Letters, we get letters, . . . Actually we get emails (and the occasional phone call), but we got a number of them asking for more information on the matter of whether compensation committees should explicitly take on the responsibility of human capital management after our blog last week listing four items that committees should consider addressing this year. On the question of whether committees should take on the responsibility of human capital management, readers’ (admittedly, a self-selecting group) responses fell into two categories, which may be summarized as follows:
- Yes, compensation committees should explicitly take on the responsibility of human capital management, and
- I don’t know Mike. You are the expert. You tell us.
Without even going into the arguments in favor of adding this responsibility, in light of current developments, I believe it is prudent for compensation committees to seriously consider adding to their duties the responsibility for human capital management (HCM). The reasons are simple. First, some significant investors and investor organizations want to see companies pay more attention to the issue. Second the SEC soon may require companies to provide additional disclosures on it and the compensation committee seems like the logical home for the consideration of these issues.
Background
Many of us already work with one or more companies that have a “Human Capital and Compensation Committee” or “Human Resources and Compensation Committee,” in place of a Compensation Committee. The issue has been percolating for a while now, but was thrust forward into the limelight recently by a recommendation to the SEC by its Investor-as-Owner Subcommittee (see, Recommendation from the Investor-as-Owner Subcommittee on Human Capital Disclosure). In 2017, the Human Capital Management Coalition, a group of institutional investors with $2.8 trillion in assets, had petitioned the SEC, under its Rules of Practice, requesting that the SEC adopt new rules, or amend its existing rules, to require companies to disclose information about their human capital management policies, practices and performance. Chairman Clayton to the House Appropriations Subcommittee on Financial Services and General Government in April 2018 on the same topic, including that he “would like to see more disclosure from public companies on how they think about human capital.” Finally, as we blogged on earlier this year, a group of 48 religious orders, public employee union pension funds, and social investment funds to every public company included in the S&P 500 index (see, Wait! Some Investors Want More Disclosure on the CEO Pay Ratio?). The letter asked that the companies expand their required CEO pay ratio disclosures in their proxy statements with supplemental disclosure to address a number of other issues, including a country-level breakdown of global employee headcount, a breakdown of full-time versus part-time employment status, the company’s use (or non-use) of subcontracted workers and temporary or seasonal employees, the tenure and experience levels of the company’s workforce, and the education levels and skillsets of the company’s workforce.
Recommendation of the Subcommittee
In March, the SEC’s Investor-as-Owner Subcommittee recommended to the SEC that it recognize the significance of HCM and incorporate it as a part of its Disclosure Effectiveness Review and the its approach to modernizing corporate reporting and disclosure. The Subcommittee suggested that the SEC require companies to make specific additional disclosures augment their existing principles-based proxy statement disclosures. The specific and principles-based disclosure recommendations are a bit lengthy, so we will cover them in a subsequent post.
The Subcommittee took care not to suggest that human capital can or should be reported as an asset on balance sheets for financial reporting purposes. However, the Subcommittee observes that current accounting standards may obscure workforce investment by reflecting it only as an expense not distinguished from other inputs. In contrast, investing in research and development is often identified by its separate line item in the income statement, and acquired in-process R&D can be reflected on the balance sheet.
For now, as companies consider whether to “get out in front” of this issue, I ask them to remember that “style” is when you are being run out of town but you make it look like you are leading a parade in your honor!
