Investors and the SEC Are Requiring Workplace Culture Audits and Human Capital Disclosures: Everything You Need to Know

What are Culture Audits and Human Capital Disclosures, What Do You Need to Know, and How Do You Prepare Them?

Typically companies pour 85% of their capital into their people, yet most investors don’t know how the companies treat their employees. That’s about to change. Get ready for culture audits and human capital disclosures.

Whether it’s pre-IPO venture capitalists or post-IPO shareholders, investors want culture audits and culture disclosures (or human capital disclosures) to complement the financial disclosures they already receive. Unlike sales or cash flow, organizational culture typically isn’t tracked or measured beyond basic annual employee engagement surveys. Corporate culture is indeed a critical contributor to business success ensuring its successful operation.

Earnings updates are now required to include Human Capital Disclosures or Culture Disclosures

In this post we outline the steps needed to conduct cultural audits, the role outside consultants should play, and where to start when creating a culture disclosures for investors and shareholders.

What are cultural audits?

An organizational culture audit is an assessment if an organization is setting up its people to reach and sustain their potential. The audit looks at the systems, behaviors and processes that foster the conditions and environment in which employees work. In other words, the audit strives to understand the company culture to gauge if there’s a poor workplace culture or not.

What are cultural audits used for?

A culture audit assists you in estimating where your organization is at and assessing whether workplace culture supports your overall business goals. It will help you measure the effectiveness of your work environment, employee engagement and internal communications.

Why are cultural audits important?

Audits provide independent review and analysis to 3rd party stakeholders. Everyone has heard of a financial audit. The time has come to place as much emphasis on the working environment, workplace procedures, and how leaders treat team members. The reason is simple: a company’s culture has a big impact on its bottom line, its business goals, and sustaining growth.

Why do investors want culture disclosures?

There is near universal agreement — across the investment community, Boards of Directors, CEOs, CFOs, management, governments, Human Resources and workers themselves — that the people inside an organization have a massive impact on organizational success.

Research provides evidence of the effects of human capital has on financial performance. Such research is amplified by CEOs of leading global organizations who often echo that people are their most valuable assets and source of competitive advantage.

Just one unexpected outcome is that future share price returns are more correlated to Human Capital ROI than they are with a company’s return on equity. Furthermore, we found that firms with different levels of staff costs and Returns on Equity have a very different Human Capital Return on Investment”. -Deutsche Bank research report “Valuing Human Capital”, dated February 13, 2019

Poor workplace culture is proven to lead to stagnant growth, or worse: massive turnover and even public humiliation — which then makes recruiting and hiring the best talent nearly impossible. Investors understand that corporate culture largely shapes the potential of an organization.

The future of work is as much about setting employees up for sustainable performance and success, as it is about technology.

Investors are starting to demand a culture disclosure in the data room. Just as an investor inspects a financial model to understand the financial capital operation, astute investors want to inspect the human capital operation. These investors understand that the majority of their investment will be applied to the human capital costs.

Investors therefore want to perform diligence around the organizational objectives and intentionality a company maintains in creating an environment for sustainable high performance for the human capital.

Is an organizational culture audit mandatory?

Organizational culture audits will soon be mandatory for some companies. The SEC is going to make culture audits mandatory for a publicly traded company. The Chair of the SEC hinted in a speech that investors need more transparency around metrics such as turnover, skills training, diversity demographics, and more:

Further, investors have said that they want to better understand one of the most critical assets of a company: its people. To that end, I’ve asked staff to propose recommendations for the Commission’s consideration on human capital disclosure. This builds on past agency work and could include a number of metrics, such as workforce turnover, skills and development training, compensation, benefits, workforce demographics including diversity, and health and safety. Disclosure helps companies raise money. It helps the efficient allocation of capital across the market. And it helps investors place their money in the companies that fit their investing needs – SEC Chair Gary Gensler, June 23, 2021

Human Capital Disclosure, or the reporting of a culture audit, is going to become required diligence to provide to shareholders.

Meanwhile, for a private company and growing startup, leaders looking to raise money should be aware VCs (venture capitalists) are hinting they want better visibility into a company’s working environment. These investors also say they want to understand if a portfolio company is ready, from a human capital support perspective, to IPO or be acquired.

