A few weeks ago, we marked the one-year anniversary of the publication by the Business Roundtable of its statement on the purpose of a corporation, which looked beyond the shareholder primacy model to a broader stakeholder model. In a new essay, “Times They are A-Changin’: When Tech Employees Revolt!” written by Anat Alon-Beck, Alon-Beck considers a more shareholder-centric model of corporate governance. She does in light of the COVID-19 pandemic, which has sparked a more intense and broader focus on human capital issues, including workplace safety, as well as social justice issues. Alon-Beck also considers the activism of tech employees during this period, who have sought to have their employers address publicly their views on various social justice issues. Tech employees, perhaps more than employees in other sectors, tend to receive a significant portion of their overall compensation in equity and, therefore, also are shareholders.
In the essay, Alon-Beck argues that corporate governance scholarship historically has focused on the relationship between directors, managers and shareholders, and not on “human capital,” or the relationship between stakeholders, including employees and communities, and the corporation. As mentioned above, the pandemic has exacerbated the call for corporations to pursue long-term value while taking a broader view of stakeholder interests that takes into account healthcare, political and socioeconomic issues when making business decisions. The author notes that there has been a shift in views, including among institutional investors, to acknowledge the role of talent, human capital and culture, on overall enterprise value. In part, this shift has been driven by initiatives undertaken by the Business Roundtable, the Sustainability Accounting Standards Board, and other similar organizations. However, despite this recognition of a broader concept of stakeholder value, there are no agreed-upon metrics to assess these efforts. Alon-Beck argues that if a public company decides to take stakeholder interests into account, the company should be required to formally change its charter to disclose this. Additionally, like public benefit corporations, which in many jurisdictions are subject to specified reporting requirements, such a public company ought to be subject to additional disclosure and reporting requirements.
In addition, the author argues that the SEC should develop prescriptive line-item requirements. Of course, in the recent amendments to Regulation S-K, about which we previously blogged, the SEC included a principles-based requirement for registrants to discuss human capital issues to the extent material. The SEC failed to adopt any prescriptive requirements. It can be expected that registrants will consider the type of information that they are being asked for by institutional investors and equity research analysts, among others, in deciding the type of information and the format or presentation of such information relating to human capital matters. Some companies already include information of this type in separate standalone sustainability or other reports or on their websites. The essay sets forth a list of factors that should be considered in connection with human capital disclosures, which includes information on: workforce composition, including workforce demographics on hiring, promotion, compensation and incentives; layoffs and furloughs; employment policies and practices broken down by major job categories; information on training, skill building and capabilities; information on healthcare coverage; and best practices to ensure employee health and safety in the workplace. These disclosures would help investors understand how management makes decisions on human capital and culture. In preparing an annual report this year, or a proxy statement early in 2021, all registrants will need to consider these issues in light of the new principles-based disclosure requirement, but, also, in light of the environment and their employee base.
The essay is available here.