Episode Transcript
Speaker 1 00:00:07 Hello everyone. Today I'd like to talk about the S e c Human Capital Reporting Rules and the role of government regulation in general and what it's doing and how to think about it. So first let's talk about the S E C. The S E C of course, is responsible for regulating publicly traded companies. So if you're a private company, this is not something you have to do. But in October of 2020, they passed a rule that basically says you have to disclose certain human capital metrics, the number of employees, um, any issue in human capital that is material to the business, um, anything related to the development, attraction, safety, engagement, and retention of employees that is material to your company's performance. Now it's almost a joke because <laugh>, all of those things are very essential to your company's performance, but financial analysts don't necessarily think that way.
Speaker 1 00:00:59 So the SCC is basically forcing companies to do is have a financial business and HR conversation about these metrics and disclose them. And the main people who read these K one s and other SCC documents are financial analysts. But you know, customers read them, suppliers read them, employees read them, the press reads them. So they're actually very, very important documents financial analysts do know and do care about your people issues, not so much as they do your financial issues. But I've talked to quite a few Wall Street financial analysts who actually evaluate companies by pouring through Glass Door and looking at what employees are saying. And then there's the whole issue of E S G and your impact on the environment, your impact on the diversity of the workforce and the general diversity of the economy, your impact on income inequality. Those are real issues that people care about, including investors.
Speaker 1 00:01:53 So this is not something to be taken lightly. Now it's interesting, PWC went through and looked at the first run of these and what are people disclosing cuz there's no specific metrics. It doesn't force you to disclose certain things. And they found that of about 2000 K one s that had been disclosed. About 89% included quantitative things. About 75% included things about covid 19 and safety and infection, about two thirds included, d e i information, which most companies feel compelled to disclose. But my suggestion is don't disclose that just because you feel good about it, but disclose it for a reason. And then the other things include demographics. How many people we have, how many people we're hiring, our retention rate, our mobility rate, our l and d spending, our health and safety record, our total rewards and how we pay people, uh, our relative rewards relative to our peers, how we manage collective bargaining.
Speaker 1 00:02:54 And then what is our employee sentiment? Employee feedback. Now I know, and you guys all know that there's lots and lots of talk about these numbers inside the company all the time. And you probably have a people analytics team or a person who's collecting a lot of this data and it's hard to get it. So this is not a new topic at all for us. I've been writing about people analytics for two decades, but it's actually a big change because what we found when we talked with companies about their experience with this is this was the first chance for the cfo, f the ceo, the head of operations and the head of HR, to get together and talk about what is the story we want to tell. Because the s e c reporting rules are so vague, you get to decide the story. For example, if you look at the SCC reporting on human capital for Tesla, it's one sentence or maybe it's two sentences.
Speaker 1 00:03:46 It says, we have this many employees and we're always looking to hire great people. <laugh>. I mean, that's literally it. You look at the s e c reporting on Ford Motor, it's three pages of detail on their human capital strategies and the highly mature way they think about their workforce. And what I think the message here is that this is a huge opportunity for you to decide what the story is you want to disclose and what process you wanna put in place. Because once you disclose this, you're gonna have to maintain that data. So in a sense, I have to thank the S E C for this. They are going to force companies to create an ongoing process of collecting this data, making sure that it's accurate and agreed upon inside the company and then disclosing it in some story. Now, one example of a company that I really think has done a great job of this is Bank of America.
Speaker 1 00:04:38 Bank of America has a whole human capital disclosure report, which I will link to in this podcast, which I found absolutely fascinating to read because we just finished a very comprehensive case study on the way Bank of America manages its consumer branch, which I also linked to Consumer Bank. And th they're doing this because they want to get better at it, not not only because they wanna disclose it. So let me talk about two examples. There are two companies we who did a webinar with that have done this and a little bit about we heard. The first is a company called Fossil Group who you probably know, they make watches and all sorts of consumer products. They're a global corporation, very well-meaning purposeful company, very focused on employee satisfaction and retention and experience and diversity and sustainability. James Webb is the global VP of People development and he basically said this was a golden opportunity for us to sit down and work with our CEO and really decide how we're gonna manage the company.
Speaker 1 00:05:38 And I was really kind of pleased to hear how positive he felt about the whole experience. And he also feels that they really cleaned up their data act a lot because now they have metrics that they have to report on a regular basis. The second person I talked with is Sarah Waltman, who works for a company called Densely Serona. This is a company that works on dental equipment and dental services, really interesting company. And she really explained that she's the VP of talent management in od and she's said the same essential thing. They're very global. So the metrics aren't necessarily easy to get. For example, diversity metrics outside the us. First of all, in some countries it's illegal to collect that data and they're not as meaningful or purposeful because there's different dimensions of diversity in different parts of the world. She felt that the process really demonstrated to the organization and to their customers and stakeholders that they care.
