How New SEC Disclosure Rules Impact CHROs and CFOs
On August 26th, the U.S. Securities and Exchange Commission (SEC) adopted a broad set of amendments to the disclosure requirements under Regulation S-K. This has the net effect of forcing companies listed on US Exchanges or doing business with the federal government to state if they view Human Capital as: (a) material to their operations, and (b) if so to place value to the people in their employ.
What this means in practical terms is that CHROs with strong people analytics teams will continue to drive success, while we can expect more rigor from CFOs in how they budget and regard talent. Organizations that do not have these capabilities will struggle and will have to quickly catch up.
What are the expanded human capital disclosure requirements?
This amendment elevates people to their rightful place as a core driver of business success, and further places the CHRO as a key strategic driver of how the business executes its business strategy.
So what does the amendment actually say? It states that organizations must now:
“include, as a disclosure topic, human capital resources, including any human capital measures or objectives that management focuses on in managing the business, to the extent such disclosures would be material to an understanding of the registrant’s business, such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the attraction, development, and retention of personnel…”
In support of these changes, Jay Clayton, the Chairman of the SEC stated: “I am particularly supportive of the increased focus on human capital disclosures, which for various industries and companies can be an important driver of long-term value.”
The new disclosure requirements come into force on October 1st. Reporting requirements are expected beginning in January 2021 and aligned with a companies fiscal calendar and existing reporting structure.
What is clear is that the SEC is demanding the disclosure of far more detail than overall headcount, cost of labor, or sales per employee.
What is not yet clear is if a holistic view of the value of human capital is required or if the SEC is only seeking a view of direct labor. In practical terms, reported or not, the better companies can understand the full value of their talent strategy, inclusive of direct, contingent and indirect (outsourced and SOW) labor the more effectively they can empower operations and drive benefit from how resources are deployed.
Forward looking organizations will not just look toward compliance, but also toward driving direct business benefit from the additional data they will now be looking at.
Ensure you’re not relying on the wrong tools
The change in disclosure requirements should drive a whole new set of investment priorities for the CHRO, their tech stack, and their teams.
The first reality is that relying on spreadsheets to perform, share, and persist information reported to the SEC will not suffice. The “source of truth” for information disclosed in quarterly reports to the SEC needs a good deal of rigor behind it as inaccurate or incomplete reporting can result in both direct and indirect penalties.
This is not an exercise for spreadsheets that are stored on a network, and only one or two people know about and know how to operate. Any auditor will immediately question this practice and highlight the unnecessary risks to which it is exposing the organization.
In addition, the CHRO will not be able to rely on their HRIS as a historical source. For one thing HRIS’ systems are notoriously bad at storing historical data in a way that makes it easy to retrieve. This is the reason why most HRIS systems can only provide charts and reports on end of period measures. They cannot show trends and changes overtime because they don’t have the architecture and tooling to create consistent calculations overtime, handling things like changes in hierarchy or job names.
Although a lot of investment has gone into moving HRIS systems into the cloud and improving the user interface, this phase of “transformation” has done little to truly enable more advanced analytics and to empower the CHRO to answer the business questions which really matter to CEOs, the Board, and investors.
Game on people analytics
People analytics is consistently a top three priority for many organizations, but despite the focus few have made the necessary investments to actually drive meaningful results. Those who have taken action and built out their people analytics capabilities are in good shape, and when tied to leading Talent Strategy and advanced Strategic Workforce Planning these organizations typically realize measurable competitive advantage in the market.
Investments in people analytics technology, teams who can make good use of it, and change management to enable data-driven talent decisions all the way down to line managers produces real and quantifiable results. This has created capabilities for the CHRO and the business which leaders have been asking for consistently for decades. (An informal survey of people analytics leaders indicated a high level of confidence that they were well prepared to respond to these new rules. Some were already engaged in Board level conversations).
Those who have delayed their investments in people analytics, deciding instead to manage with spreadsheets, or standard reporting engines tied to their core systems, or who have delayed progress until their HRIS vendor releases sufficient capability, will now find they have a crucial HR technology gap to fill.
