Grey Is The New Black

January 8, 2021

Take Advantage of the SEC’s ‘Wiggle Room’ to Build High-Impact Human Capital Disclosure

In August, after years of pressure from large investors, the SEC revised the Reg S-K disclosure requirements to “modernize” the descriptions of business, legal proceedings, and risk factors for public companies. Arguably, the most significant change was the enhancement of disclosure requirements for human capital – a topic that has recently entered the spotlight and is here to stay given the impact of COVID-19 on global workforces. People are a company’s most important asset. And, according to outgoing SEC Chairman, Jay Clayton, they are an important driver of long-term value.

That gives investors a right to know more about how companies are overseeing this most sensitive of assets – and it adds yet another critical item to management teams’ mounting list of priorities for 2021.

Unfortunately, the actual to-dos are not as clear as they could be.

There is no denying that the new SEC reporting requirements are not as prescriptive as companies would like, creating grey area around what constitutes “good enough” disclosure. Given the SEC’s lack of defined requirements, coupled with traditionally limited human capital disclosure across public companies, it’s no wonder that Laura Wanlass, Partner and Head of Global Governance Consulting at Aon, expects to see little appetite for trailblazing in this area in 2021. In fact, in the first year, we will likely see limited human capital disclosures in the 10-K.

Let your actions drive your communication.

Yet, with no “one size fits all” strategy, an opportunity exists for companies to be truly thoughtful in their approach to disclosure and perhaps even set the bar. Importantly, the SEC’s cryptic requirements allow for a principles-based approach. This means that disclosure is only required to the extent that the information is material to a company’s operations. Furthermore, it reflects an expectation that the disclosures will be tailored to a company’s own business or industry using management’s judgment. And, it allows for the disclosures to evolve in response to changes in a company’s environment (PwC).

Therefore, companies must first look inward at their own human capital programs, strategies, and goals before communicating externally. This will ensure more accurate reporting on a company’s intentions and progress as it relates to human capital. In short, it will drive more meaningful communication based on what a company is actually doing to optimize the value of its people.

Use this short-list to build a disclosure that paints the picture of what is working in your business.

While public companies are given considerable discretion when determining what human capital measures to disclose, the SEC does have a couple of clear requirements:

  • First, you need to disclose the size of your employee base.
  • Second, you need to include a description of your human capital resources, if material to your business as a whole. If material to only a specific segment, then that segment should be identified.

The rest, as they say, is up to you. Below is a list of some of the potential additional disclosure areas that your company should give thought to including in its 2021 filings:

  • More robust breakdowns of number and types of employees (e.g., full-time, part-time, seasonal, and contractors)
  • Diversity and inclusion data
    • Workforce demographics
    • Programs and initiatives
    • Hiring with a particular focus on how diversity and inclusion are considered
    • Targets related to representation levels
  • Training and development program details
    • Training hours
    • Education attainment opportunities
    • Leadership or skill-building opportunities
    • Career development plans/mentoring programs
  • Employee productivity metrics
  • Workforce health and safety data
    • Number of safety incidents
    • Safety trainings
    • Whistleblower programs
  • Employee promotion and retention numbers
    • Turnover rates
    • Rates of promotion
    • Compensation
    • Employee engagement and satisfaction surveys
    • Employee resource groups
    • Management oversight of employee programs and initiatives
    • Community giving/volunteer opportunities
  • Succession planning information
    • Diversity and inclusion considerations
    • Protocols and systems
  • Culture and benefits details
    • Employee benefits and health care programs
    • Employee assistance programs including mental health and counseling
    • Childcare programs
    • Pay equity analysis

Check out what’s already been done.

Again, there is no one right way to disclose these factors. But there are several leading companies that have already adopted the new requirements in their 10-K filings. Here is a snapshot of what we’ve seen so far:

HEICO | Link (pg. 13)

  • Workforce breakdown:
    • 5,200 full-time and part-time employees
      • 2,500 in the Flight Support Group
      • 2,700 in the Electronic Technologies Group
  • Discussion of health and safety programs for employees, including safety trainings and PPE provided to employees where needed to safely perform job functions
  • Discussion of compensation and benefits, including healthy base waves, annual bonus opportunities, a company matched 401(k) plan, healthcare and insurance benefits, health savings, flexible spending accounts, paid time off, family leave, flexible work schedules, and employee assistance programs
  • Discussion of diversity and inclusion efforts, including policies overseen by the executive team