Speaker 1 00:06:29 And that these statistics show a meaningful intention to be the best employer, to be a great company to work for and to be a great company for their customers. So I think this is a big deal and and people analytics in general. Let me take a few minutes on that because we are very experienced in this area. People analytics generally has a maturity model that goes through four stages. And these four stages are available on the web and I've written about them a lot. The first stage is cleaning up reporting, uh, all over the company. People are looking for numbers on how many staff do I have and what was my turnover rate and how much is my budget per person for bonus and on and on and on. And that data is typically collected by business partners in geographies or business units or sometimes the VP of hr.
Speaker 1 00:07:14 But that data can be inconsistent. I run the report over here, I get this number, I report over there, I get that number. So getting the inconsistent reporting together is number one, and that's where most companies start. Number two is creating a scalable reporting process where you have a standard tool, a standard dashboard, a standard set of reports, a standard set of metrics. Most companies do that at some point in their growth. So there is a system of record for this kind of data. The third level is you take the HR data or the human capital data and you correlate it against the business data and you start to look at the relationships. And this is not just saying, Hey, the retention rate in this department is higher than that department and this manager seems to be having a problem with employee issues, but actually correlating it to sales revenue, customer satisfaction.
Speaker 1 00:08:05 And that's really where the analytics team becomes more of a consulting team and they start to look at how this data impacts the company in a very actionable way. And I can give you lots and lots of examples of this, of companies that have looked at the human capital data and figured out problems in their leadership problems, in their operations, all sorts of things that had nothing to do with HR that were evidenced through the human capital data. And that's level three. And that's where I would encourage you to aspire. And level four is where you're predictive, where you create models and predictive models. I was telling a big company yesterday, for example, who's working on their performance management process at General Motors. Michael Arena did projects to study the characteristics of excellent product launches and high performing product teams. And he discovered, for example, that the most successful product teams at GM at the time, it was a few years ago, were not those with the largest budgets or the number of most expert engineers or the closest to the CEO or anything like that.
Speaker 1 00:09:10 They were the teams that had the most relationships and understanding of the other parts of General Motors. That was a fascinating project. And that led GM to rethink how they deal with product teams and create the product management process. So those four levels are really a good aspiration for you to think about. And the s e c human capital requirements are going to inject a little energy into that process to get you going. So I'll put some resources in the podcast for you. Look at. Second topic I want to talk about is government regulation in general. And without getting political, I wanna point out a couple of things. There's a new presidential order, I think it's an executive order that came out last week or the week before. And it's really worth reading. It had 72 areas of the United States economy that the Biden administration believes are overly concentrated.
Speaker 1 00:10:02 And the message essentially that Joe Biden delivered was that this is an issue of competitiveness. It's not antitrust, it's simply creating a more competitive economy and a fairer economy. And the guy underneath all that is a really, really fascinatingly intelligent lawyer by the name of Tim Wu. Wu. I read his book, the Attention Merchants, which is one of the most interesting books you could ever read about social media. And if you're into economics, I would encourage you to read his books. He's really, really insightful. But what it's about is the fact that at this point in the political cycle, there is a big effort to reign in very large companies. And I know a lot of you work for very large companies. Very large companies are not bad. They do not have evil intentions, but they do tend to do things that hurt people simply because they're big.
Speaker 1 00:10:53 And I've worked in big companies and I've talked to a lot of you in big companies. The reason that happens is big companies can't grow without sometimes crossing over the boundaries. My wife used to work for at and t, which she then worked for Pacific Bell and then S bbc. And the at and t Monopoly was broken up years ago because they owned the telecommunications industry essentially. And they could decide how much you paid for your phone and your connection and your minutes and all that. And so they became very, very conscious of this. And every time they had to introduce a new product, they had to price it for low income consumers. They had to make sure that the salespeople were trained to sell it in a diverse and inclusive way. They had to disclose all sorts of details about what it was and how much it costs.
Speaker 1 00:11:39 There were all sorts of regulations about that. It worked out fine at and t's a great company. They're still a great company and all the telephone companies are great companies. It didn't hurt that industry at all for at and t to have those regulations. For those of you that are my age, you remember when Microsoft went through antitrust gates got called out on Congress and while he was in Congress, he lied about some things they were doing. It was a pretty difficult time for the company. Look at Microsoft now. It's an incredibly good company, incredibly well run company. I think the regulatory injection of forced disclosures and forced compliance was good for Microsoft actually. So we're in that cycle and what's happening is the federal government is going from industry to industry, tech, pharmaceuticals, agriculture, healthcare, and looking at consolidation and finding out that in some cases prices have gone up, competition has been squashed, and the number of small companies being formed in the United States is shrinking.