What Is ISO 30414?

The SEC isn’t the first to contemplate the importance of corporate culture external reporting. ISO (the International Organization for Standardization) is a worldwide federation of national standards bodies (ISO member bodies) across roughly 150 countries. Technical Barriers to Trade (TBT) principles are the standards that the World Trade Organization (WTO) basis the ISO standards. The ISO Technical Committee ISO/TC 260 (Human Resource Management) prepared ISO#30414 – Guidelines for Human Capital Reporting for Internal and External Stakeholders.

ISO 30414 is the world’s first global standard focused specifically on how to measure and report human capital externally for both small and large organization disclosure.

Organizational Culture Audit Process – Getting Started

Before hiring an external consultant to run an official culture audit, run a series of internal audits to check for cultural gaps. Every corporate culture has blind spots. Use an internal audit to reveal as many culture blind spots as possible (using a culture survey like the OrgVitals 20 for a fast company culture assessment).

You can follow-up with the internal audit data to run focus groups and interview business leaders. This pairs quantitative data with qualitative.

Companies with high performing environments are intentional about their workplace culture and run such audits on a regular basis, often quarterly and paired with ongoing employee pulse surveys.

Organizational Culture Audit Process – Tracking Workplace Culture Improvements

Once internal auditors have revealed the areas to focus workplace culture improvements, your organization will want to track the performance of these improvements. There are great systems that make running internal audits easy, like OrgVitals.

If the internal culture audit reveals a large gap between what’s desired and the realities of the organization’s culture, it might be time to hire an organizational development consultant, a leadership development consultant, or a Diversity, Equity and Inclusion (DEI) consultant.

Organizational Culture Audit Process – Finding an External Culture Auditor

Whether your organization is looking to become compliant with ISO 30414, or becoming a B-Corp, or are following the demands of stakeholders who request a culture disclosure — finding the right external person to run the company culture audit is critical.

There are emerging resources that list external workplace culture auditors. Reach out to OrgVitals for free introductions to our partners around the world certified in running our culture audit.

What do cultural audits include?

Corporate culture must be assessed across a vast number of areas. When you consider the different types of conditions across an environment, from physical offices to the software used to communicate, you can understand there’s a lot of systems, processes and behaviors to audit.

Here are some core areas for a culture audit to investigate:

  • recruitment, mobility, and employee retention rates (workforce turnover)
  • equitable compensation and benefits
  • workforce demographics including diversity
  • employee health, safety and wellbeing
  • compliance and ethics
  • investment in training and developing employee skills and capabilities
  • value-based conduct and leadership behavior
  • leadership communication of the company’s vision and core values
  • systems and processes for providing feedback, guidance and recognition
  • productivity and the sustainable nature of performance
  • unity, across areas like corporate alignment and employee connectedness
  • inclusion initiatives with measures of emotional safety
  • succession planning
  • workforce availability and workload capacity

What should a cultural audit reveal?

“What will we learn from a cultural audit?” is a common question. Auditing should identify how the company conditions and environment impact the organization’s sustainable growth. Most importantly, the audit should reveal blindspots in the organization that need attention and cultivation.

Those areas might include:

  • organizational performance or low productivity issues impacted by the conditions or environment
  • retention or high turnover rates
  • engagement or low morale
  • if any group feels excluded & lacks belonging
  • achievement toward diversity goals
  • equitable opportunity across the employee population
  • sense of vertical and horizontal trust
  • customer satisfaction, as it pertains to industries where employee interface with customers
  • organization’s culture reputation, as it pertains to hiring advantage
  • leadership team and senior management positive or negative influence on the culture
  • operational efficiency and effectiveness
  • employee connectedness vs isolation with remote work

Culture Audit Template & Samples

OrgVitals is a simple solution to get an ideal culture audit. They have developed their own proprietary culture audit for private investment groups based on empirical research data that complies with ISO 30414. OrgVitals demystifies culture through their culture intelligence platform. Through their product and services, OrgVitals enables their customers to develop a culture strategy.

OrgVitals also has relationships with culture auditors and culture consultants that they introduce to orgs all over the world.

