HCM Disclosure: A Strategic Opportunity: Use the proxy to highlight your strengths in human capital management.

• Author: Sirras, Todd
• Position: COMPENSATION MATTERS

Human capital management (HCM) disclosure is evolving rapidly, and the proxy is quickly becoming the most prominent area for boards to tell their HCM story.

Disclosure rules effective in November 2020 required issuers to describe "human capital resources ... and any human capital measures or objectives that the company focuses on in managing the business" in the 10-K's Business section. As with all 10-K requirements, disclosure is required to the extent that it is material to understanding the business. HCM arguably has become "material" as companies focus more on nonfinancial elements of their business strategy and stakeholders' priorities.

We encourage companies to be thoughtful and comprehensive about their HCM strategy and use these new rules to highlight HCM strengths and leadership--but at an appropriate pace. Balance HCM with other strategic priorities, and don't overcommit through external messaging.

Rules notwithstanding, institutional investors, proxy advisors, investment managers and other stakeholders drive the evolution of these expectations. For example, State Street will vote against director nominations for "insufficient" HCM disclosure. BlackRock expects robust board oversight of HCM topics and disclosure of actions to support a diverse workforce and HCM approach. The two leading proxy advisors announced policy updates regarding "against" recommendations for insufficient HCM disclosure, such as director diversity and skills, HCM risk oversight and pay equity audits.

Give your HCM story life

The 10-K and proxy have print-media analogs. The 10-K is like The Economist: dense, text-laden and comprehensive. The proxy statement is becoming more like The Guardian: also comprehensive, but more approachable in tone and more likely to use illustrations and graphics.

Our review of 2022 proxy and 10-K filings from a sample of leading consumer-facing companies shows more HCM disclosure than 2021. The 10-Ks are more likely to include nonquantifiable discussions of culture and HCM strategy and governance. These proxy excerpts show increased disclosure prevalence and depth regarding:

HCM strategy (board/ management role). "These efforts are overseen by our board of directors--which has designated to our organization & compensation committee the responsibility for board-level oversight of the company's human capital management and inclusion and diversity policies and practices--and implemented under the direction of our chief administrative...