The Human Capital Management Movement in US Corporate Law: A Comparative Perspective


George S Georgiev
Associate Professor of Law, Emory University


Time to read

7 Minutes

One distinctive and seemingly immutable feature of US corporate governance has long been its narrow focus on the interaction among three constituencies—managers, directors, and shareholders—to the exclusion of other stakeholders, most notably employees. This state of affairs has puzzled international observers given labor’s greater visibility in other corporate governance systems. In the United States, it has fueled academic debates and numerous reform proposals, all ultimately unsuccessful, for at least half a century.

Labor’s visibility and status in US corporate governance is changing, however, owing to a new and surprising mechanism: the concept of human capital management (HCM). Consider the following developments:

  • Since 2017, large institutional investors, including BlackRock, have consistently called for greater attention to HCM in their engagement with public companies.
  • In 2020, the US Securities and Exchange Commission (SEC) adopted a new rule requiring HCM disclosure, after overwhelming support for such disclosure from mainstream shareholder constituencies and the SEC’s Investor Advisory Committee.
  • A wide range of organizations and standard setters, both in the United States and globally, have been working on frameworks for HCM reporting.
  • Legislators have put forward a series of bills proposing to require extensive HCM disclosure. Even without a congressional mandate, the SEC is poised to expand its 2020 disclosure rule considerably during the first half of 2022.
  • Boards increasingly treat HCM as a ‘mission-critical’ area of oversight and are changing their practices at the urging of legal advisers, big-four accounting firms, and executive compensation consultants, among others.
  • Board compensation committees have been expanding their remit beyond executive compensation to consider rank-and-file employee compensation and other HCM matters; the same board committees have also started to incorporate HCM metrics in executive compensation plans, which traditionally link incentive-based compensation solely to financial metrics.

Shareholder engagement agendas, board-level decisionmaking, and the SEC disclosure regime: these are some of the key levers of US corporate governance. HCM has affected each of them in short order, giving rise to what I call an ‘HCM movement’: a broad set of initiatives in support of investor-facing HCM disclosure and board-level oversight of HCM matters. I analyzed these developments, as well as their historical antecedents and international counterpoints, in a recent article titled The Human Capital Management Movement in US Corporate Law.

What is Human Capital Management: The ‘S’ in ‘ESG’

Human capital management starts from the premise that workers can be viewed as ‘assets’  that are crucial to firm performance and that ought to be managed just as carefully as firms manage physical and financial assets. In practice, HCM encompasses various employee-related matters, including workforce training, compensation, turnover and retention, health and safety, gender pay equity, diversity and inclusion, corporate culture, and others.

One way to think of HCM is as the most significant component of the ‘S’ in the now-ubiquitous ‘ESG’ acronym. Notably, in the United States HCM is surpassing more traditional ESG topics, such as environmental and climate matters, in terms of prominence and actual uptake. Academic analyses of ESG’s impact on US corporate law, however, have for the most part overlooked the fact that HCM is a core aspect of ESG.

Normative Analysis and Recommendations

Given that HCM is here to stay, what should we make of it? Subject to certain qualifications, I argue that HCM is a broadly positive and much-overdue development in US corporate governance. HCM disclosure contributes to more accurate firm valuation by shining a spotlight on a key driver of success in the modern knowledge-based economy. In addition, HCM oversight at the board level ensures that firms 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, participants in the HCM movement should seek to disambiguate the HCM concept by breaking it down into its constitutive elements, and, to the extent possible, focus the relevant discussions on those specific elements. In addition, boards should resist the tendency to blindly follow isomorphic, one-size-fits-all 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 an initial step, the SEC should revisit the HCM disclosure rulemaking process and revise the unstructured, ‘principles-based’ HCM disclosure rule from 2020, which is based on an impoverished understanding of the important concept of materiality.

There are also natural limits to what corporate law reform through HCM can achieve, which both stakeholders and policymakers need to recognize. In the aggregate, the rapid rise and idiosyncratic characteristics of the HCM movement showcase the need for a broader governmental human capital agenda (outside of corporate law) aimed at the active development and protection of human capital, not just its management.

HCM’s Place on the Shareholder-Stakeholder Primacy Continuum

One important and counterintuitive feature of the US HCM movement, at least in its current iteration, is that it fits with the traditional shareholder primacy approach to corporate governance. While it does focus on a prime non-shareholder constituency (employees), HCM is about the optimal management of that constituency for the purpose of improving firms’ financial performance for the benefit of shareholders. In other words, employees are, at best, only secondary beneficiaries of current HCM initiatives. Moreover, HCM does not give employees an active role in corporate governance through board representation, information, or litigation rights akin to those currently enjoyed by shareholders (and only shareholders). In this regard, the HCM movement differs markedly from past labor-focused reform agendas, some of which advocated for giving employees active governance rights, and all of which viewed employees as the primary beneficiaries of the proposed reforms. These features also set the HCM movement apart from parallel developments in the United Kingdom (and elsewhere), which are discussed in the article and described briefly below.

