Document Type

Article

Publication Date

3-2021

Abstract

Corporations cannot exist without workers, yet workers are not part of the formal or informal governance structures established by U.S. corporate law. Commentators and policymakers have bemoaned this state of affairs for decades, to little avail. Since the mid-2010s, however, a concept related to workers, human capital management (HCM), has become an increasingly prominent part of U.S. corporate governance. HCM is premised on the notion that workers can be viewed as "assets" and ought to be managed just as carefully as firms manage physical and capital assets. In practice, HCM is an expansive concept that has been used to refer to workforce training, compensation and retention issues, gender pay equity, diversity and inclusion, health and safety, matters related to corporate culture, employees' ability to participate in stock purchase programs, and various other matters.

The speed with which HCM has emerged and the depth and breadth of its reach have been surprising. While broadly fitting within the rubric of environmental, social, and governance (ESG) factors, HCM has quickly surpassed more traditional ESG topics in terms of prominence and uptake. Boards of directors have started to focus on HCM as part of their monitoring and oversight responsibilities, including by amending committee charters to cover HCM matters. Investors are actively engaging with firm management and boards on questions pertaining to HCM Despite its deregulatory posture at the time, in August 2020 the Securities and Exchange Commission (SEC) adopted a new rule requiring HCM disclosure by public companies. Pending legislation could create HCM disclosure mandates that are considerably more extensive. A variety of private standard-setting organizations have developed detailed frameworks for HCM disclosure, and many firms have started reporting information in accordance with these frameworks. Taken together, these developments represent a powerful and heretofore unprecedented push to incorporate worker-related concerns in corporate governance-a phenomenon I term the "HCM movement." This Article is the first to delineate the HCM movement and analyze its origins, development, impact, and normative desirability. In the aftermath of the lingering economic dislocation caused by the 2008 financial crisis and the still-ongoing public health and economic crises unleashed by the COVID-19 pandemic, there is a tangible willingness by policymakers, firms, investors, and others to reconceive institutional arrangements that have been taken for granted for decades. This Article's timely analysis of the HCM movement seeks to inform some of the attendant public and corporate governance policy choices.

Subject to certain qualifications, the Article views HCM as a broadly positive and much overdue corporate governance development: HCM disclosure contributes to better and more accurate firm valuation by shining a spotlight on a key driver of success in the modern knowledge-based economy; HCM oversight at the board level ensures that boards focus appropriately on the management of what has come to be referred to as a "mission-critical" asset. To realize HCM's full promise, however, all participants in the HCM movement should seek to disambiguate the HCM concept by carefully defining it, breaking it down into its appropriate constitutive elements, and, to the extent possible, focusing the relevant discussions on those specific elements. The weight of the empirical evidence and the appropriate policies for corporate boards, the SEC, and private standard-setters will vary depending on which element is under consideration. In addition, boards should resist isomorphic approaches, particularly ones developed by organizations such as large asset managers that are lacking in regulatory legitimacy, accountability, and HCM expertise. The SEC can and should serve as a nexus for coordination among the various participants in the HCM movement. As a first step, the SEC should revisit the HCM disclosure rulemaking process and reject the unstructured, "principles-based" approach reflected in the August 2020 HCM disclosure rule, which is based on an impoverished understanding of the important concept of materiality. In its final part, the Article considers the limits of HCM and sounds a note of caution with respect to HCM's potential to address problems outside corporate law The rise of the HCM movement has highlighted the need for a governmental human capital development and worker protection agenda; in other words, current socio-economic conditions likely require new measures aimed at the development and protection of human capital, not just its management.

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