Companies like to say people are their most important asset. A new mandate from the U.S. Securities and Exchange Commission (SEC) puts that old axiom into sharp focus.
The human capital disclosure rule, which went into effect on Nov. 9, 2020, and is part of the SEC’s broader project to modernize Regulation S-K, requires publicly traded companies to disclose specific information about their human capital resources and any measures or objectives the company focuses on in managing the business — such as those that address the attraction, development, engagement and retention of employees.
“Human capital is a material resource for many companies and often is a focus of management, in varying ways, and an important driver of performance,” the SEC wrote.
This rule ushers in a new era that places a greater emphasis on the strategic importance of HR and L&D, and it’s been a long time coming. With the rise of knowledge work over the past several decades, most companies’ value and stock price are now largely determined by their human capital, not their physical capital. But you’d never know anything about that critical piece of the performance picture by only looking at financial statements and balance sheets.
Whether you’re a publicly traded company or not, it makes good business sense to focus on measuring the return on your people investments in addition to your invested financial capital. Beyond metrics like workforce costs and profit per employees, we now have the tools and data to measure impact in areas like diversity and inclusion, leadership development, employee engagement, organizational culture and more.
And the SEC has made it clear that metrics matter. It’s not enough to say that you focus on diversity and inclusion or leadership development in managing the business. You have to be able to demonstrate the value of these efforts and explain why they’re important for the company.
The Materiality of Diversity and Inclusion
The SEC’s requirements are rooted in materiality — the likelihood that a reasonable investor would consider the information important in making an investment or voting decision.
What you track and focus on in the management of your business will depend on your mission and industry and what you want to achieve, as well as what’s important to your clients, employees and other stakeholders. But considering the strong business case for diversity and the increased scrutiny on whether companies are really walking the talk of their DEI promises, diversity and inclusion should be high on the list for every company today.
Savvy investors today are particularly interested in how companies treat and value their employees and to what extent they’re prioritizing diversity, equity and inclusion practices.
That’s because volumes of research now confirm that there are tangible business benefits when people feel included in an organization and when their talents and perspectives can be fully applied.
At a high level, inclusiveness has been shown to improve morale, engagement, productivity and cohesion. People who feel they’re included and valued for what they bring to the table will be more invested in the mission. And organizations that remove the institutional barriers to advancement will attract and retain a broader pool of talent.
It’s also worth noting that customers are increasingly demanding that the companies they do business with be held accountable for creating a fair, equitable workplace. Taken together, it’s clear that D&I hits on a number of key areas that drive organizational performance and will be very important to investors.
Measuring Impact Using Cognitive Diversity
This is all good news for the DEI practitioners and experts who’ve often seen their work devalued and sidelined over the years. But on its own, the heightened interest doesn’t resolve the common pushback that this kind of work is too abstract to really measure. It also doesn’t make the difficult conversations around issues like racial bias and equity any easier to have.
Our own work in the area of cognitive diversity provides a practical starting point for reconciling these challenges. Cognitive diversity is easily applied to business situations and can be measured, tracked and reported on in a variety of ways to demonstrate tangible impact.
The advantages of cognitive diversity in teams, for instance, can be applied to creative problem solving, innovation, strategy formation and other critical business activities.
Using diversity of thought tools, companies can analyze their teams based on thinking preference data and set them up for peak performance.
It’s a process Caesars Entertainment executive Fred Keeton has described as yield-managing cognitive diversity, which he says involves “leveraging the cognitive abilities and predispositions based on individual backgrounds, experiences and genetic wiring to generate and obtain specifically desired business outcomes.”
Cognitive diversity has also been shown to be critical for helping organizations be more adaptive and resilient during times of crisis and disruption.
Research by our colleagues in New Zealand found that effective decision making in the wake of a disruptive event requires leaders to consider and balance their thinking with that of others, as well as engage new approaches.
With an understanding of cognitive diversity, leaders can better analyze decisions in a business crisis, consider what needs priority attention and bring in the diversity of thought needed to get to their desired outcomes.
The complexity of business today simply demands a more holistic, inclusive approach. These and other examples like them show how you can make DEI goals concrete, measurable and actionable.
Human Capital: Your Most Important Performance Driver
HR, L&D and Diversity & Inclusion leaders have long touted the importance of the people-driven intangibles that have become the real engine of wealth creation in business. The SEC’s rule gives you the mandate to further quantify the work you’ve been doing to drive value to the company.
It also reinforces how important it is to articulate the business objectives of your diversity and inclusion and other human capital programs and to be able to measure their impact in business terms. It’s a framework that any company, public or private, large or small, should follow to be successful going forward.