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Human Capital Disclosures and DE&I

By T. David Colgren
September 1, 2021

Disclosing employee information is necessary for a more diverse, equitable, and inclusive workplace.

 

Little-known report called the U.S. Equal Employment Opportunity Commission (EEOC) EEO-1 Component 1 needs to be on the radar of management accountants as a possible human capital disclosure framework that may be soon mandated by the U.S. Securities & Exchange Commission (SEC). This report, however, doesn’t include information about LGBTQ+, disabled, or veteran employees. The accounting profession needs to help advocate for the inclusion of these employee categories to enhance overall workplace diversity, equity, and inclusion (DE&I) efforts through disclosures. One way to do this is by implementing a voluntary self-identification program (VSIP).

 

HUMAN CAPITAL DISCLOSURES

 

In the United States, Title VII of the Civil Rights Act of 1964 requires employers to report human capital data to the EEOC. The EEO-1 report requires U.S. companies with more than 100 employees and federal government contractors with fewer than 50 employees to submit race, ethnicity, and gender data across 10 job categories from their organization to the federal government annually.

 

The SEC is considering transparency rules related to climate risk and board and workplace diversity and inclusion matters. SEC Chair Gary Gensler stated in May 2021 that investors increasingly want to understand information about “one of the most critical components of companies, their workforce,” and his staff would propose a new rule on disclosing the workforce or human capital metrics. “This is one of my top priorities and will be an early focus during my tenure at the SEC,” he said. SEC Commissioner Allison Lee went further, saying in June 2021 that the SEC should mandate that companies disclose the EEO-1 report to investors and the public.

 

In anticipation of a possible human capital mandate, a number of companies are voluntarily disclosing their EEO-1 reports to investors and the public to showcase their DE&I efforts. But if companies want to move forward with inclusion of LGBTQ+, disabled, and veteran employees, they’ll need to create a VSIP so that these employees can begin to be counted in company disclosures like the EEO-1 report. Management accountants can play an important role in helping companies create VSIPs and support the disclosure report as they do with financial statements. (Click here for more on how to create a VSIP.)

 

VSIPs

 

A VSIP requires a company to create a “safe” environment for voluntary self-identification and have a process in place to protect employee privacy. This is especially important for LGBTQ+ employees, who currently don’t have workplace protections in 27 U.S. states. A VSIP signals the commitment of a company to connect to these important stakeholders and shows it values them. On a symbolic level, a VSIP shows the company is willing to put LGBTQ+, disabled, and veteran employees on an equal level of significance as it does with racial, gender, and other identities that it collects data on to be a more inclusive employer.

 

Externally, this is a significant filter for LGBTQ+, disabled, and veteran employees looking for employment because it shows that the company values these stakeholder groups. A VSIP also allows a company to track and enhance recruitment, retention, and promotion of diverse employees and to provide benefits to them. It helps create more connected, authentic relationships with external organizations that support LGBTQ+, disabled, and veteran communities and possibly enhance business relationships for more effective external stakeholder engagements.

 

When an LGBTQ+, disabled, or veteran employee self-identifies and chooses to be “out” about their personal identity in the workplace, it allows them to be recognized by other “out” employees for possible career mentorship and support or for themselves to be a mentor to another. VSIPs also allow LGBTQ+, disabled, and veteran employees to have allies within the company.

 

Company allies are 3.3 times more likely to intervene when they witness discrimination or comment on discrimination to support company DE&I efforts. Allies within the company have a direct opportunity to learn more about the communities of the self-identified employees and issues of importance to support workplace inclusion—especially those with intersectionality, such as a person of color who is LGBTQ+, disabled, or a veteran. (See Boston Consulting Group, “A New LGBTQ Workforce Has Arrived—Inclusive Cultures Must Follow.”) They understand external groups more effectively for company sponsorship or support, and those external organizations can connect to employees within the company for relationships.

 

HAPPIER AT WORK

 

Studies have shown that self-identified employees who are “out” at work are also happier about their work, more likely to identify sponsorship, and be promoted and stay in their jobs because they feel more comfortable about themselves, feel connected, and see others like them in positions of leadership. Most importantly, they feel they’re in a safe workplace environment and don’t need to hide their identity or personal life from peers. The report LGBT Diversity: Show Me the Business Case said 30% of LGBTQ+ employees are more productive being “out” in the workplace.

 

On the other hand, lack of a VSIP can take a toll. According to Out Leadership (Visibility Counts: The LGBTQ+ Board Leadership Opportunity), about 58% of LGBTQ+ employees are still in the closet in the U.S. A study conducted by IMA® (Institute of Management Accountants) and CalCPA in 2020 found that almost one in five LGBTQ+ respondents said inequitable and exclusive experiences contributed to their leaving the profession (Diversifying U.S. Accounting Talent: A Critical Imperative to Achieve Transformational Outcomes).

 

The LGBT Diversity report said support of LGBTQ+ employees in the workplace through company efforts like VSIPs could save the U.S. economy about $9 billion annually if organizations were more effective at implementing diversity and inclusion policies that would prevent LGBTQ+ employees from leaving their companies. On the flip side, 50% of non-LGBTQ workers don’t think that there are any LGBTQ+ employees at their workplace (see A Workplace Divided: Understanding the Climate for LGBTQ Workers Nationwide). By creating a VSIP, a company will be able to create more diverse, equitable, and inclusive workplace cultures, which affects the company’s bottom line.

 

Human capital disclosures are meaningful and drive capital market investments as well as promote social change by making important human connections to investors and important stakeholder groups. DE&I efforts support a more diverse workplace, and the benefits have been widely documented. Diversity in the workplace is an organization’s greatest strength. Currently LGBTQ+, disabled, and veteran employees remain invisible and uncounted in workplace diversity disclosures, yet with effective DE&I efforts, beginning with disclosures such as the EEO-1 report and VSIPs, this can quickly change.