Speaker 1 00:12:40 Having run several small companies, I understand that's not a good thing. Small companies become big companies when the number of small companies created declines, the big companies get bigger and the economy gets weaker. It wouldn't be easy for you to create a social network right now with LinkedIn and Microsoft and Facebook and Google essentially, and Twitter and a few other companies owning that market. I'm not saying that's necessarily something that should be broken up, but that's an example. And the reason I'm bringing it up now is essentially what's happening in the economy is the combination of economic inequalities, the global warming issues, which has everybody pretty freaked out. Income inequality from the growing centralization of technologies and industries. Political instability caused by all of these issues and lack of transparency and lack of societal focus. E S G, which is an outgrowth of that, has created a talent market that is different bull who are coming to work now.
Speaker 1 00:13:41 And I just read the Deloitte Millennial study are very concerned about these issues. Extremely concerned. Almost half of the people in the Deloitte Millennial study believe that systemic racism is embedded in society. More than 40% believe that income inequality is caused by the greed of senior executives, which obviously is silly, but I can understand how people feel a significant number believe that they have been discriminated. I think it's more than half believe that they have been discriminated against because of their identity by the government and by their employer. And they are afraid to talk to their employer. And more than half stated that they took time off for mental health or stress and did not tell their employer why they were taking time off because they didn't feel comfortable talking about it. Now people under the age of 45 are more than half the workforce.
Speaker 1 00:14:34 And that's the trend. So this is not just the government moving to the left because of the Biden administration. This is, this is a societal trend to be aware of. So things like E S G and diversity and employee experience and fair pay are really becoming business critical issues. And I thank the government for doing that. Obviously the government doesn't do everything well, but this is an injection of conscience into our business ecosystem. The final thing I want to talk about, which is also part of this is the issue of identity. Now this sounds like a weird diversion from where I started this podcast, but it gets back to the issue of government regulations and and responsibility. Uh, I'm in my mid sixties. I started work in 1978 when I got outta college, went to graduate school, did a bunch of other things, worked for about six or seven companies in my career and most of my career.
Speaker 1 00:15:27 I felt that the rule for success is conformity. I got outta school. I went to for for Exxon, I became an engineer. I went to graduate school, then I went to work for ibm. I became a salesperson and a customer service person. I wore a suit and tie for 10 years, a white shirt, buttoned down shirt for 10 years, was very happy to do that. And this conformity was very successful for people. They became the job that they wanted. They complied with the company's rules and they played by the rules and the company took care of them. And the two way street worked out great. Most people my age became successful financially, had kids, bought a house, sent their kids to college, became bulky enough to maybe retire someday and it worked out fine. Well, that's not the way people operate anymore. Most young people today believe that their individual identity is very important.
Speaker 1 00:16:25 They are different. They have Instagram accounts, they have Facebook accounts. They want to have their own gender. They want to have their own haircut. They wanna put a tattoo on their body to show how unique they are. They might want to have a piercing or wear different clothes. People in society today are striving to be different and unique. And that's a really marvelous, wonderful, enriching part of our society. We don't have to conform, we don't wanna conform, but in the business setting, we must conform. There are certain things you have to do. You have to show up on time, you have to do your job, but you have to abide by the rules. You have to be safe, but you have to disclose certain information. And so one of the reason these S e C rules and these government rules are important is they give us the guidelines for embracing individuality and uniqueness at work.
Speaker 1 00:17:17 In most of the conversations I have with CEOs and CHROs now, we talk about diversity, we talk about recruiting, we talk about employment brand, we talk about leadership. And at the end of it all there comes down to a discussion of trust. Do you trust that people will do the right thing or are you going to tighten the screws and manage them tightly to make sure they do the right thing? And that is an issue of individuality versus conformity. Do you or will you embrace the individuality of each person in your company? Will you respect it? Will you give people the opportunity to be themselves in the freedom of your job architecture and your company's needs and allow them to do their job in the way that they believe is the best with the goal of giving you the business outcomes and financial return you want?
Speaker 1 00:18:04 Or are you gonna put up a bunch of guardrails and say, here's the rules, stay inside these lines and I'm gonna tighten the lines if you get outta line to make sure you conform. I think in the economy of today, the first model is going to be more successful. And what the government is trying to do with the S e C rules and some of these 72 areas of the economy is they're trying to give you the guidance to do that. Well, if I go back to at and t and Pacific Bell where my wife worked those rules gave that company a lot of freedom. Within those boundaries, the company could innovate like crazy. My wife was responsible for developing two very successful products in Pacific Bell, and they did have rules around them and there was the California regulatory environment also, and they had to go to Washington and disclose a lot of the stuff to Congress, but it ended up becoming very successful. So these things like the s e c rules are not there to hurt you. They're actually there to help you. I know the government's not perfect, but I think in this particular case, let's take these rules and embrace them as a positive driver of change and an opportunity to take our human capital strategy to the next level. Thank you very much.
