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Groups Oppose Draft Standard on Value of Human Capital

Tuesday, June 12, 2012

By Gayle Cinquegrani  

Ray Lane contributed to this report  

A draft standard developed by the Society for Human Resource Management, which is intended to help investors evaluate the worth of a company's human capital, is causing controversy among human resources professionals who claim the standard will be burdensome to companies and irrelevant to investors.

The standard, titled Human Resource Indices for Investors, is being developed for certification by the American National Standards Institute.

Tim Bartl of the HR Policy Association told BNA May 24 that his organization is “not exactly sure why” SHRM is developing the standard. “The type, extent, and content of information contemplated by the standard is currently not being requested by investors,” said Bartl, who heads the association's Center on Executive Compensation.

If ANSI certifies the standard, it can be called a consensus standard, Bartl explained, and regulatory agencies such as the Securities and Exchange Commission may defer to it. The standard “is on top of a current disclosure and regulatory regime that is already being criticized” for being too voluminous, he said. “Our members have not heard from investors that they're looking for more information on the HR side.”

SHRM received 45 comments on its draft standard, which is dated April 9. SHRM told BNA June 1 that it will open another review and comment period after it revises the draft standard based on the comments it received during the first comment period, which ended May 24.

Lee Webster, SHRM's director of HR standards, told BNA June 5 that SHRM welcomes the comments on the standards proposal.

Financial Value of Human Capital

Investment communications such as annual reports and 10-Ks fail to give a comprehensive picture of a company's worth, “so the true wealth of the organization is consistently underreported to investors and other stakeholders,” SHRM said in its summary of the draft standard.

“Establishing respected and durable measurements of human capital value that must be included in investor communications is crucial for presenting a full picture of the performance and wealth of an organization.”

Under the draft, companies would prepare a human capital discussion and analysis that would provide information in five main areas:

• spending on human capital, including the total head count and number of full-time equivalent employees; and the total amount spent on employees (all wages, benefits, and taxes); spending in lieu of employees (temps, contractors, outsourcing); and the total spent on training and development;

• the company's ability to retain talent, including voluntary and total turnover broken down by job types;

• the company's leadership depth, including the percentage of defined positions with an identified successor, and whether defined positions were filled internally or externally;

• the company's leadership quality based on responses to an employee survey; and

• employee engagement based on an employee survey.

 

Proposal's Withdrawal Urged

The HR Policy Association, which represents the chief human resources officers of more than 335 large employers, urged SHRM to withdraw the proposal.

“Publicly held companies are overwhelmed by financial market and accounting compliance requirements,” the association told SHRM in a May 18 letter commenting on the standard. “The members of our Association were taken aback that the Society of Human Resource Management would propose yet another significant new regulatory burden.”

The association also was skeptical that investors even want this information. “The investment community is flooded with the financial information generated to meet these requirements,” it said, adding that its members have not heard investors request this sort of information.

Even if investors were inclined to consider the information that would be provided under the standard, the association said, the variations in human resources norms among industries and regions would make it difficult for investors to apply the data.

The HR Policy Association said the information in the human capital discussion and analysis would duplicate information already provided in the management analysis in the annual 10-K report required by SEC and the compensation discussion in the proxy statement that a company files before its annual meeting.

Competitive Disadvantage

“Further, companies disclosing the information proposed in the standard could be placed at a considerable competitive disadvantage,” the association warned.

It said they could become prey to “organizations seeking to raid their talent; competitors trying to gain insights into how they are organized, staffed and structured; and hedge funds and other entities seeking financial prey.”

According to the association, “[t]he percentage of defined positions with identified successors and the percentage of defined positions filled internally during the last fiscal period” is “highly strategic information.”

“[A] change in the extent to which a company fills positions externally versus internally in a certain business or region might speak to the company's plans to terminate or expand a line of business--information which competitors could use to the company's detriment,” the group explained.

Furthermore, disclosing the actual titles of people in critical leadership positions could make a company “a clear target for executive recruiters and competitors looking for talent,” the association said.

The standard's required disclosure of “information regarding their compensation structures, reliance on contingent workers, and strategy with regard to full-time versus part-time staffing” could disadvantage companies involved in bidding on a contract because their competitors may be able “to undercut a bid based on insight into margins and other proprietary information gleaned from these disclosures,” the association said.

