The number-one new issue for issuers to focus on as they prepare for their 2019 proxy disclosures, and their all-important “early engagement” activities is - and we say this with very mixed emotions - your company’s management of “Human Capital.”
On the one hand, the fast-emerging recognition that a company’s management of its human capital is as least as important as the management of its financial capital is a very good thing. And yes, in recent years we have seen way too many companies that are totally mismanaging their human capital - via massive but under-studied cost-cutting campaigns, sudden moves to other states or countries, “early-retirement programs” aimed as senior staffers, massive lay-offs, drastic cutbacks in staff-training and development efforts and a wide variety of other “financial-engineering moves” where long-term employees are concerned.
But on the other hand - and here’s where things get scary - “Human Capital Management” can and does mean an awful lot of different things to different people:
How’s this for starters: The impending publication of a new human capital reporting standard - ISO 30414 - by the International Organization for Standardization, which will, reportedly call for companies to publicly report on 23 specific metrics, grouped into nine different categories, and to report internally on an additional 36 (!) metrics such as “organizational culture” and “succession planning.” The publicly reportable metrics are grouped into these nine categories:
Ethics (number and type of employee grievances filed, number and type of concluded disciplinary actions, percentage of employees who have completed training on compliance and ethics)
Costs (total workforce costs)
Workforce Diversity (age, gender, disability, and “other indicators of diversity”- and diversity of the leadership team)
Leadership Trust (to be determined by employee surveys)
Organizational Safety, Health, and Well-Being (lost time for injuries, number of occupational accidents, number of fatalities during work)
Productivity (human-capital ROI; revenue per employee)
Recruitment, Mobility, and Turnover (average time to fill vacant positions, average time to fill critical business positions, percentage of critical business positions filled internally, turnover rates)
Skills and Capabilities (total development and training costs)
Workforce Availability (number of employees and full-time equivalents)
Meanwhile, the Human Capital Management Coalition, led by the UAW Retiree Medical Benefits Trust and including 25 asset owners like CalPERS, CalSTRS, CtW, NYC Comptroller and the Teamsters, filed a rulemaking petition with the SEC on July 6th - calling for new rules on nine slightly different areas, to require qualitative, quantitative and principles-based disclosures by issuers on their human-capital-management policies, practices and performance measures, arguing they warrant disclosure because they are “fundamental to human capital analysis.” Here are their nine areas:
Workforce Demographics (number of full-time and part-time workers, number of contingent workers, policies on and use of subcontracting and outsourcing)
Workforce Stability (voluntary and involuntary turnover, internal hire rate)
Workforce Composition (diversity, pay equity policies)
Workforce Skills and Capabilities (training, alignment with business strategy, skills-gaps)
Workforce Culture and Empowerment (employee engagement, union representation, “work-life initiatives”)
Workforce Health and Safety (work-related injuries and fatalities, lost day rate)
Workforce Productivity (profit/revenue per full-time employee, ROI)
Human Rights Commitments and their Implementation (principles used to evaluate risk, constituency consultation processes, supplier due diligence)
Workforce Compensation and Incentives (bonus metrics used for employees below the NEO level, measures to counterbalance risks created by incentives)
Our advice, as you gear up for your 2019 engagement efforts, is to begin by reviewing BlackRock’s commentary on engagement at the following link:
https://www.blackrock.com/corporate/literature/publication/blk-commentary-engagement-on-human-capital-march2018.pdf
One thing is for sure: we guarantee that human-capital management initiatives will produce a bottomless supply of new rules, disclosures and “engagement opportunities” - and longer and denser proxy statements every year.
THREE MORE HOT NEW ENGAGEMENT ISSUES ARE EMERGING: PAY RATIOS, AUDIT TENURE…AND “PLASTICS”
Last year, we noted that the new pay ratio disclosures were largely a non-event…a yawn. Now, it seems we were wrong on
this: A Willis Towers Watson blog disclosed that recently, Fortune 500 company compensation committees began receiving a letter from a group of 48 institutional investors, noting that “disclosure of the median employee’s pay provides a reference point for understanding the company’s workforce” and that companies should move “to help investors put this pay information into the context of your company’s overall approach to human capital management” with more expansive disclosure.
