Workforce Data Insight Pitch

employees from full-time to part-time could indicate a downward shift in operations, and the volume of independent contractors provides insight into management's assessment of the stability of current operations. Research shows that "[a]bnormal reductions in the number of employees" are useful in predicting financial misstatements while overall reductions in the number of employees may be an indicator of declining demand for a firm's products.38 Failure to distinguish between the type of employee could obscure these trends-and may be misleading regarding the size and scale of operations. The lack of visibility also hampers investors' ability to conduct ratio analysis with respect to human capital (e.g., "ROIT", return on invested talent). 39 Given the inconsistent disclosures and the relevance of this information for valuation, it is imperative that the SEC provide issuers with updated guidance along the lines we recommend. 40 Turnover or comparable workforce stability metrics. 41 Despite the limited data available, studies provide consistent evidence that turnover is meaningfully related to financial performance. Better employee retention is associated with higher stock returns, 4¹ whereas higher turnover is associated with lower measures of profitability (e.g., return on assets and sales growth) 42 and lower product reliability. 43 On average, it may cost firms from one half to up to over two times an employee's annual salary to replace them; Gallup 38 Patricia M. Dechow, Weili Ge, Chad R. Larson, and Richard G. Sloan, Predicting Material Accounting Misstatements, 28 CONTEMP. ACCT. RSCH. 17 (2011), https://www.thecaq.org/wp-content/uploads/2018/03/Dechow- et-al-2011-Contemporary Accounting Research.pdf 39 Underreporting the full breadth of labor utilized by the firm provides a misleading view of labor productivity. For example, a firm that uses contingent labor for core operations may look more productive than a firm that uses the same amount of labor from direct employees even if the amount of labor in both cases is the same. 40 It is unlikely companies will disclose additional information about the sources of labor beyond headcount which in many cases may go well beyond direct hires ("purchased" labor) into labor provided from contingent/contracted sources ("leased" labor)—absent more explicit instruction from the Commission. 41 A study of employee retention at 2,000 publicly-traded companies over a 10-year period found companies with better employee retention saw cumulative stock returns that were 25 percent higher, or 2.8 percent annualized, than those with the lowest retention. Morgan Stanley Investment Management, Counterpoint Global Insights: Culture Quant Framework (April 2022), https://www.morganstanley.com/im/publication/insights/articles/article_culturequantframework_en.pdf?161479168 6701 42 Qin Li, Ben Lourie, Alexander Nekrasov, and Terry J. Shevlin, Employee Turnover and Firm Performance: Large-Sample Archival Evidence, MGMT. SCI., forthcoming, https://papers.ssrn.com/so13/papers.cfm?abstract_id=3505626 (analysis of turnover at over 3,600 firms over a ten- year period, academics found that higher turnover is associated with lower future financial performance. The negative association between turnover and performance is stronger for small firms, for young firms, for firms with low labor intensity, when the local labor supply is tight, and when the firm likely needs to replace the departing employees. The significant negative association between turnover and performance disappears when turnover is very low) 43 Angie Basiouny, Employee Turnover Costs More Than You Think, KNOWLEDGE AT WHARTON (August 2, 2022), https://knowledge.wharton.upenn.edu/article/why-employee-turnover-costs-more-than-you-think/ (the greater incidence of product failure provides evidence that high turnover costs may go well beyond recruitment and training replacement employees) INVESTOR ADVISORY COMMITTEE 10

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