Human capital development is one of the key factors in human development in which the government and the private sector plays a critical role. Policies and systems established by the government and the business community to enable education, trade and socialization help human capital development and prevent marginalization in society and strengthen democracies. The marginal productivity of capital, and the growth rate of the population, technological progress, and depreciation means that human capital is a kind of wealth used to create more wealth. Therefore, one can argue -- that human capital is a key component relevant to the development of an vibrant, stable and dynamic democratic economy.
People today have less trust in their political and social institutions than they have in years; many expect business leaders to fill the gap and human capital disclosures is an important link in connecting individuals to society through their working environment.
For more than 50 years in the United States -- the concept of human capital corporate disclosure has generally been associated with the background (gender, race, and sexual orientation), skills, knowledge and abilities employees and what they bring to the work environment in both government and the private sector.
In recent years, institutional investors have taken a mounting interest in the subject of human capital disclosures, in large part due to the increasing awareness that Human Capital policies are material to long-term financial performance and success of companies and their connection to key stakeholders to promote sustainable growth.
Management of human capital clearly results in better business. According to Deloitte: In many ways, social capital is achieving a newfound status next to financial and physical capital in value. In a recent survey, for instance, 65 percent of CEOs rated “inclusive growth” as a top-three strategic concern, more than three times greater than the proportion citing “shareholder value.”
US SEC Chair Jay Clayton Urged US Public Companies to Disclosure Human Capital Data on February 6, 2019:
“Today, human capital and intellectual property often represent an essential resource and driver of performance for many companies. This is a shift from human capital being viewed, at least from an income statement perspective, as a cost.”
“For example, for human capital, I believe it is important that the metrics allow for period to period comparability for the company.”
On the same day - February 6, 2019 -- companion bills were introduced into both the U.S. House of Representatives and Senate that would require every public company to disclose in proxy statements: (i) data regarding the racial, ethnic and gender composition of its board of directors, director nominees, and executive officers, as well as the status of any such person as a veteran, in each case, based on voluntary self-identification; and (ii) whether the board has a policy or strategy to promote racial, ethnic and gender diversity among directors, nominees or executive officers. The SEC’s interpretation and the Congressional “Corporate Diversity Bill” are the latest evidence that efforts over the past two years for enhanced board diversity are gaining considerable momentum.1
The Human Capital Management Coalition—a group of institutional investors with $2.8 trillion in assets—is urging the US Securities and Exchange Commission to require issuers to “disclose information about their human capital management policies, practices and performance.”
Management accountants work closely with the CFO on financial disclosures.
The US SEC Chairman is urging public companies to disclose human capital in addition to financial data.
Role of the Management Accountant:
What role will management accountants play in this new area of corporate disclosure Can management accountants help companies provide this additional data to the capital markets? Will they help their finance team gather this data and create internal systems in place to manage and report this new information to company stakeholders. Can this data be disclosed in a machine-readable format for investor to input and use in data analysis? Are global standards for this non-financial information being developed and used across the capital markets - especially for human capital data? Are corporate indexes being created that will provide additional alpha to the company reporting this information such as Bloomberg? Where does “diversity” and “inclusion” play in human capital disclosure as well as “gender pay” and “pay ratio” disclosures?
The US SEC Chairman's remarks should be a wake up call for management accountants to become more involved in the concept of non-financial reporting and what their company may need to do including its supply chain for more effective disclosure to better portray the value of the company to its key stakeholders to drive more investment.