John Deere | Link (pg. 9)

  • Workforce breakdown:
    • 69,600 employees
    • 27,500 employees in the US and Canada
    • Unions are certified as bargaining agents for approximately 84% of John Deere’s US production and maintenance employees
    • 8,740 of John Deere’s active US production and maintenance workers are covered by a collective bargaining agreement with the United Auto Workers (UAW)
  • Statement addressing value of diverse backgrounds
  • Statement encouraging employees to become involved in their communities

Sanderson Farms | Link (pg. 13)

  • Workforce breakdown:
    • 17,445 employees
      • 1,980 salaried
      • 15,465 hourly
    • Collective bargaining agreement with United Food and Commercial Workers International Union (UFCWIU) covers 625 hourly employees at processing plant in Hammond, Louisiana
    • Collective bargaining agreement with UFCWIU covers 1,540 production, maintenance and clean-up employees at Bryan, Texas, processing facility
  • Discussion of company culture and values, including company vision, statement on human rights, and code of conduct
  • Discussion of health and safety programs, including OSHA injury rates and targets to reduce injury rates
  • Discussion of diversity, equity, and inclusion, as well as employee demographic breakdown:
    • 48% of total workforce were women
    • 87% of total workforce were minorities
    • 22% of management team were women
    • 48% of management team were minorities
    • 45% of new hires were women
    • 88% of new hires were minorities
  • Discussion of recruitment programs, including those targeted at Historically Black Colleges and Universities
  • Discussion of recruitment, retention, and development programs, including employee compensation and benefits and total amount of money invested in employee training and development programs

Starbucks | Link (pg. 7)

  • Workforce breakdown:
    • 349,000 total headcount
    • 228,000 employees in the US
    • 8,000 employees in US corporate roles
  • Discussion of board oversight process on broad human capital matters
  • Commitment to employee surveys on topics like confidence in company leadership, career growth opportunities, and benefits
  • Overview of total rewards strategy, including comprehensive health insurance coverage for employees working over 20 hours per week, the Starbucks College Achievement Program (tuition coverage), parental leave, and more
  • Investment in training and development with a focus on safety and security, customer engagement, anti-bias coaching, and more
  • Commitment to and success in achieving 100% pay equity in the US in addition to China and Canada along with a commitment to do so in all “company-operated markets”

Navistar | Link (pg. 12)

  • Workforce breakdown:
    • 11,000 total active employees
    • 1,100 total inactive employees
    • 2,600 total UAW employees
    • 3,900 total other union employees
  • Discussion of talent management and succession plan process
  • Discussion of employee training programs, including leadership training modules
  • Annual targets around Incident Frequency Rates and Lost Time Case Rates; achieved in 2020
  • Discussion of alignment of compensation with external market to ensure competitiveness
  • Diversity and inclusion vision

Visa | Link (pg. 15)

  • Workforce breakdown:
    • 59% male, 41% female
    • Women represented 34% of leadership
    • US ethnicity breakdown:
      • 38% White
      • 42% Asian
      • 11% Hispanic
      • 6% Black
      • 3% other
    • US leadership:
      • 63% White
      • 19% Asian
      • 12% Hispanic
      • 4% Black
      • 2% other
    • 20,500 total employee headcount
  • Safety procedures for employees
  • Commitment to no layoffs related to COVID-19
  • Voluntary turnover information, (rolling 12-month attrition) of 6.3%
  • Commitment to increase the number of employees from underrepresented groups in US leadership roles by 50% in three years and the number of US employees from underrepresented groups by 50% in five years
  • Discussion of strategy for driving improved diversity and inclusion
  • Commitment to pay equity and conducting a pay equity analysis annually

Start shaping your disclosure today.

As a first step, companies should lean on their HR teams to understand their current data, policies, and actions. This will provide a base from which to move forward. You can also use the above examples as a baseline.

If you’re worried about your current data, don’t be. And don’t let it hold you back. It is unlikely that companies will be subject to criticism if they set clear goals for improvement and start to introduce actions and policies that drive greater attraction and retention of diverse employees. Make engagement and transparency your priorities for 2021, then commit to communicating action for 2022 and beyond.

As a final thought, do not forget to share your goals and actions with your employees. Thoughtful internal communication, in addition to your external disclosure, can go a long way in helping retention, improving your narrative, and strengthening your company.

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