The role of the CFO in human capital reporting
CFOs familiar with regulatory issues may wish to brief their human resources colleagues on the human capital disclosures they have worked on together over the past six quarters, particularly the typical development formula followed by the guidelines. regulations. time:
Principles-Based Reporting Requirements + Additional Tips and Comments = Rules-based reporting requirements
If this well-worn pattern in the lifecycle of regulatory guidelines and requirements holds, Chief Financial Officers and Chief Human Resources Officers (CHROs) should expect the U.S. Securities and Exchange Commission (SEC) is issuing more definitive guidance on the human capital disclosures that publicly traded companies have been required to include in their annual reports since late 2020. Rather than wait for that clarity to materialize, however, CFOs can take concrete steps – often in collaboration with their CHRO counterparts – to refine this information so as to at least meet the not-yet-fully-clarified reporting thresholds envisaged by regulators as well as meet the needs of stakeholders who are manifesting greater interest in the organization’s human capital programs.
In August 2020, the SEC issued a rule requiring companies to report human capital metrics. The rule became effective in November 2020. Specifically, the amendment to SEC Rule SK Section 101(c)(1)(xiii) requires human capital disclosures “to the extent that such disclosure is important to understanding the activity of the registrant taken as a whole”. .” This investor-focused requirement aims to modernize financial reporting by adding an element that is increasingly scrutinized by investors, customers and even employees.
The wording of the new principles-based rule gives companies the latitude to shape the content and format of their human capital reports. This explains, in part, why the vast majority of human capital disclosures to date consist of largely ambitious statements about diversity, equity and inclusion (DEI); employee experience; living wage; and other areas of talent and human capital management. This would fall under the “basic data” category shown in the attached “Disclosure Effectiveness Hierarchy” chart.
Disclosure Effectiveness Hierarchy
A small group of SOEs provided more detailed information on human capital, supported by numbers and, in some cases, functional measures of efficiency or outcomes (e.g., business evaluation scores). employee engagement and investments in training and development). An even smaller portion of human capital reports provide these metrics while establishing correlations between human capital and the bottom line via quantifications such as talent return on investment (ROIT). These issues are reflected in the accompanying chart as higher levels of reporting maturity.
While ambitious statements may be good for now, SEC history tells us that they may not be for long. Experienced CFOs who have been around the neighborhood a few times know this all too well.
Organizations should expect more specific requirements to be made by the commission soon, either through the ongoing filings comment process or through additional guidance. If they want to elevate the maturity of their human capital reports, the organization’s board and management team will need to keep the following points in mind:
- Reporting on human capital requires the involvement of the CFO. Human capital disclosures established a new category of information for SEC reporting. A precautionary approach starts with identifying the measures and outcomes (the overall framework), followed by the measures that support the framework. As with financial reports, supply chain and other data, all content in this report should be factual and verifiable.
- For most CFOs, this represents a new reporting dynamic. While the CFO provides and vouches for the human capital information contained in the annual reports, the CHROs and their groups are responsible for providing the data used to create the necessary metrics and reports. CHROs typically have limited experience in quantifying and validating metrics presented to regulators and shareholders. This dynamic requires effective collaboration between the CFO and the CHRO. Again, there is a discipline that underlies public reporting that CFOs understand only too well.
- Human Capital Reporting Requirement Reflects Growing Demand for Funding – and Funding –adjacent-knowledge. In recent years, the CFO and finance function have responded to increasing demands for financial analysis from a growing group of internal clients. In addition to closing the books accurately and on time, CFOs and finance teams have become the primary information providers for their business. Although much of the data used in human capital reports does not reside in corporate financial systems, CFOs are nonetheless expected to ensure the accuracy, efficiency and timeliness of this information, including the effectiveness of underlying disclosure controls and procedures. After all, the CFO signs the quarterly Section 302 certification with the CEO. Here, the financial organization’s experience and insight into data-driven reporting is invaluable.
To prepare for what may become more specific rules-based human capital reporting requirements, smart CFOs will recognize the opportunity to add value to the process and lead the way by undertaking a number of important steps. First, finance leaders should consult with their C-suite peers to ensure that any aspirational statements in human capital disclosures properly and accurately frame the company’s vision and goals. A montage of dreams does not lend itself to public reporting. Next, the CFO should work closely with the HR manager to develop ways to quantify the links between human capital investments and performance and/or profitability. Deploying calculations such as ROIT will increase the maturity of the company’s human capital information while helping to forge a stronger finance-HR partnership.
Finally, CFOs and HR managers should benchmark their human capital information against that of other organizations that contain the strongest links between human capital strategies and business results. These examples of investor relations and reporting tend to reside in industries where human capital issues have an outsized impact on performance. In healthcare providers, for example, contract labor is extremely expensive, up to four times the cost of a regular full-time employee. Since healthcare providers do not have the option of running out of staff in areas such as emergency rooms and surgical facilities, the cost difference between 30 days and 180 days to recruit and fill positions is important.
The magnitude of these financial impacts often translates into more rigorous measurement and reporting of human capital. Similar calculations and correlations can be applied to diversity and inclusion, employee experience, pay equity, and other human capital programs, not to mention broader sustainability initiatives. These efforts will help meet investor demands or demands to better understand the business while maintaining compliance with disclosure requirements that may soon offer CFOs and HR managers less latitude in reporting.
Using the formula quoted above, I mentioned “additional tips and comments.” When the SEC comes down the mountain with more clarity about its expectations in this area, CFOs should alert their CHRO counterparts that SEC staff will likely include more specific questions and requests regarding financial disclosures. human capital in response letters to the company. to its deposits. In general, the intention of the staff is to transform the directives of the commission into more rigorous and coherent reports. The Company’s comment letters and response are part of the public record and therefore may form part of the Company’s trend research. Diligence in addressing the above suggestions should reduce the duration of last-minute efforts to respond to these comments and the related impact on company disclosures.