LEAD ARTICLE

When Lion Electric went public in the spring of 2021, CEO and Founder Marc Bedard hired a direct report with the unusual title of Chief People Officer as one sign of the importance of human capital management, says Isabelle Adjahi, Vice President, Investor Relations and Sustainable Development. Over the past months, Adjahi has worked with the Chief People Officer to put together an employee questionnaire for gathering diversity data and to draft COVID policies.

Lion’s manufacturing plant remained open throughout the pandemic by implementing a mandatory vaccination rule and testing the entire workforce for COVID each week. These steps were critical, says Adjahi, because “not taking care of employees represents a material risk.” She continues: “At any public company, the people part – just like the capital market part – is essential to success…If you don’t take care of employees, sooner or later it’s going to come and haunt you.” 

No question, world events have elevated the importance of the human capital management (HCM) conversation, which might also be considered the social dimension – or ‘S’ – in ESG. “The whole phenomenon of COVID is really waking people to the importance of human capital in the success and long-term value creation of companies,” says Catherine McCall, Executive Director of the Canadian Coalition for Good Governance.

“Human capital really does affect the bottom line,” she continues. “The pandemic underscored how important employees are to the business. Businesses couldn’t function unless they had these frontline workers, and that was a bit of an eyeopener.”

COVID: A New Lens

At Baytex Energy, providing greater flexibility to work from home was one byproduct of the pandemic that may alter life for employees at this Calgary-based oil and gas company long after the threat of the virus is over.

With more than 400 Canadian employees, including contractors in the field, Brian Ector, Vice President of Capital Markets and head of the IR function, emphasizes that “our people are critically important to us, and that’s become even more apparent in the last couple of years, through the downturn and through the COVID crisis.”

Within the past two years, Baytex began surveying employees more frequently, and found that 97% of employees valued the flexibility of being able to work from home through a program dubbed “Bayflex.” Ector notes that Baytex recently began addressing mental health issues at town halls and in one-on-one conversations within teams.

In addition, Ector says that institutional investors and other stakeholders are keenly interested in human capital management, and he’s therefore communicating more about workplace issues. “In our most recent ESG report,” he says, “there’s now a greater emphasis on the social side of our business – and how we’re looking after our teams.”

One sign of a shift in employee attitudes is The Great Resignation, the popular name for the masses of employees who took the pandemic as an ‘aha moment’ and began questioning assumptions from working remotely to embarking on new careers.

“People are taking stock and realizing that there are other ways to live, and they don’t necessarily have to put up with what they put up with before,” says McCall. “This is creating labour shortages, forcing companies to reassess the value of human capital to their enterprise.”

Adjahi agrees: “If you look at what’s happening in the markets right now, access to skillsets and manpower is a nightmare for companies.”  She argues that “turnover is a metric that markets will soon start closely tracking because [hiring and training new employees] costs so much money.”

Chris Makuch, Vice President at Montreal-based MBC Capital Market Advisors, is also convinced that human capital will “need to be addressed in 2022 and beyond.” He continues: “If a global pandemic happens again, investors want to know how you’re going to manage that situation.”

Even without the pandemic, a strong argument could be made for HCM disclosures because human capital represents the vast majority of intangible value at most companies. According to PwC, up to 85% of a company’s costs are tied up in people and so “stakeholders looking to allocate investment dollars” need to understand this aspect of a company’s strategy and operations.

What to Disclose – and How?

One way that Canadian IROs are wrapping their minds around the wide range of human capital management topics is by watching their U.S. counterparts grapple with mandated HCM disclosures. On August 26, 2020, the SEC amended Regulation S-K to add human capital resources as a disclosure topic under Item 101 in the 10-K. 

The SEC decided against defining “human capital,” or specifying which human capital measures or objectives should be disclosed, other than to say the area is evolving and disclosures should be made for whatever is material to managing the business.

According to law firm Gibson Dunn, HCM disclosures made by S&P 500 companies in the first year following the new SEC mandate ranged from talent development to employee compensation, unionized employee relations, culture initiatives, succession planning and the ratio between full- and part-time employees.

When deciding which HCM areas to disclose, Adjahi suggests researching the norms of where capital is coming from, and investors are based. One reason why she plans to delve into gender and pay is that reporting on the gender pay gap has been mandatory for many U.K. employers since 2017.

“We are based in Quebec, but the capital we need to run our company is based in Europe and the U.S.,” says Adjahi. “If we want access to this pool of capital, at some point we need to talk the language of the holders who run these funds. We can’t tell them, ‘We’re in Canada and in Canada we’re not required to disclose these things.’”

Diversity and Inclusion

“Canadian companies have some of the best Board and executive level diversity of any companies we cover,” says Courteney Keatinge, Senior Director, Environmental, Social & Governance Research, for Glass Lewis. “We’re seeing really good disclosure and it’s on a consistent level for Canadian companies.” Excelling in this area matters, she explains, because diversity and inclusion (D&I) has been such an important focus area for many investors over the past two years.

Pressure to disclose about diversity and inclusion is coming from a number of different directions at once. The BlackNorth Initiative, for instance, asks Canadian CEOs to pledge to a minimum goal of filling 3.5% of executive and Board roles based in Canada with Black leaders by 2025. This hiring goal mimics the prevalence of Black people in Canada; with nearly 1.2 million Black citizens, this group represents 3.5% of the Canadian population overall. Signatories include Air Canada, Bank of Montreal, Bombardier, TELUS, Manulife, Knight Therapeutics, and Scotiabank.

Gibson Dunn found that among human capital topics addressed by S&P 500 companies, “diversity and inclusion” topped the list. That said, while 368 S&P 500 companies may have delved into D&I, a far smaller subset gave specifics. Only 187 companies disclosed quantitative diversity stats in terms of gender, and 158 in terms of race and ethnicity.

At Lion Electric, Adjahi has begun anonymously surveying employees about their backgrounds and identities. “You need to be able to begin to track diversity,” she says, citing an old adage, “the best way to eat an elephant is just one bite at a time.” 

Communicating about HCM

Sylvia Groves, President of Governance Studio, notes that IROs and other executives need to be mindful of the language they use in conversations about human capital management. She recently learned that Indigenous people prefer the term “rights holders” to “shareholders,” with good reason.  She says: “Indigenous people have specific rights that have been provided to them by treaties over the years…and so we’ve had to think about how to adjust our language.”

Considering the preferred terminology for addressing HCM in a proxy circular or on a roadshow can make an enormous difference, Groves maintains. “There should be a conversation,” she says, “between IR and governance and human resources to make sure that discussions about these sometimes tender issues and sore spots are done in a respectful way.”

The nuances matter, and so does providing decision-useful data. Glass Lewis’s Keatinge notes that whenever possible, ESG investors want a clear baseline for comparable disclosures, as well as disclosures that are made consistently over an extended period of time.

“When things get kind of fuzzy – which they can when you’re talking about an issue like human capital management – it is important that companies be intentional in how they’re approaching this,” she says. “Look at where are you now, and where you need to get to. Then ask: How can I get there?”

In the end, Adjahi is convinced that engagement through employee surveys, clear metrics and understandable data are critical for IROs wading into the HCM disclosure arena for the first time.

“We need to go beyond ‘people are our best assets’ and wishful thinking…I am the type of person who believes that we need to rely on facts and tangible data,” she concludes. “What gets measured gets managed, and if you want to improve things at the level of employees, we need to measure and report.”