Here's why we need human capital metrics and reporting in company disclosures.
We are in a human crisis. How we choose to respond matters. To economically recover, we will need people-centric measurements and solutions.
The US currently has the largest number of open jobs in recorded history—11.3 million as of February 2022, according to the US Bureau of Labor Statistics. At the same time, more than 4 million people each month are leaving their jobs, another record.
From an organizational perspective, something is missing. Are we doing our best to value employees? How do we know?
CEOs say workers are their most valuable assets and critical drivers of success. But are we treating workers that way?
The reality is that even with the many positives that large and small companies have shared with the media, no one knows the truth, because US companies are not required to disclose much information regarding people. That leaves employers free to loudly trumpet any successful perk, such as the rollout of a new employee well-being program, while sweeping failures such as inequities among their leadership ranks under the rug.
Think about it from an investment standpoint. If executives continue to believe in and state that people are their most valuable asset, then companies owe investors and stakeholders adequate insight and reporting on those assets.
Given the seemingly clear impact of people and human capital practices on organizations, does it not make sense that such critical resources, a primary source of value creation, be included in public disclosures? Shouldn't companies then measure people data and disclose it publicly?
The late, great comedian George Carlin once said, "The reason I talk to myself is because I'm the only one whose answers I accept." The history of human capital metrics shares a similar shortcoming.
HR and talent development professionals often create metrics that are meaningful to them but that do not inspire interest or action from other organizational stakeholders. Believing that quantity paves the road to respect within their companies, workforce analytics scribes eagerly generate hundreds of calculations, pivot tables, and 3D graphics to describe both the simple and the sublime features of their workforces.
Yet, despite recent interest by the US Securities and Exchange Commission (SEC) and other environmental, social, and governance (ESG) bodies, talent executives still struggle to find a constructive and compelling way to calculate and communicate human capital metrics.
Carlin would say that we are still speaking to ourselves. How then do we free ourselves?
Without human capital metric standards, everyone is operating without guidance: investors, employees, insurers, policymakers, and even corporate executives who seek benchmarks against which to compare themselves. Human capital risk is a new focus for companies and a topic frequently mentioned in legal industry newsletters.
Companies have taken little action beyond relying on boilerplate risk language that will soon be inadequate, though. Even employers would agree that determining metrics to report opens the businesses to a risk of misinterpretation or, worse, shareholder lawsuits or SEC investigations.
Without human capital metric standards, everyone is operating without guidance.
While critical for investors, human capital reporting is equally important for employees. Think about a person deciding where to work.
When making an employment decision, wouldn't job seekers want to understand key human capital metrics, such as workforce diversity, amount invested in employee training, company turnover rate, and culture measures such as leadership trust or employee engagement?
Global and US standards
The value of human capital is not always easy to measure. Nevertheless, there is a global standard in human capital reporting that many organizations need to be aware of: ISO30414 Human Capital Reporting Guidelines-December 2018 created by a global ISO technical committee (TC260). While some global companies such as Deutsche Bank are moving to adopt the ISO standards, most US companies have disclosed little information publicly.
"We may not always want to know what the data tells us," says one ISO TC260 member. But that can be a recipe for disaster and certainly not one that leads to higher productivity and performance.
Further, in an attempt to expand reporting, in November 2020, the SEC released new rules mandating human capital disclosure. The new Regulation S-K rules require publicly traded US companies to disclose detailed human capital data and metrics where human capital is considered material to the business and its performance. The rule requires disclosing details for each area of talent management deemed material, such as talent attraction, talent development, talent retention, and productivity.
Throughout 2021, investors and stakeholders watched, tracked, and reported on what additional workforce-related metrics public companies included in public reports, such as in the SEC form 10-K, annual reports, ESG reports, sustainability reports, and even custom reports companies are creating about their workforce.
Investors and stakeholder advocates have been disappointed with the lack of additional information companies have since disclosed. A notable exception has been increased disclosure of basic diversity metrics—however with inconsistent metrics and definitions.
What has become clearer is that a basic requirement or standard to measure and report workforce metrics is needed—something closer to Generally Accepted HR Principles. SEC Chair Gary Gensler said last year that "new public company disclosures will be at the forefront of upcoming and pending rulemakings."
New rules, better metrics
The raw data on human metrics is readily available—thanks to modern digital, web-enabled SaaS-based HR systems and the proliferation of data from those powerful systems. Turning people data into metrics requires skill, effort, discipline, and budget, which are lacking in many strapped HR and talent development departments.
Those teams have often prioritized building employee engagement and experience metrics, along with other custom metrics. The enhanced usage of people data and analytics overall has been a positive business trend long before the COVID-19 pandemic, but it lacks standard definitions and clarity, which are a goal of investors and stakeholders who are pushing the SEC for new rules and standard metrics that enable comparability in addition to greater transparency.
The SEC has made clear that it will be mandating new human capital disclosure metrics. The new rules will require a significant change in what and how US companies report data going forward and could be a landmark change moment for organizations regarding the importance and impact of people data.
Moving forward, enhanced transparency around workforce management and human capital measures will be needed. Without such data, companies will have a difficult time adapting to changing markets and workforce needs or building critical partnerships.
The businesses that invest strongly in their workforce, for example, through employee training and career development, will increasingly outshine and outcompete their peers. In fact, that already may have been happening for decades, but it is unclear without adequate disclosures. And according to EPIC research, organizations that release more data about their human capital have historically performed better in the market.
Further, as employers collect more data about their workforces, existing and prospective employees will want to benefit from that data, such as internal employee marketplace networks and greater diversity and pay equity disclosure information.
One ISO TC260 member notes that they had less privacy concerns after seeing the diversity, engagement, and employee turnover data that leading companies are increasingly disclosing.
Stakeholders and employees deserve to know which companies go beyond their words with actions, investment, and results. In a future world in which human capital data is more transparent, it will become increasingly obvious which employers truly treat their employees as a strategic most-valuable asset versus those who treat them as disposable resources to be used up and discarded.
Read more from CTDO magazine: Essential talent development content for C-suite leaders.