The SEC’s new human capital regulations: A talk with David Green

It seems that the new SEC guidelines for Human Capital disclosures have quietly snuck under everyone’s radars, and suddenly sprung out, fully formed, this past November.

But despite the lack of fanfare, the new regulations carry huge ramifications for investors, publicly traded companies and HR leaders alike.

So why is this happening, and what opportunities and challenges does this afford HR professionals in publicly traded companies?

We sat down for a talk with HR expert David Green, Managing Partner at Insight222, to discuss these new developments, and get his take on what the future holds.

Gloat: First off – thank you for taking the time to speak with us about this.
It seems to us that this is a huge development in the world of HR – but nobody appears to be paying it much attention. Why do you think nobody is talking about this?

David Green: I’m not sure people fully understand the SEC guidelines, and what they actually mean. This certainly applies in our domain in HR – beyond conversations I’ve had with a few people analytics leaders, but even at the C level, I don’t think many leaders have realized that this is a potential game changer. Up until now, companies have only disclosed limited information about human capital.

 In fact, before these reforms, the only human capital information the majority of companies disclosed was the number of their employees. But though a large number of employees may be indicative of the company’s size, it doesn’t tell investors much more than that.

I don’t think many leaders have realized that this is a potential game changer.

G: Is there a reason this is happening now? Has something changed?

DG: I believe it is happening partly due to the increased focus by companies on culture and wellbeing, as well as paying more attention to wider societal issues like diversity and inclusion.

But I also think it is mostly down to demand from the investment community. Human capital has historically been an intangible asset. Over the last 40 years, intangible assets have evolved as a major consideration for investors. Indeed, according to Aon, by the end of 2018, intangible assets comprised 84% of all enterprise value on the S&P 500, a near five-fold increase from just 17% in 1975. Human capital is the most valuable of these intangible assets.

One should also consider that the move by the SEC is not the first in this direction. At the end of 2018, the International Standards Organization (ISO) published their first set of human capital metrics (ISO 30414). Just eight months later, the Business Roundtable group comprising 180 of the largest organisations in the United States issued a public statement redefining their purpose from a sole focus on shareholders to one serving an expanded group of shareholders – consumers, employees, suppliers and communities – as well as shareholders.

However, even with this momentum, I don’t expect that we’ll see the full ramifications of the new SEC and ISO guidelines for a couple of years.

G: Do you think this reflects a change in the way we think about what makes a company valuable?

DG: Yes. Workforce costs represent up to 70 per cent of company expenditure, but more importantly there is an increasing realization from investors and CEOs that it is the people within an organization that ultimately determine its success. This was the case before the pandemic – witness the focus on the Fourth Industrial Revolution at the annual World Economic Forum for the last few years, including many topics related to human capital. All this has only been accelerated by the largest global pandemic for a century.

In today’s world, the pace of transformation is so fast that your ability to pivot, to reinvent yourself, is actually an important part of your ability to succeed and grow as an organization. A lot of this comes down to having the right talent, in the right place, at the right time – and having the right data to drive decisions related to this.

 Only this week, I heard a great example about the CEO of Unilever citing their internal talent marketplace as a significant contribution to revenue during a quarterly earnings call. They were able to redeploy over 3,000 people from parts of the business with low demand during the pandemic to the areas that were seeing high demand.

G: As you know, the parameters for these disclosures are pretty loose. The required disclosures aren’t set in stone, specifically so companies can report on what’s relevant to them. Did you have any thoughts about what kind of parameters are going to be reported? Do you think most companies will stick to the bare minimum at first? Or will some use this as an opportunity to show off a little bit?

DG: I think a lot of companies will initially gravitate towards the diversity and inclusion part of the guidelines. A growing number of companies such as Google, Microsoft, PwC and Target are already publishing annual diversity and inclusion reports.

Many companies will already measure many of the metrics covered by the guidelines, so they may disclose the areas they think they’re doing well on to start off with. For instance, I think those organizations that are already invested in people, people analytics and getting their people data into some sense of order, are likely to be the companies leading the way in terms of disclosure.

This is an opportunity for HR and people analytics leaders to help their organizations navigate these guidelines. The risk, especially for those HR leaders who haven’t invested in people analytics, is that their leaders say: “I’m not putting this in HR!” and instead ask finance to take the lead. So that’s the risk, if HR doesn’t get it right.

G: Say I’m a CHRO, and I picked up the phone and called you, and asked “Hey, I have to do something about this. What should I do?” Do you have any tips?

DG: Well, I think the first thing is, look at it as an opportunity. Get ahead of it.

If you’ve got a people analytics team, then maybe look at the option of metrics you could report on, and start to think about those that are most important to your business and that you can already do. People analytics offers the opportunity to CHROs, boards and investors to transform human capital from an intangible asset in your company to one that can be measured. The benefits in terms of brand, consumer confidence – and meeting the demand of regulators, makes it worth the investment.

 So, if you don’t have a people analytics team, now’s the time to create one. 

So what can you do?

At Gloat, we’ve written about the importance of being able to quickly pivot the orientation of workforces and track and reallocate talent in real time, as well as rethinking your workforce’s potential.

David Green, on his part, has been writing and speaking about the increasingly prominent role of HR and People Analytics in podcasts, on his LinkedIn blog, and even at Gloat’s online conference, GloatLive2020. His book, Excellence in People Analytics, co-authored Jonathan Ferrar, will be published in the summer of 2021.

The new SEC guidelines reflect all of these new trends, and the changing role of HR and People Analytics in organizations.

More than anything, they’re the opportunity the HR community has been waiting for to get ahead and showcase their contributions to their organizations’ bottom lines.

These are exciting times.