The Changing Perception Of Human Capital Resources

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.

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