We in Human Resources have long talked about human capital (HC) metrics: which ones are important, how do you calculate them, where does the raw data come from, and who in the organization cares about them. The answer to who cares about them is now the CEO, CFO, and Investors. As part of the U.S. Securities and Exchange Commission’s update to Regulation S-K, a final rule on human capital reporting will be effective November 9, 2020. That means that year end reporting for all SEC registered companies will need to report HC metrics. It’s not just SEC registered companies that will start reporting HC metrics – forward thinking organizations of all kinds will want to be transparent and help shape the standards.
This new reporting requirement is an opportunity to better connect HR’s efforts to the business—something for which HR and senior leaders have long been asking.
Maybe you already knew about this rule, or maybe this is the first time you have heard about it. Either way, you may be wondering – so what exactly does my company need to report? The rule specifically says:
A registrant will need to disclose, to the extent material to an understanding of the registrant’s business, a description of the registrant’s human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel).
The concept of materiality comes from accounting and is used in compiling and auditing financial statements. Something is considered “material” if there is a substantial likelihood that a reasonable person would consider it important in making investment decisions. Take that same concept and apply it to HC. Who wouldn’t want to know if a company had a retention problem, whether the culture of the company supported inclusion, or whether they were developing their talent sufficiently to create strong internal succession?
There is only one required HC metric – the number of people employed. The other reported metrics should reflect what HC metrics and objectives your company uses to manage your business.
So don’t wait for the finance function to ask you for the metrics. Grab your seat at the table and set the agenda for human capital reporting – both in the initial year of reporting and for future years.
Ask yourself: what are the questions your senior leaders, board members, and investors ask about the business; and what HC and talent management metrics align with those questions? What measures do you already have available? What measures will you need to develop?
If you were struggling to make the business case for initiatives to attract, develop, or retain talent, you now have the opportunity to tie the initiative to your company’s reported HC metrics. For example, coaching your leaders positively impacts employee engagement and succession readiness, both of which are metrics your company may consider material. Similarly, a positive culture will reduce turnover, which may be another reported metric. As the material metrics are identified in your company, there will likely be a pull for the activities and initiatives that contribute to improvement in these metrics. Make sure your goals and objectives reflect these activities and initiatives.
How many times have you heard a CEO say, “People are our most important assets.” It will now be incumbent on organizations to disclose key information about their most important assets. If you are in Human Resources, don’t let this opportunity to connect your efforts to the business pass you by!