Commenting separately, on behalf of the New York State Common Retirement Fund, and adding a few new angles, New York State Comptroller Thomas DiNapoli noted that “We’ve seen a growing disparity in corporate income in the United States for years, with CEO pay rising dramatically while wages for most other company employees have remained flat. We are encouraging companies to adopt policies that take their entire workforce into consideration rather than setting CEO pay solely by benchmarking it against other CEOs. Overall employee compensation and executive pay has been and will continue to be a key factor for how we engage with companies going forward.”
As to Auditor Tenure, last year, following the disclosure of 75-100-year auditor tenures at audit-issue-plagued companies like GE, P&G and Wells Fargo - and given the impossibly long odds that careful comparison by audit committees would have yielded so few changes - we predicted we will see increasing challenges to companies that have used the same auditors for super-long periods.
Here, we seem to have been right: The investment committee of the California State Teachers’ Retirement System (CalSTRS) approved new corporate governance initiatives in November that will target companies that have continued to use the same auditor for many decades.
Aeisha Mastagni, a portfolio manager with the CalSTRS corporate governance unit, said CalSTRS investment staff will engage with approximately 40-50 companies with lengthy auditor tenure of 75 years or more in 2019. Issues related to auditor independence, audit reporting, and disclosure will be discussed. “Currently, in the US, companies are not required to periodically rotate their auditors. As a result, many companies have established long relationships with their auditor, some extending for many decades, causing concerns of potential independence issues with the extended relationship.”
(Also, while their long list of older engagement topics is still alive and well, CalSTRS will also engage with - and, we think, will likely take some actions against - companies that hold virtual-only annual meetings, without the option of an in-person meeting. And. oh yes, they have their own new draft of new investment principles on human-capital management that they intend to adopt in April, in time for meeting-season.)
The hottest new engagement issue on the horizon, we think is PLASTICS:
First, a tip of the hat to Liz Dunshee, of TheCorporateCounsel.net who recently blogged that Walden Asset Management, in collaboration with As You Sow, wrote to the CEOs of nine companies - arguing that membership in trade association “PLASTICS” conflicts with their companies’ publicly stated corporate values. The nine companies were Becton Dickinson (which then withdrew from PLASTICS) Clorox, Coca-Cola, John Deere, ExxonMobil (which, as a maker of key ingredients in plastic bags, dug-in its heels), Ford, General Motors, ITW, and PepsiCo.
Walden requested that each company leverage its industry standing in PLASTICS to demand that it cease lobbying for state preemption laws to get around local prohibitions of plastic bags, stating that “investors have a financial interest in maintaining strong share value and not alienating customers or employees through prohibition of the rights of local communities.” A copy of the June 2018 edition of National Geographic magazine with the headline “Planet or Plastic” and a plastic bag iceberg on the cover was included with each letter.
“Several of the companies have public commitments to support the UN Sustainable Development Goals (SDGs), including SDG 14 - Life Below Water. Support of preemption laws on bag ordinances is not consistent with SDG 14 which calls for conservation of oceans, seas and marine resources. In the 2017 International Coastal Cleanup, more than 757,000 plastic grocery bags were collected from beaches around the world in a single day. Preemption of local bag ordinances prohibits local communities from enacting proven approaches to reduce bag litter.” Based on the publicly available PLASTICS committee member lists 23 other major companies are also members.
Yet another tip of the hat to Broc Romanek, who prevailed on Liz to include his favorite movie quote, from “The Graduate” (1967)… when Mr. McGuire took young Benjamin (Dustin Hoffmann) out to the pool to offer career advice:
Mr. McGuire: I want to say one word to you. Just one word
Benjamin (Dustin Hoffman): Yes, sir.
Mr. McGuire: Are you listening?
Benjamin: Yes, I am.
Mr. McGuire: Plastics
Benjamin: Exactly how do you mean?
Mr. McGuire: There’s a great future in plastics. Think about it. Will you think about it?
Right now, we think a great future absolutely requires us to clean up the millions of tons of plastics that are clogging our oceans, killing fish and other wildlife, and, reportedly filling our bodies with millions of “micro-plastics”…and to stop releasing tons of new plastics into the environment every day. (It might be possible that that those micro-plastics are “plasticizing” our heart valves and creaky joints in a way that may make “plastic surgery” unnecessary someday…though we think not.)
We think that PLASTICS will and should turn into one of the hottest “engagement topics” out there….Think about it…Will you think about it?
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