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Board Oversight of Human Capital Management No Longer a Nice-to-Have for Smaller Public Companies

The COVID-19 pandemic has underscored the importance of board-level oversight of workforce issues at public companies. How boards have managed mandatory shutdowns and the ongoing return to work are likely to have a significant and lasting impact on company reputation and performance. Prior to the pandemic, members of the investment community were already focused on the growing importance of a company’s workforce and the need to provide board-level oversight of human capital issues. These matters are generally referred to as human capital management (HCM) and include how a company manages its workforce (e.g., recruitment, development, engagement and retention) and the related issues of workforce diversity, worker health and safety, compensation, company culture and human rights issues in its supply chain. While HCM was a topic of board oversight and related disclosure at many large cap companies prior to the pandemic, many smaller public company boards have recently begun to consider HCM issues as part of their COVID-19 emergency response. These smaller public companies should harness their momentum to develop a strategy to respond to growing investment community interest in HCM matters. After outlining recent developments that demonstrate growing investor and regulator focus on HCM matters, we provide some practical suggestions for companies that are newly focused on HCM matters to help them strategically prepare for oversight of their workforce management and related disclosures.

While current SEC requirements do not mandate specific HCM disclosure, developments suggest that this may change. On May 21, 2020, the SEC’s Investor Advisory Committee (the “IAC”) recommended that the SEC work to establish formal, comprehensive disclosure policies on environmental, social and governance (ESG) matters, which include HCM, underscoring that these topics have become a priority for the investing public. The IAC’s recommendation advocates for principle-based disclosure rules to ensure that the investing public receives material, comparable and consistent information on ESG matters, and a framework for disclosing this information. The IAC recommendations were motivated in part by a desire to level the playing field among all reporting companies, regardless of market cap size or capital resources, and noted that smaller public companies, with fewer resources, are at a disadvantage when responding to inquiries from the growing number of third-party information companies who have entered the market to satisfy investors’ demand for corporate ESG information. The IAC also noted that issuers ignoring or failing to respond fully to queries from these companies do so at their peril, with possible negative impacts on stock price and ability to access capital markets.

Before the pandemic forced state-ordered shutdowns, investors were already interested in understanding how boards were prioritizing workforce management. Ernst & Young’s Center for Board Matters (the “E&Y Center”) reported that a third of the investors with whom they engaged in 2018 indicated that HCM should be a top board focus, up from just 6% three years earlier.[1] More recently, the E&Y Center and Corporate Board Member reported[2] that nearly 80% of 378 US public company board members in late 2019 indicated that their boards spend more time discussing talent strategy than they did five years ago, but that nearly half of them did not think that their company’s external reporting adequately communicated its human capital strategy and goals.

A number of institutional investors have indicated that companies with poor HCM could face operational, legal and reputational risks, while those with strong HCM might have a competitive advantage. BlackRock, the world’s largest asset manager, has made HCM an engagement priority since 2018 and considers robust HCM disclosure to be a competitive advantage. State Street Global Advisors focuses on corporate culture as a value driver that affects a company’s ability to execute its long-term strategy.

The COVID-19 pandemic has intensified institutional investors’ focus on the impact of closures, layoffs, furloughs and salary reductions on workers and how companies will manage the return to work. International Corporate Governance Network, an investor-led coalition of governance professionals with members responsible for assets of $54 trillion, recently issued an open letter calling on corporate leaders to prioritize human capital and other social considerations during the pandemic: “Covid-19 presents a new era of engagement, one which reinforces the significance of this dialogue and elevates the importance of social factors as a key determinant to a company’s long-term financial health and sustainability.” ShareAction’s Workforce Disclosure Initiative, supported by 130 investors with over $14 trillion, requests disclosure on workers both employed by a company and in its supply chain. The Interfaith Center on Corporate Responsibility, the New York City Comptroller’s Office and Domini Impact Investments, joined by a group of over 280 institutional investors representing over $8.2 trillion in assets under management, issued a statement asking public companies to increase workforce oversight in light of the impact of the COVID-19 pandemic on workers and communities.

The SEC responded to the investment community’s interest in HCM with an August 2019 release proposing updates to Regulation S-K[3] including an amendment to Item 101 (Description of Business) (the “Proposed Amendment”), which would require disclosure of a company’s human capital resources, including any human capital measures or objectives that management focuses on in managing the business, to the extent material to an investor’s understanding of the company’s business. This new disclosure would replace the current requirement to disclose the number of a company’s employees. The proposed amendment is intended to “refocus” disclosure to reflect that human capital and other intangible resources represent an increasingly essential asset and driver of performance, requiring oversight at the board level. Since the onset of the pandemic, the general public has been keenly interested in the impact of closures, layoffs, furloughs and salary reductions on the most vulnerable workers, which suggests that the Proposed Amendment, in some form, will be adopted, as may other ESG disclosure guidance.

Prior to the pandemic, there had been a growing trend among large cap companies to provide voluntary HCM disclosure in their proxy statements in response to increased investor interest in HCM. A November 2019 study of the S&P 250’s 2019 proxy statements found that 81 of these companies included voluntary HCM disclosure, 37% listed HCM as a board skill or experience and 30% discussed HCM in their shareholder engagement activity.[4] An E&Y Center study[5] of Fortune 100 company 2019 proxies with voluntary HCM disclosure showed that approximately half provided disclosure on workforce diversity; a third addressed workforce compensation; 22% addressed topics of culture initiatives, employee health and safety, and skills and capabilities; and 6% provided disclosure on turnover. Given increased investor interest in the impact of the coronavirus pandemic on workers' and employers’ responses, we expect to see this disclosure become significantly more common.

