June 22, 2022
Transparency is critical in helping companies communicate their financial fitness, organizational priorities and areas of progress to investors, customers, employees and other stakeholders.
Together, various disclosures – in annual reports, Form 10-Ks, ESG reports and other communications – provide a transparent view into a company’s operations and help shine a light on its achievements, goals and areas of focus. One of the biggest trends in corporate reporting is a greater focus on human capital management (HCM), especially diversity, equity & inclusion (DEI), as a result of regulatory and stakeholder pressure as well as voluntary efforts. From a best practices standpoint, the scope of DEI should be broad, encompassing race, ethnicity, religion, gender, national origin, age, disability, veteran status, pregnancy, genetic information, citizenship status, sexual orientation, gender identity or expression, or any other differences in identity.
In a January 2022 article titled “Key Considerations for the 2022 Annual Reporting and Proxy Season Part I: Form 10-K Considerations,” international law firm White & Case highlights how the emphasis on DEI reporting is changing:
- “A review of the 2021 Form 10-Ks of Fortune 50 companies found that over half of the Form 10-Ks included quantitative human capital metrics, such as information on (i) the percentage of employees who are women or people of color, (ii) corporate investments to improve gender and ethnic/racial diversity in their workforce, and (iii) employee turnover and retention rates.”
- “Similarly, a 2021 survey of HCM disclosures made in the Form 10-Ks of S&P 500 companies found the following were common new human capital metrics disclosed: … diversity statistics and commitments to diversity and inclusion; … core values (e.g., learning, development, inclusion, diversity, teamwork); [and] social impact and social justice initiatives.”
It is also worth noting that there is a business case for having a strong commitment to DEI, especially in the leadership ranks. According to “Diversity Wins,” a landmark 2019 study of 1,000 companies in 15 countries conducted by McKinsey & Company, companies that embrace DEI within their executive teams generally outperform those that do not.
Highlights from the report include:
- Companies in the top quartile for gender diversity on executive teams were 25% more likely to have above-average profitability than companies in the fourth quartile – compared with 21% in 2017 and 15% in 2014.
- The greater the gender diversity within a company’s executive team, the higher the likelihood of outperformance. Companies with more than 30% women executives were more likely to outperform companies where this percentage ranged from 10% to 30%, with an even bigger difference with companies below 10% or with no women executives at all.
- Companies in the top quartile for ethnic and cultural diversity on executive teams saw similar success to those with greater gender diversity. In 2019, top-quartile companies outperformed those in the fourth quartile by 36% in profitability, slightly up from 33% in 2017 and 35% in 2014.
Perhaps it shouldn’t be a surprise that companies with a greater DEI focus are often better suited for solving problems, filling talent gaps, innovating across the organization and being prepared for leadership succession planning when the need arises. Steps such as instituting diversity-focused hiring practices, assessing employee attitudes on company policy and behavior through regular surveys, empowering internal Business Resource Groups, and prioritizing training and mentorship programs to prepare the next generation of diverse leaders are just a few ways companies can help further their DEI efforts.
Demonstrating a commitment to DEI is becoming a business imperative. For companies that do it well and know how to report on their progress and goals, this is an opportunity to distinguish their organizations as employers of choice committed to personal, professional and business growth.
If you’d like to talk about DEI disclosure and impact, email me.