The new SEC disclosure requirement is not a set list of clearly defined measures that need to be reported. They expressly chose to stay away from a “one-size-fits-all” set of standards, which every organization can easily follow and present. Instead, they require the reporting of human capital measures that are “material to an understanding of the registrant’s business.” This makes the process of reporting, explaining, and updating the information shared with the SEC far more complex than other regulatory reporting.
For example EEO-1 or I-9 compliance reporting has a standard format and list of measures. The SEC has taken the opposite stance leaving each organization to report what they view as “material” to their business. Understanding whether or not a measure is “material” will require the data and skillsets that can link people practices to organizational outcomes. This is where people analytics teams with the right technology are vital.
In practical terms, there is no one-size-fits-all answer to this question across an entire companies workforce. The value of your sales team is different from your back office functions, which is different than your operations teams, etc. Careful and deliberate thought is going to need to be paid in creating the metrics for these values. The good news is once the work is done the reporting is straightforward, and again the real value is not in compliance but what else can be done with the views being created.
Let’s walk through the example of absence rates. This is the percent of time that employees are absent from work due to illness, etc. For organizations with an hourly or shift-based workforce, absences have a “material” affect on their labor costs. Absences generate overtime, overtime increases the cost of production, and, if not well managed, this impacts the margins achieved by the business. However, for organizations with high volumes of knowledge workers, where production is not measured hourly, absence does not have the same material impact. It does not necessarily generate overtime, so does not impact production costs and may or may not impact overall production deadlines.
In lieu of specific guidance from the SEC, organizations will need to either build their own capabilities or engage with consulting firms to form a clear and well articulated opinion about what they will disclose and what these numbers mean for their business. Whether you build in-house capabilities or work with a consulting partner you will need the technology that assembles data from multiple sources and allows for the exploration of linkages between people and costs, risks or revenue.
With the first reporting deadline imminent, every organization will need to have this capability on hand fast.
Wait and see is not an option
When the right direction is unclear it is most common for organizations to wait and see what others do before taking action themselves. In this situation, inaction will be opening up your organization to significant legal and financial risk.
Some of this risk does comes from the SEC as a regulator, but most will come from investors who now have expectations on the information that will be disclosed to them about the organization in which they have invested. It is no accident that Blackrock, a Fortune 500 investment company, was named as part of the SEC’s press release. The driving force behind this change is the institutional investment groups, who want to make better investment decisions based on a perspective of the business which includes the people. These groups are the ones more likely to drive and shape the type and extent of human capital disclosures that become the norm.
Talking this through with some legal friends we came up with the following scenarios:
1. An organization chooses to disclose nothing at the first or second reporting deadline.
The likely response from the institutional investors is to either discount your stock or downgrade their guidance. The assumption is that the reporting organization does not have a good handle on its human capital risks, and opportunities because it has reported nothing. Therefore, buying the stock becomes riskier than previous guidance indicated.
2. An organization has a people related event come to light and its stock loses 2-5% in value.
The institutional investors chose to launch a lawsuit against the organization. Their case is based on the fact that the people-related events were risks that were, or should have been, known to the organization. The lack of disclosure of a “material” human capital risk means the reporting organization could be liable for the money that the investors have lost due to the drop in the value of their investments.
The costs associated with either of these scenarios far outweigh the level of investment that would be required to stand up a strong people analytics practice, including people and technology. The level of investment required is a small fraction of what it has been costing to upgrade the core transactional HR systems, and yet the value returned is far greater.
People analytics is a NOW priority
Much has changed during 2020 and the effects of these changes will be felt for a long time to come. When this level of disruption hits organizations, it brings with it the imperative to reset overall goals and investment plans.
People analytics has moved to the front of the line for any CHRO that needs to re-align their people to new business models and staffing plans. The new SEC disclosure rules have increased the urgency with which the people and technology need to be in place to support the big reset of work and meet the required reporting deadlines.
A version of this article first appeared on LinkedIn.
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