While many smaller public companies are currently focusing on the immediate human capital issues caused by the pandemic, and providing more robust COVID-19 disclosure, in many cases, this activity has, by necessity, been largely reactive. Given the confluence of growing focus on HCM by investors and regulators, and in light of the impact of COVID-19, all companies should be preparing to provide a cohesive narrative explaining how the workforce is being thoughtfully and strategically managed to minimize the impacts of COVID-19 and to generally build long-term value. Companies without an articulated HCM governance strategy should use their current momentum to shift to a proactive strategic approach to HCM that will have long-term benefits for both reputation and performance. These smaller companies should, at a minimum, consider taking the following steps in the near term:

  • Board oversight of HCM risks. Decide whether the entire board or a designated committee should be tasked with overseeing how the workforce is being managed, and include discussion of HCM issues as a critical topic at each meeting. Companies may consider creating a special committee to oversee the response to the pandemic.
  • Near-term HCM Strategy. Engage with senior company talent management to articulate an HCM strategy for determining how to best maintain a healthy, satisfied and engaged workforce during the pandemic, taking into consideration shareholder and other stakeholder feedback and peer company trends, including:
    • determining how layoffs or furloughs, if necessary, will be managed to treat affected workers, particularly those on the lower end of the pay scale, fairly and how these measures will be communicated;
    • considering how the company’s compensation programs should be administered or adjusted to both provide effective incentives and to manage shareholder expectations, including deciding how to continue to offer opportunities to develop and retain high-quality talent for what may be a remote workforce;
    • establishing health and safety protocols for the return to onsite work; and
    • developing employee training programs that will enable employees to thrive in an evolving economy.
  • Executive Compensation. Determine whether the company would benefit from a near-term adjustment in compensation or the addition of retention mechanisms, and consider options available under the company’s incentive and other compensation plans and applicable law, including possibly reviewing peer company compensation measures and investment community response.
  • Disclosure. Begin to prepare a narrative explaining the board’s process for considering pandemic-related challenges and responsive measures (e.g., reductions in force or compensation, and preparations to ensure the health and safety of workers, such as provision of personal protective equipment, workspace sanitation and accommodation of workers with disabilities) and how these measures are communicated to workers. Provide robust disclosure in earnings calls and any other communications with the marketplace, with as much forward-looking advice as is prudently possible. Consider whether any COVID-19 HCM impacts trigger the need to file a Form 8-K. Identify any special engagement with or programs for workers or the local or health care community in response to COVID-19.

Once these preliminary matters have been addressed, smaller companies should consider focusing on these longer-term goals:

  • Board Composition. Given the critical nature of HCM to a company’s financial performance and prospects, consider adding HR expertise as a necessary board skill reflected in any board skills matrix used in identifying possible nominees. Committee charters may need to be revised to reflect any resulting shifts in focus.
  • Long-term HCM Strategy. Identify and prioritize those aspects of HCM that are most critical to long-term performance and profitability.
  • Engagement with Management. Establish regular meetings of the board or relevant board committee and senior talent management to identify how the company’s people can be managed to increase value, perhaps with the assistance of an outside consultant, rather than merely relying on written reports. Work with management to develop programs and metrics for attracting, developing and retaining the best talent.
  • Performance Goals. Based on information provided by senior talent management, establish performance goals to support an annual HCM strategy. Identify metrics to measure success on these initiatives, and consider tying relevant executives’ bonuses to HCM performance goals.
  • Company Culture Initiatives. Consider whether to develop specific programs that communicate company culture to attract high-quality talent (e.g., programs to help employees understand how their work is tied to the company’s mission, programs to connect employees with each other or the community, employee health and wellness programs and employee surveys on satisfaction with company culture).
  • Disclosure. Consider whether any shareholder feedback on the company’s workforce should be incorporated into the company’s HCM programs and initiatives and, if not, be prepared to explain why not.

Thoughtful planning should ensure that all companies are well positioned to meet the HCM challenges of the pandemic and the post–COVID-19 era, and provide the type of HCM disclosure increasingly demanded by investors and that eventually may be required by regulators.

1 E&Y Center for Board Matters, How and Why Human Capital Disclosures are Evolving (October 29, 2019).
2 Corporate Board Member and E&Y Center for Board Matters, How the governance of human capital and talent is shifting (May 19, 2020).
3 Modernization of Regulation S-K Items 101, 103, and 105 (August 8. 2019).
4 Labrador, Human Capital Management Study of S&P 250 Proxy Statements (November 2019).
5 E&Y Center for Board Matters, How and Why Human Capital Disclosures are Evolving (October 29, 2019).


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Anne L. Bruno is a Member at Mintz who advises clients ranging from start-ups to multinational public companies on issues related to corporate and employment law, including executive compensation, employee benefits, securities law, and corporate governance. She is also a key member of the firm’s multidisciplinary ESG practice, helping corporate boards, companies, and their investors navigate a broad range of environmental, social, and governance considerations.