Covid-19 puts spotlight on human capital

Aug 03, 2020
Despite initial claims the pandemic and associated economic turmoil would cool interest in ESG issues, the reverse appears to have happened – with a particular focus on social issues such as human capital management as companies tackle employee safety and the future of work

Corporate leaders have in recent years proclaimed their company’s employees as their greatest asset – statements that have sometimes been met with skepticism. So when Covid-19 emerged to threaten the lives of workers, it was time for employers to put not just their money but also their attention and efforts where their mouths were.

Human capital management had been growing in prominence for investors and companies before 2020, but the pandemic thrust it into the spotlight. For companies, there is not just a need to address the immediate health and safety of employees, but also an array of associated issues such as wellness, mental health, ensuring employees have the right tools and policies for working from home, helping employees return to work safely and dealing with layoffs and morale, to name but a few.

Governance teams are helping boards with their oversight of these challenges while reporting about their company’s efforts and engaging with investors. At Hewlett Packard Enterprise (HPE), general counsel Rishi Varma describes a new work environment as employees return to its facilities, not just in terms of a focus on safety but also that ‘employees’ experience has to extend beyond the four walls of the office.

’Thought is being given to what it means to be an HPE employee working from home, including ensuring access to the right technology, Varma says. Beyond where and how people work, boards and management at companies need to consider issues such as diversity, inclusion and talent development, says Derek Windham, vice president and associate general counsel at HPE.

Joanna Daly, vice president of compensation, benefits, corporate health and safety and HR business development at IBM, says the pandemic has acted as a stress test for the company’s human capital management– including moving 95 percent of employees worldwide to working from home within two weeks. This went smoothly, partly because the firm had been investing in tools to enable remote working, she says. Since then, her team has taken the pulse of the workforce through polls asking such questions as ‘How are you doing?’ and ‘Are you getting the support you need?’

Another human capital issue to come to the fore is succession planning, notes Tierney Remick, vice chair and co-leader of Korn Ferry’s board and CEO services team. This includes boards gaining more awareness of key roles beyond the C-suite and plans to fill those posts if people fall ill, she explains. With many companies looking at a shift in business model, boards may also need directors with new skillsets, she adds.

One of the most obvious governance impacts of the pandemic has been the boom in virtual AGMs in an effort to protect shareholders, directors and employees. Last year Broadridge hosted 326 virtual AGMs. By comparison, the company worked on 860 virtual shareholder meetings between January 1 and May 22 this year, with more to come. Cathy Conlon, head of corporate issuer strategy and product management at Broadridge, reports that these meetings have seen an increase in the number of attendees and questions asked by shareholders.

‘In their presentations, almost all our clients are proactively addressing how they are operating during the pandemic, including outlining steps they have taken to protect the health and safety of employees,’ says Jennifer Warren, CEO for issuer services in North America at Computershare. ‘Investors also took the opportunity to ask questions about the impact of the virus on employees, both on their health and long-term implications around employment practices.’

Shareholder scrutiny

Filing deadlines meant the door was closed to Covid-19-related shareholder proposals this year. But governance professionals and investors expect to see measures put forward in the fall and during 2021. Timothy Smith, director of ESG shareowner engagement at Boston Trust Walden, says proposals are more likely to arise if investors or the public perceive a company to have behaved badly, such as by not offering adequate protection to workers or awarding its CEO a large bonus despite having made layoffs.

Peter Reali, senior director of responsible investing at Nuveen, says shareholder voting relating to the pandemic is more likely to focus on punishing directors for poor performance. His firm has also been making a list of companies where it may want to revisit executive compensation plans. Say on pay and equity grants are likely to attract a lot of scrutiny, he adds.

Taking positive steps around human capital may not always go down well with shareholders if they see efforts such as paying good benefits to employees being laid off as a cost, says Anuj Shah, managing director with KKS Advisors. But those efforts build goodwill with clients, improve morale and retention among remaining employees and may make it easier to hire back the same workers when business conditions improve, he adds.

Lots to discuss

In the meantime, human capital management related to the pandemic has been a core aspect of engagement during 2020. Varma describes a shift from investors asking about attracting and retaining top talent to enquiring how the company has been protecting employees and how the board has been involved in those efforts.

Frank Sedlarcik, vice president, assistant general counsel and secretary at IBM, says the company proactively raised its Covid-19 response during engagement, with discussions focusing not only on health and safety but also on the company’s efforts to provide assistance elsewhere, such as its work with the Weather Channel. Meanwhile, at Boston Trust Walden, Smith says firms in general have proven willing to discuss their pandemic responses, including human capital issues, provided questions are not framed as an attack.

