Nearly a year ago, on August 26, 2020, the Securities and Exchange Commission (SEC) announced that it updated the public disclosure requirements by requiring new descriptions of business (Item 101), legal proceedings (Item 103) and risk factor disclosures (Item 105). Then-SEC Chairman Jay Clayton announced that the update “modernized our public company business disclosure rules for essentially the first time in over 30 years.” The new rules, which became effective November 9, 2020, required public companies to disclose:
- The number of employees and a description of its human capital resources, if material to the business as a whole; and
- Any human capital measures or objectives, if material, that the registrant focuses on in managing its business, such as those related to the development, attraction, safety, engagement and retention of employees.
The rules did not define “human capital” nor did they identify the measures that public companies would be expected to disclose. In turn, companies that made their public disclosures during the first half of 2021 ran the gamut from providing detailed numerical data of various diversity metrics to summarizing human capital information in a couple of paragraphs. The lack of specific guidelines related to this new reporting requirement is likely to blame. Indeed, there is an overwhelming number of options for companies to choose from in determining what information to disclose, including Sustainability Accounting Standards Board (SASB), Global Sustainability Standards Board (GSSB), International Organization for Standardization and frameworks developed by several international bodies like the United Nations and the World Bank.
Despite these challenges, many companies understand that diversity, equity and inclusion (DEI) is good for the bottom line: a 2020 study conducted by McKinsey found that “[i]n the case of ethnic and cultural diversity . . . top-quartile companies outperformed those in the fourth one by 36 percent in profitability” in the prior year. And many companies are undertaking valiant efforts to increase diverse representation in their workforce.
Although there is no “one size fits all” approach to improving DEI, several processes have proved successful and are worth considering:
As with any other project, companies must first identify the data and the potential issues with a broad stroke, then key in on specific, measurable and achievable goals. All-encompassing statements like “We plan on hiring more women” or “We would like to increase the representation of every single ethnic minority in our company by 25%” can render the project daunting and impossible to track. Most companies already maintain thorough data of employee demographics, but for purposes of developing a DEI plan, it may be helpful to commission a pulse survey to gauge engagement and related barriers to identify ways to enable better engagement and retention and to address ambient cultural concerns before they become legal, reputational and/or financial risks. After all, these issues directly affect every employee. A survey tool will also assist companies in identifying certain intangible information beyond demographics, such as confidence in direct supervisors, trust in the company’s statements and barriers to an inclusive work environment.
2) Obtain buy-in
A key aspect of a successful DEI program is tone at the top. It is crucial that all leaders in the company—not just those generally tasked with DEI initiatives like the Chief of Human Resources or Chief of Diversity Initiatives—are invested and committed to achieving these priority DEI metrics. If the leadership is not aligned on this issue, executive briefings on topics such as implicit bias, leading diverse teams and the business case for inclusion can help bridge the gap and develop a common purpose. Some companies have taken it a step further and tied DEI goals to an executive’s salary or bonus structure in order to incentivize meaningful buy-in.
3) Measure progress
An often-overlooked aspect of a DEI program is tracking progress on the company’s stated goals. Just like it is insufficient to simply declare that diversity must be increased without setting any specific objectives, failing to track progress will hinder companies from assessing the effectiveness of the program, the impact it is having on employees and whether any additional processes are necessary to achieve the company’s stated DEI goals. The same tools that are used by companies to track profitability, sales or other financial metrics can be adopted to track progress on DEI objectives. And, as mentioned earlier, conducting periodic anonymous surveys can help companies identify the unquantifiable impact of ongoing DEI efforts.
4) Reassess and reframe
Some may believe that once a robust DEI program is established and a method for tracking the initiatives is put in place, the work is finished and leadership can move on to the next project. But DEI is an ongoing process that must be reassessed periodically and, if needed, reframed. If a company is making solid progress on its initial DEI priorities, perhaps there is room to add new ones. Or if its initial priorities are shifting as the workforce changes, then there may be a need to rethink those priorities and ask if they are still serving the company. Regular check-ins with employees, leadership, outside counsel and other outside management firms can both spark new ideas and help the company stay the course of its DEI mission.
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While adopting these steps may not answer the ultimate question of what information the SEC is looking for in the new human capital disclosures, having a solid DEI program is unquestionably the first step in preparing for making those disclosures next year. A DEI program that is (i) specific to the company’s mission and priorities, (ii) supported by leadership and (iii) measurable encompass the first crucial step toward more meaningful public disclosures.