oversee these issues, specifically, whether they
will be brought in the first instance to the full board or a
committee of the board. Public companies are increasingly placing
human capital management oversight responsibility with the
board’s compensation committee (which some companies have
renamed the human capital management committee or similar) or the
nomination and governance committee (often in the case of companies
that are approaching human capital management as an integrated
aspect of environmental, social and governance, or ESG, oversight).
The CHRO should be ready to report to the board on these issues and
should consider whether any training, skills or support is required
to take on this responsibility.
In forming the team, consider these
questions: Who in the organization is ultimately
responsible for managing human capital resources? Is it the CHRO
alone or a shared role, perhaps with the general counsel’s
office? Should the team include outside advisors, from a legal and
consultancy perspective, much like the role advisors have
historically played in the context of executive compensation? What
role can the CHRO play in overseeing, supervising and coordinating
the team? What information, skills and expertise does the CHRO need
to acquire to perform this role effectively?
Set Measurable Human Capital Management Objectives
Companies should develop clear human capital management
measurements and objectives and share and discuss these objectives
with their boards. For public companies, human capital resource
management disclosure should describe the aspects of human capital
resources the company measures, why those measures are tracked and
what goals the company has with respect to those measures.
Disclosure should address whether the company has met its
objectives and, if not yet met, where the company is on its path to
achievement. It is helpful to include specific data points and
describe programs that the company has implemented to achieve its
objectives. Companies should also expect to be held accountable for
progress toward their goals and should be careful not to promise
the achievement of unrealistic goals. Further, if goals are being
revisited and revised by the company, discuss why these adjustments
have occurred.
Although private companies need not make these disclosures, they
should engage in the same process of identifying, tracking and
re-assessing human capital resource measurements. Both public and
private companies will need to determine what it means to attain
specified goals and whether the CHRO is responsible for tracking
progress.
In setting and tracking goals, consider these
questions: What is the
company’s philosophy with respect to human capital resource
management? How would tracking potential measurements contribute to
the company’s success? What is the company going to do
differently in the coming year if goals have not been achieved? How
will the company consider what it did last year and whether that
approach is still right for the company?
Identify Business Priorities and Strategies
Companies, together with their boards, need to assess human
capital management specifically in the context of the company’s
business plan and priorities. It is key to meaningful human capital
resource management and its disclosure to not just identify the
company’s human capital resources, measures and objectives, but
to situate these within the company’s long-term objectives and
strategies. After reviewing a company’s disclosure or human
capital management strategy planning documents, readers should be
able to discern how the company’s approach supports the
company’s business plan. The focus of the disclosure required
for public companies is rooted in an explanation of the
company’s business and how people, as a critical asset of the
business, are managed in that framework. Private companies should
similarly focus on the connection between human capital resources
and the company’s business plan and priorities.
In aligning human capital resources with the
company’s business plan, consider these
questions: How does the company
support its people to achieve business objectives? As business
objectives and strategies evolve, for instance in response to
particular challenges, how does human capital resource management
and measurement evolve? Does the company provide training and
development opportunities for its employees to further the
company’s business plan? How does employee recruitment and
talent retention factor into the achievement of long-term goals?
What does the company do to promote the health and safety of
employees and how does that align with a sustainable company? Are
compensation programs designed with specific business plan
objectives in mind?
The Roadmap
By forming a team, setting measurable human capital management
objectives and identifying business priorities and strategies to
situate those human capital management objectives, companies can
set out a roadmap for drafting effective human capital resource
management disclosure, for public companies, and continuing to
develop the systems behind human capital management itself for both
public and private companies. The CHRO plays a crucial role in the
development and implementation of this roadmap.
Originally published
in StrategicCHRO360
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