Recent Labor-Focused Reforms in UK Corporate Governance

In the United Kingdom, corporate governance reforms adopted in 2018 included several provisions focused on employees. Somewhat paradoxically, these reforms moved the UK away from the US model and closer to the European model at the same time as the UK was preparing to separate from the European Union. Three provisions stand out:

  • The UK Corporate Governance Code now requires board engagement with the workforce and identifies the appointment of an employee-selected director as one acceptable means of fulfilling this mandate. Other possible engagement mechanisms include the establishment of a formal workforce advisory panel, designating a non-executive director focused on the workforce, or ‘alternative arrangements’ determined by the company. The Corporate Governance Code operates on a comply-or-explain basis. The accompanying guidance document notes that ‘[a] director appointed from the workforce will bring a workforce view to the boardroom [...] [but] their role is not solely to represent the views of the workforce.’
  • Pursuant to The Companies (Miscellaneous Reporting) Regulations 2018, any company with more than 250 UK-based employees now needs to include in its statutorily-mandated directors’ report a statement ‘describing the action that has been taken during the financial year to introduce, maintain or develop arrangements aimed at (i) providing employees systematically with information on matters of concern to them as employees, (ii) consulting employees or their representatives on a regular basis so that the views of employees can be taken into account in making decisions which are likely to affect their interests, (iii) encouraging the involvement of employees in the company’s performance through an employees’ share scheme or by some other means, and (iv) achieving a common awareness on the part of all employees of the financial and economic factors affecting the performance of the company.’
  • Also pursuant to The Companies (Miscellaneous Reporting) Regulations 2018, large UK companies are required to include in their statutorily-mandated strategic report a so-called ‘Section 172(1) statement’ explaining how directors have considered the interests of stakeholders in decisionmaking. Like the preceding provision, this is only a disclosure requirement, but one that can be expected to affect corporate policy. The regulatory guidance provided in respect of this provision states that companies ‘will probably want to include’ information about ‘the issues, factors and stakeholders the directors consider relevant’ in complying with their obligation to have due regard for stakeholder interests, as well as ‘information on the effect of that regard on the company’s decisions and strategies.’ Taken seriously, this provision pries open the black box of director decisionmaking and requires directors to explain how they weigh shareholder interests against stakeholder interests.

How do the US and UK Developments Compare?

While both the US HCM movement and the UK legislative reforms described above focus on employees, the UK reforms reflect a departure—tentative though it may be—from a strict shareholder primacy model. Moreover, the new UK provisions apply widely to both listed (ie public) and unlisted (ie private) companies, whereas the US HCM movement covers only public companies.

On the whole, the ‘Anglo-American’ corporation, often deemed a conceptually consistent entity found on both sides of the Atlantic, today looks less monolithic due to the novel signs of divergence in UK and US law’s respective approaches to labor rights and labor participation in corporate governance. The comparative balance may still evolve: Whereas UK law on the books now goes to greater lengths to incorporate worker voices, there is considerably more momentum behind the US HCM movement and it encompasses a broader base of participants.

The Future of the HCM Movement

The US HCM movement shows no signs of abating. The SEC is expected to propose expanded HCM disclosure requirements during the first half of 2022. HCM was a key area of focus in investor and other stakeholder responses to the SEC’s 2021 request for public input on climate and other ESG disclosure. Alongside climate change, worker-related issues have been a mainstay in BlackRock/Larry Fink’s annual letters to CEOs since 2017, and the 2022 letter featured HCM more prominently than ever. Investor proposals on HCM matters have increased considerably in recent years, with the Conference Board observing that ‘HCM proposals helped fuel the record level of support for environmental and social (E&S) shareholder proposals in the 2021 proxy season.’ New SEC guidance is only likely to solidify this trend starting with the 2022 proxy season: The SEC has said that it will now allow shareholder proposals on ‘issues of broad social or ethical concern’ regardless of their economic effects.

In sum, the rise of the HCM movement—the broad set of initiatives in support of investor-facing HCM disclosure and board-level oversight of HCM matters—is a singular development in the history of US corporate governance. Viewed in a comparative light, it has the potential to make the US system less of an outlier among advanced market economies. After several decades of successive and ultimately unsuccessful attempts to increase the prominence of workers in US corporate governance, firms’ employees are finally gaining visibility in corporate disclosure reports and attention in corporate boardrooms. Whether or not this will translate into tangible improvement in working conditions, workforce training, compensation, organizational culture, and other changes that redound to the benefit of employees remains to be seen.

George S. Georgiev is an Associate Professor of Law at Emory University. This post is based on his recent article The Human Capital Management Movement in US Corporate Law published in the Tulane Law Review, and a comment letter written and submitted in response to the SEC’s 2021 request for public input on ESG disclosure.


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