Difficult to Gather Data

The association also focused on the difficulty companies would have in gathering the data.

“The data required for this disclosure is not currently gathered by all companies,” the association said, so “it would require significant time, effort and resources for our members to track down and collect the proposed information on a routine basis.”

The association said “the required disclosure of total compensation for all employees globally would be inordinately complex and time-consuming” for many companies because many multinational companies maintain their payroll data in each country where employees work, and “compensation packages vary tremendously across the globe” and are subject to different privacy rules in different countries.

The association added that employees located in foreign countries often are part of joint ventures, and the businesses rarely share common data systems.

In addition, the association said, fluctuations in foreign currencies could complicate the compilation of salary data.

The HR Policy Association also questioned the utility of gauging the leadership quality of a company's managers by relying on an employee survey.

It said leadership “is far more than an employee popularity contest” and noted that in most organizations, managers are assessed by their boss's boss.

The association expressed concern that companies might have to enlarge their bureaucracies or hire outside consultants to complete the human capital discussion and analysis.

In fact, the association asserted that some members of the task force drafting the proposal could be motivated by a desire to increase the profits of their own consulting businesses.

“Compliance with the standard would necessitate companies relying quite heavily on outside vendors and consultants in order to generate the data needed for disclosure,” it said. “In fact, the standard encourages this outright, which is noteworthy given the significant presence of management consultants on the Taskforce involved in the development of this proposal,” the association said.

“Many of the requirements in the standard appear to be written primarily for the benefit of consulting organizations selling HR services to our member companies, especially those doing employee surveys,” the association charged.

Section 5.6 of the draft standard is “self-serving,” the association said, because it would require disclosure of all “direct spending” on training and development while explicitly exempting from disclosure “any costs associated with traveling to, paying for, attending, and teaching at conferences as well as lost work time while engaged in 'formal learning activities.' ”

The association said this exemption “appears to be an express exemption for SHRM related activities.”

The HR Policy Association encouraged SHRM to withdraw the proposal. It said if the task force believes a standard on HR metrics is desirable, it should develop a metric that a company could use internally to measure the effectiveness of its HR programs.

Contingent Workers

The American Staffing Association, which represents staffing and recruiting firms, expressed concern that the guidelines would require companies to disclose information about their use of contingent workers and their overall staffing strategies.

In a May 21 letter to SHRM, ASA said such disclosure would reduce a company's flexibility to adjust its workforce to accommodate fluctuating market demands. It also said such disclosures could reveal a company's proprietary staffing practices and trade secrets.

Furthermore, ASA predicted that the disclosure of staffing costs “would invariably result in pressure to reduce such spending whether or not justified by business necessity.”

As a result, it said, “[c]ompanies would lose the flexibility and other benefits attendant to using temporary and contract labor, and temporary and contract workers could lose jobs.”

ASA explained that “companies' staffing needs vary according to their size, geographic location, revenue, and products sold or services rendered.”

Therefore, the association said, scrutinizing contingent labor expenditures “without context would be pointless at best and potentially harmful to companies and workers alike.”

ASA pointed out that a company could be “tapping specialized talent to develop a new product or service,” or it could be shifting its workforce from one line of business to another.

“Simply indicating the costs of contingent labor in a vacuum would be misleading,” it said.

SHRM 'Not Advocating Anything'

“These are exactly the kinds of comments being sought from the human resources community,” SHRM's Webster told BNA.

“We're not advocating anything,” he continued. The Human Resource Indices for Investors was proposed and put forward for consideration by a coalition of domestic and international business leaders and human resource professionals, not SHRM, Webster emphasized.

“The process for drafting, amending, changing, or discarding the proposal is open-ended, and that's not boilerplate,” he said. “The open process is what makes this effort great. Everyone in the human resources community can and should speak their mind on this and all the other standards being considered in the years to come.”

“We're listening,” Webster said.

By Gayle Cinquegrani
Ray Lane contributed to this report
 


Text of SHRM's draft standard is available at http://op.bna.com/dlrcases.nsf/r?Open=gcii-8ulu8r. The HR Policy Association letter is available at http://op.bna.com/dlrcases.nsf/r?Open=gcii-8uumd8. The American Staffing Association letter is available at
http://op.bna.com/dlrcases.nsf/r?Open=gcii-8uumb6.

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