Transparency is coming and you need to be prepared to include key learning metrics in your company’s quarterly financial disclosures. Since this may be the first you have heard about it, let’s back up to cover two important developments.
First, the International Organization for Standardization (ISO) published its first-ever Human Capital Reporting Standards in December 2018. This was the work of an international team of experts in the human capital field and included recommendations for reporting by large and small-to-medium organizations. ISO recommends 10 measures for public reporting by all organizations and an additional 13 measures for public reporting by large organizations. Many more measures are recommended for internal reporting. Some countries will pass legislation to make these recommendations law but most will not. You are probably thinking, “This doesn’t affect me,” unless you happen to live in a country that makes such reporting mandatory (none yet) or if you happen to work for a multinational company with operations in a country that does mandate it. However, if you live in the United States or work for a company based here, read on.
Second, on August 8, the U.S. Securities and Exchange Commission (SEC) proposed new rules for financial disclosure by publicly traded companies (any company selling stocks, bonds, or derivatives). Historically, companies had to comment on 12 items (if relevant) like products and services offered, order backlog, supplier issues, and seasonality in the business. Of the 12 items, only one related to HR, and that was number of employees. The SEC has now proposed to do away with the “prescriptive approach” and replace it with a requirement that companies must disclose all material information—which means anything a potential buyer or seller would find relevant in making a decision to buy or sell a security. Furthermore, acknowledging the increasing importance of human capital, the SEC has said that companies must disclose material information on their human capital, including attraction, development, and retention.
So, what is considered to be “material?” If you were considering buying stock in a company, what would you like to know about that company’s human capital, its people? How about its retention rate, especially for critical positions? How about vacancies and how long it takes to fill positions? How about its culture and whether employees trust their leaders? How about development for employees and leaders? You can probably think of five to 10 more things you would like to know before investing. And the stakes for the company to get disclosure right will be high. An investor will be able to sue for failure to disclose information which would have led her to sell (or buy) securities.
Where will a company turn for guidance to reduce their risk of shareholder lawsuits? Many of us think companies will turn to the ISO Human Capital Reporting standards, at least as a starting point. Here are the 10 metrics recommended for public reporting by all organizations:
1. percentage of employees who have completed training on compliance and ethics
2. total workforce cost
3. human capital ROI
4. revenue or profit per employee
5. turnover rate (one-retention rate)
6. total development and training cost
7. number of accidents
8. number killed during work
9. number of employees
10. number of full-time equivalents (FTEs).
Some additional key measures for public reporting by large organizations include:
1. workforce diversity by age, gender, or disability
2. diversity of the leadership team
3. leadership trust
4. time to fill vacant position
5. time to fill critical vacant positions
6. percentage of positions filled internally
7. percentage of critical positions filled internally.
Are you beginning to see why this is a big deal? This is transparency. What will investors and employees think of companies that do not disclose these recommended items? What would you think? Wouldn’t you assume they are not sharing because their metrics are terrible? In the future world of transparency, why would you go to work for such a company? If you are already there, why would you stay? Why would you invest in a non-transparent company when you could invest in a transparent one with a good track record for human capital? Even companies that are not governed by the SEC will be forced to follow suit as they compete for employees and investors.
Let’s close by focusing on the eight training-related measures recommended by ISO:
1. total development and training cost
2. percentage of employees who have completed training on compliance and ethics
3. percentage of employees who participate in training
4. percentage of employees who participate in formal training by category
5. percentage of leaders who participate in training
6. percentage of leaders who participate in leadership training
7. average formal training hours per employee
8. workforce competency rate.
The first two are recommended for public reporting by all organizations. The others are recommended for internal reporting, but leading organizations are likely to include many in their public reporting. At a minimum, my recommendation is to prepare to report on training metrics one through three and five through seven. Can you do that today? Likewise, I believe leading organizations will begin reporting on most of the 17 metrics in the first two lists. How close are you to being able to do that?
I hope you agree that we are entering an exciting new world of transparency in human capital. We have had transparency in physical capital for many years, and now it is time to focus on what is truly driving success and valuation in today’s world. Let the disclosure begin!