HCM Disclosures Proliferate, But May Be Moot

Human capital management disclosures in the 10-K continue to rise, with a median wordcount of 1,025, according to a Gibson Dunn analysis of the S&P 100 – but the SEC’s promise to mandate a prescribed table of disclosures may render current efforts obsolete.

The big picture: Nearly half of large companies increased their HCM disclosures in 2023, with significant increases in diversity, mental health, culture, and talent. Key findings include:

• Diversity. 2023 saw an increase in a wide range of diversity topics, such as workforce demographics including gender (65%) and race (60%), or diversity in retention, development and recruiting (around 42-45%). Interestingly, 19% of companies included numerical diversity goals in the 10-K (a more common practice is to have these in a CSR report or website).
   
• Workforce Composition. Most companies do not report quantitatively beyond the number of full-time employees (58%).
  
  
  1. Just 16% reported full-time vs part-time employees.
     
     
  2. About 20% reported quantitative turnover rates.
     
     
• Compensation and culture. Although 88% of companies discuss broad-based compensation, quantitative details on items like pay gap (17%) or minimum wage/investment in benefits (17%) are rare. 70% of companies mentioned culture and engagement, with 26% sharing specific culture initiatives and 64% sharing details around engagement surveys. 

Next steps: It’s clear that current company practice is very far from what the SEC is likely to require. A recent Semler Brossy report shares excellent suggestions for how to get ahead of potential requirements:

• Check the data. Start assessing data availability, quality and accuracy now – along with the cost to make that data “camera-ready.” The SEC takes company costs into account when considering rulemaking, so it’s critical that companies understand the burden.
  
  
• Tell the story. Part of the difficulty of HCM is its qualitative and relative nature – most investors aren’t experts in how people strategies may result in differing numerical results for turnover, headcount and cost. 
  
  
• Look at progress. “Anti-woke” agendas notwithstanding, mandated HCM disclosure will almost certainly turn the heat up on companies to show “progress,” however that is defined. If current strategies aren’t resulting in measurable change, consider how that story will be told.
  
  
• Communicate. The most important part of communications around HCM will be to explain how people strategies align with business strategies and how that is reflected in the numbers. 

The bottom line: HCM is a unique area of disclosure that requires collaboration between a number of teams – HR, Finance, Legal, Investor Relations, and business leaders – not to mention the Compensation Committee, Audit Committee and external auditors and advisors. Companies should start the discussion now to be prepared for whatever 2024 may bring.