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BOARD MEMO 2021

Increasing focus on human capital management and diversity

Pamela Marcogliese

Pamela
Marcogliese

Partner, New York

Elizabeth Bieber

Elizabeth
Bieber

Counsel, New York

Employees, investors, customers and other stakeholders are focused on how a company manages its people. 

Over the next year, public companies in the United States will therefore be expected to convey information about their human capital management (HCM) to these groups. Stakeholders will be looking to human capital information to understand how a company and its board are approaching the COVID-19 recovery era, the impact of any lessons learned from the past year and for details on how the company will be managed in the future. The ability to attract, retain, train, incentivize and protect workers is a critical element of any company’s strategy and poor HCM oversight and execution, broadly defined, may be perceived to be a growth-limiting factor, if not a misalignment among priorities and stakeholders. Furthermore, HCM is an area in which the interests of many stakeholders converge, providing an opportunity for messages to resonate synergistically, but also with the potential for issues to quickly become significant reputational challenges. While part of this expectation is driven by the new SEC disclosure rules, these principles-based requirements are a minimum and unlikely to satisfy stakeholders. Early disclosures are yielding a wide range of approaches to the SEC requirement with respect to subtopics, level of detail, use of metrics, and length, among other factors.

One of the challenges and opportunities is the lack of an agreed-upon definition of the components that comprise HCM. As a result, the first step for many companies is to specify these parameters. There is, however, a growing expectation that diversity and inclusion initiatives will be included in HCM oversight. After the significant and important societal issues brought to the fore in 2020, stakeholders are turning to companies and expecting progress. We can see this through new racial and ethnicity board diversity requirements in California, the ISS and Glass Lewis proxy voting guidelines, diversity-related derivative lawsuits, shareholder proposals and settlements regarding pay gap information, and the continued engagement and assessment by institutional investors regarding a company’s progress on overall diversity. The areas of focus are increasing – from the boardroom, to leadership and employees. In addition, the ability for smaller companies to wait for the trend to trickle down no longer exists, nor is it feasible for companies to make little incremental progress because they compare favorably to peers or their index. With the increase in overall investor resources for governance – and the increasing appetite for progress in these areas – companies are being reviewed on their own performance.

The good news for directors is that there are no secrets to doing well in these areas. While it can be challenging to implement and oversee, and the individual details are critically important, the recipe is constant. Establishing oversight, making incremental gains, having a mechanism for assessing progress and effective communication with stakeholders are the elements of a successful HCM and diversity program.

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