One of the most important policy steps the US could take to heighten awareness of intangible assets is to require companies to include them in companies’ financial statements (see earlier postings). In a speech given earlier this summer, SEC Chairman Gary Gensler reiterated his support for enhanced disclosure by companies of their human capital:
Further, investors have said that they want to better understand one of the most critical assets of a company: its people. To that end, I’ve asked staff to propose recommendations for the Commission’s consideration on human capital disclosure.
This builds on past agency work and could include a number of metrics, such as workforce turnover, skills and development training, compensation, benefits, workforce demographics including diversity, and health and safety.
Disclosure helps companies raise money. It helps the efficient allocation of capital across the market. And it helps investors place their money in the companies that fit their investing needs.
As the SEC works through its process, it is important to understand what companies are already doing. A new study out from the analytics organization JUST Capital (The Current State of Human Capital Disclosure in Corporate America: Assessing What Data Large U.S. Employers Share) provides some helpful insights.
The report identifies 35 human capital metrics (28 of which they were able to collect data). The metrics cover six themes: employment and labor type; job stability; wages, compensation, and benefits; workforce diversity, equity, and inclusion; occupational health and safety; and, training and education. The specific metrics are very detailed. For example, the employment and labor type theme includes not only the number of employees but the number of on-site contractors and on-site temporary or seasonal workers. The job stability theme includes the amount of voluntary turnover by gender and race/ethnicity. The wages theme includes the minimum wage to local minimum wage ratio.
Their analysis of the data collect from 100 of the largest U.S. companies shows why SEC action is needed. To start with, disclosure of human capital data is low. The disclosure rate is below 20% for the majority of metrics. The most commonly disclosed metric was the number of full time employees; even there the disclosure rate was below 40%.
And even then when the data is disclosed, it is likely to be included in a Corporate Social Responsibility Report, Sustainability Report or other Impact Report rather than in the company’s financial report (10-K). As important as these reports are, the study points out that they are optional publications with no set standards for reporting and no auditing requirements. Thus, they are difficult to use to make comparisons across companies and may lack accountability.
The report explains why this lack of data standardization matters: “Without the ability to compare how companies are performing on various human capital metrics, investors can’t make well-informed decisions about where to direct their holdings, potential hires can’t factor a company’s treatment of workers into their employment choices, and customers can’t shift their purchasing practices to support companies leading the way.”
Likewise, the same need for comparability is the reason for why such data disclosure must be mandatory. I understand that some object to increased mandatory reporting, arguing that it gives away important information to competitors. Remember that there was a time when the disclosure of even basic financial data such as revenues, expenses and profits was opposed on the grounds it was proprietary. But as I noted back in 2005 in our paper on Reporting Intangibles, without such information investors and others are flying blind.
Managers also need better data. The JUST Capital study l0oked at public disclosure of human capital metrics. I wonder how many companies don’t even collect such data. Mandatory disclosure may force companies to do what they should be doing anyway: collecting data to better understand and manage their intangible assets including human capital.
So, the sooner the SEC moves to requiring more disclosure of data on human capital, the better. And thanks to JUST Capital for continuing to push on this topic.