What are companies doing to communicate how they handle human capital issues?
Human capital management is fast-becoming an important topic for corporations and investors alike, and governance teams and directors need to be prepared to tackle the challenges and opportunities it entails. Earlier this year, in his annual letter to chief executives, BlackRock CEO Larry Fink urged business leaders to pay more attention to their human capital management efforts and disclose more information about these practices, repeating themes from his 2018 letter. In State Street Global Advisors’ (SSGA) letter to board members this year, the investment management company likewise urged board members to focus on their culture, which SSGA links to human capital management. The goal of human capital management is to enable an organization’s employees to contribute significantly to that organization’s productivity. Although the term is just now becoming commonplace, the underlying concepts of human capital management – including diversity, inclusion, talent development, succession planning and workplace culture and misconduct – are deeply familiar to boards. To give directors, executives and general counsel a framework for discussing these issues, we have flagged recent developments, created suggested agendas and listed possible policies and practices that could improve a company’s human capital management.
Recent developments Although many companies are still grappling with how to integrate a culture of best-in-class human capital management, we have seen developments that signal a movement toward more corporate disclosure in this area. Earlier this year, for example, the SEC’s division of corporation finance declined to grant no-action relief to a couple of companies that were seeking to exclude from their proxy statements shareholder proposals asking for more disclosure of certain human capital management metrics. Meanwhile, some firms, when faced with shareholders’ requests for more disclosure on this topic, have opted to negotiate rather than pursue no-action relief, while others have embraced BlackRock’s mission. Certain investor groups have petitioned the SEC to require companies to disclose more information about their human capital practices. But SEC chair Jay Clayton on February 6 said he was ‘wary of jumping in with rules or guidance that would mandate rigid standards or metrics for all public companies. Instead, I think investors would be better served by understanding the lens through which each company looks at [its] human capital.’ All of this leaves companies facing a puzzling predicament. Should they adopt the human capital management policies advocated by BlackRock, SSGA and others? How much should they disclose to the public about their policies and goals and the strength of their human capital management system? Boards and management need to establish an agenda and process to address this multi-faceted topic. Even companies that choose not to disclose a great deal of this information can still be committed to advancing the ultimate goals of human capital management.
Some companies and their boards have already taken steps to place a higher priority on human capital management, including revising their policies, identifying metrics to measure the status of their progress and creating a reporting structure that will make sure this information reaches the board and top management. Companies that are considering steps like these should start with a meaningful discussion that may include the following issues as well as the pros and cons of making changes at this time.
Human capital management strategies that foster a healthy company culture and prevent unwanted behavior
Policies to protect employees – for example, codes of conduct dealing with whistleblowing and sexual harassment – and procedures to allow the board to assess the effectiveness of those policies
Diversity, including the composition of the board, senior management, management and employee ranks
The relationships between human capital management performance and executive compensation
Processes for succession planning for directors and senior executives.
Policies that encourage employee engagement, including wellness programs, support of employee networks, training and development and stock participation programs
Processes for ensuring employee health and safety
Talent management that will facilitate the growth of the company’s next generation of leaders
Voluntary and involuntary turnover, measured on various dimensions, such as by seniority, gender and ethnicity
Statistics on gender and other diversity characteristics, as well as promotion rates for and compensation gaps across different demographics
Systems to oversee the supply chain, including seasonal workers, contractors and subcontractors.
As an initial issue, boards must determine who will take primary responsibility for human capital management. One third of the 30 companies included in the Dow Jones Industrial Average have given their compensation committees broader responsibilities that include many human capital management functions, according to a September 2018 report by the Semler Brossy Consulting Group. Given the importance of human capital management, the full board may still want to revisit this topic periodically. Directors should therefore consider the pros and cons of the following oversight practices that some companies adopt:
A requirement that the board be alerted immediately if a senior executive is alleged to have committed misconduct or there appears to be a pattern of misconduct within the company. As recent events have demonstrated, directors may come under fire for lax oversight, insensitivity or gross disregard if their company has a pattern of sexual harassment complaints
A quarterly review of reports about complaints made to the company’s employee and compliance hotlines
A requirement that the board be advised before the company enters into any workplace misconduct settlement that exceeds a specified dollar amount or that involves management team members above a certain level
A regular review of the company’s code of conduct, particularly sections on sexual harassment policies and training procedures, in order to make sure the company has adequate reporting and enforcement mechanisms
Amendment of employment agreements and equity plans to require that all individuals comply with the company’s code of conduct and do not engage in sexual misconduct.
Building and sustaining a successful organization that will thrive in the future requires systematic evaluation of the organization’s talent pipeline. When reviewing talent and succession planning, boards and management should consider the pros and cons of the following:
Ensuring the CEO has a talent development plan in place for each of the company’s senior executives
Annually reviewing succession plans for the CEO and senior executives
Identifying talent gaps and taking steps to fill them through executive development or recruitment
Hiring a third party for an independent view on succession and the talent pipeline
Ensuring directors have the opportunity to get to know senior executives and future leaders.
In deciding the best course of action, boards should discuss the following:
The availability of verifiable company information relevant to human capital management
The ease or difficulty of gathering information that is not available
The cost of crafting and maintaining enhanced disclosures and subjecting them to disclosure controls and procedures
The sensitivity of this information
The materiality of this information to shareholders
The impact of this information on employees
The competitive advantage this information represents
Disclosure practices of competitors and highly regarded companies.
Melissa Sawyer is a partner and Jared Snyder an associate in the M&A group of the New York office of Sullivan & Cromwell.The views and opinions expressed in this article are those of the authors and do not necessarily represent those of Sullivan & Cromwell or its clients.