3 Tips to Assess and Audit Your Corporate Culture

Culture plays a vital role in the health of any organization, but may feel invisible to those in it. It’s why cultural audits are such a good tool. No matter whether your corporate culture needs minor or major revamp, it’s never too late to start making changes, especially if you’re a company needing to eventually provide a culture disclosure to an investor.

Here are 3 tips when you develop your own culture audit:

  1. If this is your first organization culture audit, then don’t navigate it alone. Human beings are complicated creatures. How they collaborate inside a corporate culture is exponentially harder to understand. The best cultural audit systems map the culture data across a network map of employees to reveal insights about where intervention is needed to improve areas of the culture. Yet even the best systems to capture and analyze the data from cultural audits needs someone experienced to properly prepare the audit and interpret the audit results.
  2. Make sure you understand culture management to prepare a fully encompassing cultural audit. Think about the stages in planning, implementing and reviewing the audit. You might want to work backwards from the culture disclosure or the human capital disclosure: what needs to be assessed from the needs of investors?
  3. Be ready to analyze the data beyond pretty visualizations. Think about how you will analyze the results to understand the data correlations and drivers behind the root cause of issues within the org’s culture. When employees respond to a survey and the employee feedback isn’t used to improve anything, the survey actually did more harm than good. The best aspect of a great cultural audit is being able to tell a story with the data. Usually that means using the data to drive culture change and influence the executive team to invest in the corporate culture. For an audit that leads to an investor disclosure, the data story needs report specifics about how the human capital is set to efficiently scale along with the growth of the business.

What are the staff reactions to the cultural audits? 3 Things to avoid with your culture survey

If expectations are not communicated well by leadership before the corporate culture audit begins, then the audit may not get valid data.

  1. Employees have survey fatigue. In many orgs, employees are burned out providing feedback only to never see any changes implemented. In other words, employees don’t participate because they feel leadership never listens.
  2. Employees don’t trust what’s going to happen to their feedback. Retribution is the fear, meaning employees don’t trust they can speak truth to power even when the survey is marked anonymous.
  3. Employees don’t participate because they’re busy and a culture audit doesn’t seem that important. This is a case of expectations not being set by leadership about how important a cultural audit is to the business.

There are several options to avoid these three pitfalls, beyond setting expectations.

For starters, some culture audits offer an alternative to the same format as company-wide employee surveys. Many audits feel more like binary checklists. These audits lists statements that are mostly factual that a single person or small group can agree or disagree with, like “Hiring managers have the autonomy to make the best hire possible and are supported in recruiting a diverse and equitable talent pool.”

Another thing the auditor should do is provide feedback from the culture audit results that chart progress. Many consultants run follow-up interviews and focus groups to reveal the results and then engage the staff on specifics about how to improve the culture.

Employees care about their culture, and the more team members are sought after for advice on how to improve things, then the more ownership they will feel ownership for the culture. This simple act provides an immediate boost in employee engagement.

Finally, make sure leadership commits work time for employees to respond to culture surveys. In other words, staff needs to be on the clock when they provide feedback to an audit. Their feedback is critical and to make sure the process is represented as important, leadership needs to communicate it as such, and treat the rollout as something that’s high priority.

What evidence do you report in Human Capital Disclosures?

There’s no specific framework (yet) for Human Capital Disclosures. The SEC specifically wants to keep Human Capital Disclosures open so that everyone can feel open to reporting about their culture in ways that are most meaningful to the individual business. That said, here are some resources to help understand criteria that a human capital disclosure or culture disclosure should include:

  1. OrgVitals Culture Audits and Human Capital Disclosures, for companies that are either private (like startups or scale-ups that need to report to investors, VCs, and boards) or public.
  2. SASB Standards, identify the subset of environmental, social, and governance issues most relevant to financial performance in each of 77 industries. These ESG-type standards are designed to help companies disclose financially-material sustainability information to investors.
  3. ISO 30414, a paper (that costs money) that provides guidelines for internal and external human capital reporting (HCR).
  4. CPA Journal has a breakdown of what public companies are sharing so far.
Are you a culture consultant? OrgVitals is an end-to-end assessment solution for your clients. Learn more!