CAP report: To promote long-termism in the corporate world, the Securities and Exchange Commission should require firms to disclose investments in human capital, which are currently classified in the same category as general overhead in a public company’s financial filings.
Washington, D.C. — Greater transparency around investments in human capital at public companies would help move public firms away from short-term thinking and promote productivity-enhancing long-term investments, a new report from the Center for American Progress says. The Securities and Exchange Commission, or SEC, should require firms to disclose investments in human capital—that is, worker training. Better disclosure of such investments would be a net positive for investors, workers, and companies alike, the report argues. While investments in research and development are clearly designated on the financial statement such firms submit to the SEC, investments in human capital are currently classified as “selling, general, and administrative” expenses—a designation also assigned to items such as company lunches and paper clips. Because financial markets are unable to distinguish investments that raise productivity, such as worker training, from other less productive expenditures, the current classification of human capital investments as general overhead may be actively discouraging firms from making these investments.
“Short-term thinking and Wall Street pressures are discouraging public companies from investing in human capital. Unfortunately, the current financial reporting framework fails to encourage such investments and, due to a lack of transparency, may even dampen them,” said Angela Hanks, Associate Director for Workforce Development Policy at CAP. “Better disclosure of human capital investments would help protect and empower long-term investors with the information they need and encourage companies to make long-term investments that are, in the end, good for everyone’s bottom line.”
Recent evidence suggests that employer-sponsored training has been in decline, with one study finding that over the past decade, the share of employees who received training fell 28 percent—with much of this decrease resulting from a declining share of large-firm employees receiving training. In addition to facing short-termist market pressure, CAP’s report notes that firms may be discouraged from investing in human capital due to what economists call the multitask problem: When people have an incentive to perform easily measurable tasks, such as increasing reported profits, they will focus on those tasks at the expense of those that are more difficult to measure, such as investing in the skills of their workforce. This multitask or measurement problem may create a disincentive for firms to make human capital investments, even when those investments are critical to a firm’s long-term performance.
Requiring companies to distinguish investments in training from general overhead by reporting those investments separately would be net positive for investors, firms, and workers, CAP’s report notes. The report says these requirements can be directly mandated by the SEC or accomplished through changes to the financial reporting standards set by the Financial Accounting Standards Board, which is overseen by the SEC. Improved transparency would allow firms to demonstrate to investors that they are making productivity-enhancing investments in their workers and would supply investors with material information upon which to base investment decisions—and to the extent that disclosure would lead firms to increase human capital investment, it should help raise workers’ wages and benefit the economy overall. The report also recommends a government-led survey to supplement these disclosures and identify broader trends in human capital spending.
Click here to read “Workers or Waste? How Companies Disclose—or Do Not Disclose—Human Capital Investments and What to Do About It” by Angela Hanks, Ethan Gurwitz, Brendan V. Duke, and Andy Green.
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For more information or to speak with an expert, contact Allison Preiss at [email protected] or 202.478.6331.
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