First ISO, then the SEC, and now Nasdaq. All these agencies are requiring the disclosure of human capital measures. Human capital often drives a majority of the costs for businesses. Its role in driving business success, when smartly managed, is finally being recognized.
ISO in December 2018 published guidelines for human capital reporting. The SEC in November of 2020 mandated the reporting of human capital measures for publicly traded companies. On December 1 NASDAQ filed a proposal with the SEC to adopt new listing rules related to Board of Directors’ diversity and disclosure.
Let’s quickly unpack all of this.
The U.S. Securities and Exchange Commission (SEC) on August 30, 2020, introduced new disclosure requirements designed to give stakeholders insight into human capital—including the operating model, talent planning, learning and innovation, employee experience, and work environment. The SEC intends to help stakeholders evaluate whether a business has the right workforce to meet immediate and emerging business challenges and if they are making the necessary human capital investments.
The SEC requires only that a publicly-traded company disclose the number of its workforce. However, it encourages that companies report the number of full-time, part-time and temporary employees as well as independent contractors and contingent workers if they are material to an understanding of the company’s business. It also requires a description of human capital resources if this description is material to the business as a whole or a business segment. The SEC also requires the disclosure of any human capital measures that are material to managing the company and are a focus of the business, such as measures related to the attraction, development, and retention of employees. “Material” means anything that an investor would want to know before buying or selling a stock, bond, or derivative.
The SEC’s rules became effective on November 9. As a result, 2020 Form 10-Ks filed on or after this date will need to include the new disclosures.
Nasdaq’s filing last week, if approved by the SEC, will require all companies listed on Nasdaq’s U.S. exchange to publicly disclose consistent, transparent diversity statistics regarding their board of directors. Additionally, the rules would require most Nasdaq-listed companies to have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female and self-identifies as either an underrepresented minority or LGBTQ+.
“Nasdaq’s purpose is to champion inclusive growth and prosperity to power stronger economies,” said Adena Friedman, President and CEO, Nasdaq. “Our goal with this proposal is to provide a transparent framework for Nasdaq-listed companies to present their board composition and diversity philosophy effectively to all stakeholders; we believe this listing rule is one step in a broader journey to achieve inclusive representation across corporate America.”
The International Standardization for Organizations (ISO) began the movement to disclose human capital measures in 2018 by publishing new human capital standards for its certifications. ISO’s objective was to make transparent the human capital contribution to the organization to support the workforce’s sustainability. ISO’s human capital reporting applies to all organizations, regardless of the type, size, nature, or complexity, whether in the public, private or voluntary sector, or a not-for-profit organization. It requires reporting on 12 human capital areas:
- compliance and ethics
- organizational culture
- organizational health, safety, and well-being
- recruitment, mobility, and turnover
- skills and capabilities
- succession planning
- workforce availability
More can be learned about ISO’s guidelines by purchasing their document, ISO 30414:2018 Human resource management — Guidelines for internal and external human capital reporting for $155.
What to do for 2021?
The SEC’s rules are already in effect, which means that 2020 Form 10-Ks, and future forms 10-Qs and S-1s to be filed will need to include the new disclosures. NASDAQ’s proposal to publish diversity statistics on a company’s boards of directors is still under review by the SEC.
The SEC’s rule only requires publishing the size of the workforce. Companies can decide whether to publish other human capital information that is material to current and potential shareholders regarding the attraction, development, and retention of the workforce or the number of full-time, part-time, and contingent workers.
Companies that want to meet ISO standards in the area of attraction, development, and retention of employees should consider the metrics below when making their SEC disclosures:
- Attraction: Time to fill vacant positions, time to fill critical vacant positions, percentage of positions filled internally, and percentage of critical positions filled internally.
- Development: Development and training cost, percentage of employees who have completed training on compliance and ethics.
- Retention: Turnover rate.
Research also supports the importance of focusing on talent management strategies. According to McKinsey and Co. there is a significant relationship between well thought out and executive talent management and company performance. Yet, only five percent of the respondents to McKinsey’s survey say their organizations’ talent management has been very effective in improving company performance.
Those who report success with talent management are much more likely to say they outperform their competitors: 99 percent of respondents reporting very effective talent management say so, compared with 56 percent of all other respondents. The point is that well thought out, executed, and measured talent management leads to higher financial performance.
With the SEC beginning to require the reporting of the simplest human capital metrics, and NASDAQ petitioning for the reporting on board of director diversity, it is time for companies to become serious about their human capital. It is time to develop, implement, and measure talent strategies that support the business. They will enjoy the improvement to their bottom line.
Victor Assad is the CEO of Victor Assad Strategic Human Resources Consulting, managing partner of InnovationOne, and Sales Advisor to MeBeBot. He works with companies to transform HR, implement remote work, recruit executives, and develop extraordinary leaders, teams, and innovation cultures. He is the author of the highly acclaimed book, Hack Recruiting: the Best of Empirical Research, Method and Process, and Digitization. Subscribe to his weekly blogs at www.VictorHRConsultant.com.