How Boards Can Get Human Capital Management Right in Five (Not So) Easy Steps: Enhancing long-term value through effective human capital management and disclosure.

• Author: Washington, Paul
• Position: HUMAN CAPITAL

At the outset of the pandemic, employees were the top priority of boards, second only to continued liquidity. That focus intensified during the social unrest following the death of George Floyd. Now, the SEC's new disclosure rules on human capital management (HCM) could further re inforce the focus on workers--at least temporarily.

Boards will soon face a choice, however, when it comes to their role in HCM. They can ensure that the company satisfies the new SEC reporting requirements but return to the traditional approach of providing general oversight and being deeply engaged on workforce issues on a periodic basis--as they did in response to the #MeToo movement or company-specific events such as mergers and scandals that highlighted weaknesses in corporate culture. Or they can view recent events as a catalyst to make the workforce a sustained strategic focus of the board.

Boards are struggling with how deeply to be involved in HCM, and there are risks in overstepping into a managerial role. But if companies achieve the appropriate level of board engagement and disclosure on HCM (focusing on strategy and key drivers, rather than day-to-day activity), they will not only drive long-term value, but also provide a template for how boards can tackle other ESG areas.

We offer five practical steps to help boards make HCM a strategic business advantage based on a recent report by The Conference Board, Brave New World: Creating Long-Term Value through Human Capital Management and Disclosure. This report represents the collective wisdom of more than 100 practitioners and thought leaders who participated in a working group convened by The Conference Board to address the topic.

The link between human capital and company performance

For boards hesitant to dive into the deep end of the pool (let's be honest, it can be intimidating), it is worth remembering why the phrase "people are our most important asset" is often quite literally true.

From 1985 to 2020, the share of the S&P 500's market value comprising intangible assets increased from 32% to 90%. Given that human capital makes up a large share of a firm's intangible assets, a firm's workforce is a fundamental component of its economic value.

There is also considerable research showing a strong link between an organization's performance in employee diversity, health and safety on the one hand, and shareholder returns on the other. Indeed, effective HCM disclosure itself can also drive shareholder value.

Moreover, HCM matters to shareholders and other stakeholders. In 2020, support for proposals on workforce diversity averaged 38.2%, up from 28.6% in...