‘The crisis has illuminated the need to focus on human capital being a company’s most valuable asset,’ says Aeisha Mastagni, a portfolio manager in the sustainable investment and stewardship strategies unit at CalSTRS, adding that every call with companies has included discussion of the issuer’s response to Covid-19 in terms of employees, customers and communities.

Mastagni's approach to engagement this year has three main themes: companies’ business continuity planning, including around suppliers and communities; the health and wellbeing of employees in the short and long term; and whether the company’s approach aligns with long-term value creation by not allowing for one stakeholder, such as employees, to be impacted disproportionately.

Reali notes the many questions about the future of work, including working from home and deciding how to arrange office space so that it can be used safely. Many companies would admit they don’t have answers to these questions, but Reali wants to see that they are thinking about it – for example, how often is the board getting updates? What is the level of board oversight? Is there a timeline for changes? What future problems is the company preparing for?

Getting the message right

Corporate governance teams have also been preparing disclosures that address human capital-management issues in relation to the coronavirus. As with much ESG reporting, some of the key decisions entail the use of metrics.

‘In terms of Covid-19, I think a lot of work is being done to figure out best practices for reporting,’ says Jonas Kron, senior vice president and director of shareholder advocacy at Trillium Asset Management.

AT&T delayed publication of its ESG report in part to include information related to the pandemic. ‘We want to make sure we’re telling all the stories,’ explains Ben Kruse, director of global ESG reporting and insights at the firm. For example, the report now includes a page on AT&T’s business continuity planning and related governance. It also includes a page on the company’s efforts to help employees by working from home, its philanthropic initiatives and its work for Covid-19 first responders by providing them with their own wireless network. Kruse says this reporting takes more of a narrative approach in part because the situation has been shifting so rapidly that data could be out of date overnight.

Regions Financial Corporation also delayed the release of its ESG report to include details of its pandemic response from a human capital management and community perspective. Hope Mehlman, executive vice president, corporate secretary and chief governance officer, explains that part of that response has been to conduct Gallup polls among employees to get feedback on the company’s handling of the crisis and to gauge how the workforce feels about returning to normal operations. ‘We want to make sure our associates have a voice,’ she says. The company’s reporting includes metrics such as the results of the polls, how many people have been working remotely and how many workers have received extra pay.

Mastagni says CalSTRS is supportive of companies using a narrative approach but would like to see some basic metrics regarding human capital management. According to Reali, Nuveen has not decided what metrics it will be looking for from companies around Covid-19, but that they are likely to include measurements of employee safety and retention. In terms of ESG, the firm prefers to see data showing how far the company is getting toward meeting goals outlined in its narrative.

Guidance on human capital metrics is available. Kron says the Human Capital Management Coalition’s 2017 petition that the SEC require firms to disclose information about their human capital-management policies, practices and performance remains a good ‘touchstone’ for companies, investors and regulators. The petition seeks categories of workforce information such as demographics, stability, composition, skills and capabilities, culture and empowerment, health and safety, productivity, human rights and compensation and incentives.

Kron also notes that Trillium has for two decades been asking companies to release their Employer Information Report EEO-1 tables, which must already be filed with the US Equal Employment Opportunity Commission and include company employment data categorized by race/ethnicity, gender and job category. He adds that this would be particularly important given the racial disparity in terms of the health impacts of Covid-19: ‘Given the conversation we are having about gender and race in this country, it’s the least companies can do.’

Hannah Orowitz, a managing director on Georgeson’s corporate governance advisory team, notes that reporting will be company-specific, but recommends that issuers look at Boston Trust’s Q1 ESG impact report, which spells out what investors are asking for. She also points to an SEC proposal that would add human capital to corporate disclosures, SASB's human capital-management category and the Task Force on Climate-related Financial Disclosures’ four-pillar structure: governance, strategy, risk management and metrics and targets.

Meanwhile, Rodolfo Araujo, senior managing director in the strategic communications segment at FTI Consulting and head of the segment’s corporate governance and activism practice, notes that while the pandemic has made companies aware they need the right policies to ensure they can keep employees safe, it will also expose those that do not. He points to a phrase attributed to Warren Buffett: ‘Only when the tide goes out do you discover who’s been swimming naked.’

 

This article originally appeared in the Summer 2020 issue of Corporate Secretary

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