Institutional investors and other stakeholders are seeking better information from public companies on workforce diversity. Company executives and boards are discussing how and what to disclose, and many observers believe the SEC will mandate further disclosures. But when it comes to disclosing Human Capital information, straightforward and satisfactory answers are elusive. For SEC-reporting companies there are few established norms when it comes to diversity-related disclosures, let alone the broader topic of Human Capital issues.

At least three organizations have produced Human Capital disclosure standards, and other organizations have developed frameworks for reporting on diversity topics. Few reporting companies, however, have embraced those standards wholesale. Last summer, the SEC dipped its toe in the water by adopting a principles-based approach that generally requires a registrant to describe its Human Capital resources including the number of persons employed by the company and any Human Capital measures or objectives that the company focuses on in managing its business. But agency-prescribed reporting requirements are not likely to arrive in time to address the current demands for more transparency that reporting companies face.

This article provides a brief overview of disclosure issues for reporting companies. It also discusses some of the challenges and opportunities for organizations considering how and whether to report on workforce diversity — the hot Human Capital topic. Last, it briefly discusses a company’s options on where and how to disclose diversity information.

Evaluating whether and how to report Human or Social Capital issues involves a myriad of questions. What external standards exist? What internal sources of information can a company draw upon? Should the reporting be qualitative or quantitative? Is the information material to the company’s business? How can the company assure reliable and accurate reporting? What information is being disclosed by the company’s peers, if anything?

Sources of Human Capital Reporting Guidelines

Companies tackling Human Capital reporting may turn to several international standard-setting organizations or other non-governmental organizations to identify guidelines. In the Human Capital area, three organizations offer a standards-based approach to disclosures. The Sustainability Accounting Standards Board (“SASB”) has developed standards for 77 industries across five sustainability dimensions, of which Human Capital is one. Under the Human Capital dimension, the SASB has identified three general issue categories: 1) Employee Diversity, Inclusion and Engagement; 2) Labor Practices; and 3) Employee Health and Safety. Under the SASB’s approach, topics that fall under Diversity, Inclusion and Engagement include:

  • Gender and race/ethnic group representations;
  • Amount of monetary losses as a result of legal proceedings involving employment discrimination; and
  • Employee turnover, voluntary and involuntary.

The Global Sustainability Standards Board (“GSSB”) has issued a comprehensive set of standards known as the Global Reporting Initiative (“GRI”). The GRI provides both foundational and general disclosures about an organization and topic-specific standards. For example, at the 100-level standards (organization scale level), organizations are encouraged to disclose the total number of employees by country or region, the number of contractors and employees by gender and region, and company remuneration policies. Within the 400-level (social topics scale level), there are a series of standards on employment, labor-management relations, employee safety, and diversity and equal employment opportunity standards.

The International Organization for Standardization (“ISO”) has also developed a standard, ISO 30414, that provides guidelines for internal and external reporting of several Human Capital area. Those areas include diversity, organizational health and safety, turnover, succession planning and workforce availability.

Some reporting companies reference other frameworks or declarations from multinational organizations such as United Nations (“UN”), the International Labour Organization (“ILO”), the World Bank, or the Organisation for Economic Co-operation and Development. The UN and ILO proclamations often serve as sources of authority for the standard or framework-producing organizations. If the company elects to embrace or reference a standard or framework, it should ensure its board and executive team are comfortable with the choice and understand the contents of the referenced document. Some are quite old. For example, the UN promulgated the Universal Declaration of Human Rights in 1948. Its scope extends far beyond the workplace, but to the extent it enunciates standards for workforces, it is not controversial in developed countries: it prohibits involuntary servitude and slavery, declares everyone has the right, without discrimination, to equal pay for equal work, and everyone has the right to form and join trade unions. Others like the UN Guiding Principles on Business and Human Rights or any number of ILO Conventions are of more recent vintage, and some conventions or principles may not be universally perceived as uncontroversial.

Challenges in Disclosing Diversity Topics

The sources described above will help a company identify the types of information a company could compile and consider whether to disclose. The more salient questions are what a company can reliably and accurately disclose, whether disclosing that information is material, and if the company is prepared to address how stakeholders may react to disclosures. For companies wrestling with these challenges, this alert focuses on diversity disclosures. We plan to follow with subsequent alerts on fair pay and labor practices and employee safety practices.

The word-choice options to describe the diversity of a company’s workforce are plentiful. Who qualifies to be included in a people of color designation? What does it mean to identify as diverse or have an indicator of diversity? Some companies have invoked other phrases such as underrepresented communities. Who does that include or exclude, and does it vary by industry or country? To date, many disclosures on Human Capital issues have occurred in company’s self-published ESG or Diversity reports. But will those assertions withstand scrutiny if they are included or incorporated by reference in a SEC filing?

Consider an example or two. “Women and people of color make up 62% of the workforce” or “25% of employees identify as diverse”. Those formulations seemingly describe a sufficiently woke company, but do they withstand scrutiny? Is the first company doing well if women represent 55% of the workplace? What are “people of color”? There is no generally acceptable, legal definition, other than the obvious, non-white employees. What does it mean to be diverse? Are white female employees diverse?