 

EEO-1 Mandates

 

  • An EEO-1 report provides a demographic breakdown of the employer’s workforce by race and gender. It must be filed by covered federal contractors that have 50 or more employees; are prime contractors or first-tier subcontractors; and have a contract, subcontract, or purchase order amounting to $50,000 or more; or serve as a depository of government funds in any amount or is a financial institution that is an issuing and paying agent for U.S. savings bonds and notes.

 

  • In 2015, the SEC, Office of the Comptroller of the Currency, Federal Reserve System, Federal Deposit Insurance Corporation, Bureau of Consumer Financial Protection, and National Credit Union Administration jointly issued Final Interagency Policy Statement Establishing Joint Standards for Assessing the Diversity Policies and Practices of Entities Regulated by the Agencies, which states: “…a broader definition [of diversity] may include the categories referenced by the [EEOC] in its Employer Information Report EEO-1 (EEO-1 Report), as well as individuals with disabilities, veterans, and LGBT individuals.” The SEC’s 2020 report Diversity and Inclusion Strategic Plan said: “Diversity is defined broadly and refers to the range of similarities and differences in individual and organizational characteristics that shape our workplace. These include national origin, language, race, color, disability, ethnicity, gender, age, religion, sexual orientation, gender identity, socioeconomic status, veteran status, and family structure.”

 

  • The California Legislature passed SB 973 in 2020 which requires private California employers with more than 100 employees and who are required to file an annual EEO-1 report to submit an annual pay data report to the California Department of Fair Employment and Housing. This is to increase transparency about their pay data; encourage employers to self-assess pay disparities along gendered, racial, and ethnic lines in their workforce; and promote voluntary compliance with equal pay and anti-discrimination laws.

 

  • Illinois enacted SB 1480 that will render employers’ diversity efforts more transparent by making public their EEO-1 reports, which will be published on a state website beginning in early 2023. Illinois employers will also need to begin reviewing and potentially modifying their compensation practices immediately to obtain an equal pay registration certificate, which will be required as of March 24, 2024.

 

  • On July 1, 2020, New York City Comptroller Scott M. Stringer, on behalf of the New York City Employees’ Retirement System, Teachers Retirement System of the City of New York, and New York City Board of Education Retirement System, sent letters to the CEOs of 67 S&P 100 companies calling on them to affirm their commitments to racial equality and diversity and inclusion with concrete action by publicly disclosing their annual EEO-1 report data. “It is not enough to condemn racism in words; systemic change in corporate America will require concrete action and accountability,” Stringer said. “We’re asking companies that issued statements in support of racial justice to walk the walk and publicly disclose the demographics of their employees by race, gender, and ethnicity―including in their leadership and senior management. This information is crucial for shareowners to better understand diversity and workforce practices and identify areas for growth. Companies are stronger and deliver better value when they are inclusive and representative, and the CEOs of these leading companies should take direct action to match their words.”

 

  • Nasdaq filed a proposal with the SEC in December 2021 to adopt new listing rules to increase diversity on the boards of its listed companies amid growing pressure from investors and state laws for greater inclusion of underrepresented groups. Listed companies would also have to disclose consistent, transparent diversity statistics regarding their board of directors. Failure to comply will result in a company being kicked off the exchange. The proposal would require “all companies to provide consistent, comparable data under Rule 5606 by utilizing the existing EEO-1 reporting categories that companies are already familiar with, and by requiring companies to have, or publicly explain why they do not have, at least two directors who are diverse in terms of race, ethnicity, sexual orientation or gender identity under Rule 5605(f)(2).” While the EEO-1 doesn’t currently include sexual orientation or gender identity, “Nasdaq believes it is reasonable and in the public interest to include a reporting category for LGBTQ+ in recognition of the U.S. Supreme Court’s recent affirmation that sexual orientation and gender identity are ‘inextricably’ intertwined with sex and based on studies demonstrating a positive association between board diversity and decision making, company performance and investor protections. Nasdaq also believes that the proposed rule would foster the development of data to conduct meaningful assessments of the association between LGBTQ+ board diversity, company performance and investor protections.” On August 6, 2021, the SEC approved Nasdaq’s proposed rule.

 

  • The Sustainability Accounting Standards Board Preliminary Framework on Human Capital Disclosure (December 2020) suggests: “Given this reporting challenge, a likely path forward is first relying on existing, widely-used measures, such as the U.S. [EEOC] EEO-1 survey, as a foundation for gender and racial and ethnic disclosure in the near-term as research on diversity and inclusion progresses and regulations emerge” and “For regions of the world where greater emphasis is placed on racial and ethnic diversity, it is reasonable for entities to report to existing standardized regulatory requirements, such as the U.S. [EEOC’s] EEO-1 survey.”

 

Companies’ EEO-1 Reports

 

 

VSIP Resources

 

Out Leadership and Ropes & Gray: Visibility Counts Corporate Guidelines for LGBT+ Self-ID

 

Human Rights Campaign Foundation: Self-Identification of LGBTQ Employees

 

University of Massachusetts Amherst—Center for Employment Equity:

“Collecting LGBT+ Data for Diversity: Initiating Self-ID at IBM”

 

US. Department of Labor Voluntary, Self-Identification Form

 

ADP has created a program called SPARK that allows organizations interested in achieving success with their diversity and inclusion initiatives through candidate self-identification.

 

T. David Colgren is CEO of the Colcomgroup, Inc. He is also a member of IMA’s Diversity, Equity, and Inclusion Committee and IMA’s New York Chapter. He can be reached at dcolgren@colcomgroup.com.
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