DealMakers - Q2 2021 (August 2021)
Trend watch: Human capital management reporting
by Johann Piek
It was reported that with the onset of the COVID-19 pandemic, employees (aka human capital) became the second highest priority for boards, behind liquidity. This is evident from the many employee-related initiatives rolled-out during this period to help mitigate workforce disruptions.
These initiatives included the now ‘basic’ remote working enablement and extra days off, as well as more niche topics such as home office stipends, mental health therapy sessions and in-house skill-swap programmes. Notwithstanding the universal acknowledgement of the critical role that human capital plays in the success of an organisation, the reporting on human capital management (HCM) remains largely scant.
In essence, HCM refers to how an organisation manages its workforce in concert with other ‘capitals’ to achieve its stated objectives, with due regard to aspects such as employee hiring, development, enablement, reward and retention. It has, along with other social matters falling within the ‘S’ pillar of ESG, enjoyed unprecedented interest lately. This is largely due to the rise in prominence of social justice movements (ala #MeToo and #BlackLivesMatter) and the renewed focus on basic human rights.
Early signs of the tide turning?
Significant progress in HCM reporting was recently made when the US Securities and Exchange Commission (SEC) adopted changes that broadened the human capital-related information that US companies are expected to disclose in their annual reports. These changes were spurred on by the pressure exerted by the Human Capital Management Coalition, a group of institutional investors representing over $2.8trn in assets under management, who called on the SEC to require companies to disclose nine categories of information on HCM policies, practices and performance. It must be noted that the SEC stopped short of prescribing specific HCM metrics, instead requiring companies to disclose “a description of the company’s human capital resources, including any human capital measures or objectives on which management focuses, to the extent that these are material to the company’s business as a whole”.
Position in South Africa
Under the Companies Regulations, South African public companies are, via their social and ethics committees, obliged to monitor and report to shareholders on matters falling within the committee’s mandate, which includes human capital-related matters such as the company’s employment relationships and its contribution towards the educational development of its employees. The King IV Report, whose principles and recommended practices are applied by many such companies, does not deal with HCM in detail. Instead, it endorses the International <IR> Framework as good practice, which in itself advocates meaningful disclosure on an organisation’s human capital. Despite the aforementioned, there appears to be a lack of provisions requiring specific and standardised HCM-related disclosures.
Stakeholder benefits and notable metrics
Some companies will be quick to argue that the reporting regime currently applicable to them is already quite burdensome from a cost and administration perspective. However, done right, specific and standardised HCM reporting is likely to benefit companies and their respective stakeholders in several ways, including:
making the company more attractive to ESG-focused investors;
potentially increasing investment into the company’s employees once the company experiences the value that HCM reporting brings;
showcasing the company as a true corporate citizen, interested in the wellbeing of its employees;
helping companies understand how human capital performance is correlated to financial performance, and highlighting vital indicators by comparing standardised HCM information with other performance indicators (ROE, ROI etc.); and
better enabling investors to evaluate the company’s risk profile. There are many HCM-related metrics that companies can track and report on. Some notable examples include training spend and return per employee, employee turnover rate, total cost of the workforce, overtime and absenteeism percentages, and employee satisfaction rate. Ultimately, the choice in metrics will depend on the company with regard to factors such as its size, sector and strategic objectives.
That being said, with the international trend towards stakeholder inclusivity in full swing, now may be an opportune time for South African companies who wish to be seen as leaders in this respect to adopt comprehensive, standardised HCM reporting early. If not, and companies continue to ‘under report’ on HCM matters, shareholder activism and, ultimately, legislative changes are bound to follow.
Piek is a Corporate Financier at PSG Capital.
Section 43(5) of the Companies Regulations, 2011
The King IV Report on Corporate Governance™ for South Africa, 2016