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Q&A with CalPERs on its Strong Support for Human Capital Disclosures by Public Companies

“We believe there is a growing recognition among the business community on the importance of Human Capital Management (HCM), as shareowners are increasingly incorporating analyses of HCM into their overall evaluation of a company’s ability to deliver long-term sustainable value; however, company disclosures remain lacking.” 
 
In a recent feature, “Momentum Grows for Human Capital and Employee Engagement Disclosures by Public Companies,” ESM reported that CalPERS, the nation’s largest public pension fund, filed a formal request with the Securities & Exchange Commission that takes a major stand concerning the disclosure of human capital investments. In response to a request for comments, the CalPERs letter advocated, among other aspects of ESG (Environmental, Social and Governance), for the disclosure by public companies of investments and practices in a broad range of human capital initiatives. ESM asked CalPERS to explain why it filed this letter with the SEC and to outline how much importance it places in the issue. 
 
Q: What prompted CalPERS to write the letter to the Securities & Exchange Commission? How important is this issue to CalPERS? 
 
A: CalPERS is the largest public pension fund in the United States. We manage approximately $300 billion in global assets on behalf of more than 1.8 million public employees, retirees and beneficiaries. CalPERS recently adopted a five-year strategic plan which outlines how we will approach sustainability issues that are essential to how we vote our interests and allocate capital to achieve sustainable returns. The new strategic plan will guide our (Environment, Social and Governance) efforts in a comprehensive and integrated way across all asset classes and includes ESG strategic initiatives around:
Of particular interest to our efforts around data and corporate reporting is a 40-page letter that we submitted in response to the United States Securities and Exchange Commission (SEC) Concept Release regarding business and financial disclosure required by Regulation S-K. These disclosure requirements serve as the foundation for the business and financial disclosure in registrants’ periodic reports 1.  The intent of the Concept Release was to assess whether the disclosures provided under Regulation S-K continue to provide the information investors need to make informed investment and voting decisions or whether any rules have become outdated or unnecessary. 
 
The CalPERS Investment Office is guided by 10 Investment Beliefs 2 intended to provide the basis for the strategic management of our investment portfolio. Investment Belief 4 states: “Long-term value creation requires effective management of three forms of capital: financial, physical and human.” Given our size and long-term liabilities, we are strong advocates of reform that enhances the information provided to us in order to make informed decisions as to how we vote our interests regarding boards of directors, auditors and shareowner proposals and allocate capital to achieve sustainable returns. 
 
Human Capital Management (HCM) encompasses a broad range of corporate practices that contribute to long-term, sustainable returns. To assess HCM risk and opportunity, investors need sufficient, meaningful disclosures that provide an understanding as to how HCM fits into a company’s overall strategy to create long-term value. As highlighted in our letter, HCM disclosure contributes to the efficiency of the market by helping investors effectively assess the size, scale and viability of a registrant’s operations and trends. Furthermore, HCM disclosures help support an investor’s ability to promote strong governance, transparency and corporate board accountability around the effective management of human capital. Given the integral role that corporate financial reporting plays within capital markets, we strongly support robust corporate reporting of ESG data including HCM disclosure in periodic filings. Accordingly, CalPERS deemed this issue important enough to warrant comment.
 
Q: Does CalPERS believe this subject is receiving sufficient interest from the business community?
 
A: As stated in our response to the Concept Release, current financial reporting rules require companies to disclose very little information about how human capital is measured or managed. We believe there is a growing recognition among the business community on the importance of HCM, as shareowners are increasingly incorporating analyses of HCM into their overall evaluation of a company’s ability to deliver long-term sustainable value; however, company disclosures remain lacking.
 
Q: What would be the next step from the SEC? What is the process for seeing to it that regulations would be changed per the recommendations of the letter? 
 
A: After compiling and reviewing the responses from the Regulation S-K Concept Release, the SEC should exercise its rulemaking authority to establish a market standard for comprehensive disclosure of HCM metrics. CalPERS will make use of available opportunities to engage with the SEC regarding our need for additional disclosures. 
 
Q: Is CalPERS aware of efforts by other pension funds to promote these same kinds of ideas?  
 
A: CalPERS actively works with other pension funds, including the Human Capital Management (HCM) Coalition. HCM Coalition was initially formed following the horrific Bangladesh factory disasters that occurred in 2012 and 2013. 
 
Q: Has CalPERS drawn up its own information requests from public companies, given that it may take years for the SEC to act?
 
A: In March 2015, CalPERS petitioned the SEC to strengthen disclosure of corporate board diversity. Alongside eight other pension funds, a joint petition was sent to the SEC urging the adoption of a rule requiring corporate disclosure of board nominees’ gender, racial and ethnic diversity, as well as mix of skills, experiences and attributes. Additionally, CalPERS recently submitted a response to the H.R. 4718 Gender Diversity bill sponsored by Representative Carolyn Maloney asking that the Representative consider expanding the scope of the bill to go beyond merely gender diversity to include skill sets, age, nationality, race, sexual orientation, gender identity and historically under-represented groups. CalPERS has not focused on drawing up information requests from individual public companies that have been outside of its work with HCM Coalition that normally focuses on specific issues at particular companies.
 
Q: Is CalPERS aware that the International Standardization Organization has begun the process of creating standards on human capital reporting, as well as employee engagement practices? Would it support those efforts?
 
A: It was recently brought to our attention that the International Standardization Organization has begun the process of creating standards on human capital reporting and employee engagement practices. We have not adopted a position on supporting the ISO.

1 See, SEC Concept Release No. 33-10064; 34-77599; File No. S7-06-16
2 See, CalPERS Investment Beliefs

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