Defaulting to the definitions used in an EEO-1 report may make sense, but some debate whether those are adequate. For example, the federal government has long considered creating a separate category for people of Middle Eastern or North African heritage, but under current EEO-1 reporting standards people of Middle Eastern and North African descent are deemed Caucasians or white. And the questions for a company with an international workforce are more complicated. Should the company disclose by region? If so, which ones?

What does it mean to identify as a person who is diverse? Most observers would agree racial or ethnic minorities are generally considered diverse. Some companies, however, describe women as part of their diverse team. Is a disabled employee or a veteran considered diverse? Unfortunately, the standards do not help. For example, GRI Standard 405 Diversity and Equal Opportunity discusses classifying people by indicators of diversity or vulnerable status. Indicators of diversity, according to that standard, include age, ancestry, citizenship, creed, disability and gender. Relying on that standard may water down what it means to be diverse in the United States.

Where does sexual orientation and gender identity figure into the mix? Should an organization conduct voluntary surveys on sexual orientation or gender identity? Asking the question alone is likely to generate heated debates, particularly for global companies. No federal standard currently requires employers to count their employees by sexual orientation, and gender identity presents questions that standard binary (male or female) reporting questions may not be equipped to handle. One tech company’s diversity report recognized that its use of traditional gender categories aligns with U.S. government reporting requirements, but that it “deeply respects that gender is not binary.” Neither SASB nor the GSSB has tackled how to survey, track or report on sexual orientation or gender identity.

Existing Sources of Corporate Data

Understanding how a company collects and defines diversity information is critical. In the United States, every employer with more than 100 employees must file an annual EEO-1 report. To capture the data needed for that report, companies often request employees to voluntarily disclose their race and gender. The information is then stored in a Human Resources database or file. Those records may contain other data about the workforce such as age, veteran or disability status.

Should a company report or disclose EEO-1 data? There may be simplicity associated with this approach. Race and ethnicity are defined, the data is collected, verifiable, and allows for benchmarking across an industry. Some companies have concluded it is may be the best data to use for U.S.-based operations and have included it in their diversity reports. The EEO-1 report requires a company to classify its workforce in 10 separate job groups—such as executives, sales, professionals, service workers and crafts people—and then identify by sex and race the number of individuals in each job group.

Employee surveys represent another internal source of data. Does the survey track the EEO-1 definitions, or can it be modified to include other indicators of diversity? Companies that are federal government contractors or subcontractors often include voluntary survey questions on veteran and disability status, which yield data on other populations.

Affirmative action plans, for federal government contractors and subcontractors, represent a third source of data. This data, however, has limits. Like the EEO-1, these plans compile demographic data based on sex and race and map that data over various job groups. But affirmative action plans are typically site-specific and a company’s data is not aggregated nationwide. Affirmative action plans will also have data on veterans and employees with disabilities, but the quantitative analysis for veterans and disabilities is not as comprehensive as the data typically captured for race and gender categories. Moreover, affirmative action plans are not typically public documents, are not regularly filed with the government, and may contain confidential or proprietary information.

Despite its limitations, an affirmative action plan has a useful feature. To determine the utilization of racial minorities and women in the workforce, the plan compares a company’s incumbent workforce to the demographic makeup of the available labor pool for any given job category. For example, to determine whether a company has a deficit of racial minorities among its professional engineers, the company compares the percentage of its workforce at that particular location to the percentage of professional engineers who are racial minorities in the relevant labor market. Although this exercise may be foreign to current diversity standards or frameworks, the federal government mandates that type of comparison for its contractors. And this concept may better describe how a company’s current workforce relates to the demographic profile of those with the requisite skills in the relevant labor market.

Choices on Where and How to Disclose

Sustainability or corporate social responsibility reports have become a regular task for many reporting companies. Originally, environmental issues dominated many of those reports, but more recently, many companies now include statistics on the demographic profile of their workforce in such reports. Some companies have issued diversity reports that wrestle with the questions considered in this alert. These are often available on a company’s investor relations website. There are emerging liability concerns that could arise from these reports, e.g., where a plaintiff can demonstrate the information is incorrect or misleading and relied on such information in making an investment decision. With more demand for Human Capital disclosure, a company weighing whether to step beyond a website-based, self-published report deserves thoughtful consideration.

A company could choose to furnish their ESG or diversity report to the SEC via a Form 8-K, Item 7.01 or Item 8.01, treating it as a Fair Disclosure or Other Information report. Electing that route would avoid liability under Section 18 of the Exchange Act for a material misstatement or omission, but it would not necessarily immunize a company from other potential liabilities, e.g., under Section 10(b) or Rule 10b-5. Alternatively, a company could consider including workforce diversity data in an annual or quarterly filing or their proxy statement, but such a decision should weigh materiality, accuracy and transparency. In short, an SEC filing may not be the place to first wade through what diversity means in a company’s workforce. If a company elects to furnish or file diversity data, it will want to confirm that it has invested the time and effort to understand the external standards or frameworks, if any, on which it relies or benchmarks itself, that it has compiled and can verify the internal sources of data it uses, which may require new internal certifications, and has carefully considered the words and data it uses to describe its workforce.

Source: JDSUPRA