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Human Capital Disclosure, From the fiscal year ended March 2023, For the 4,000 largest companies

THE NIKKEI via scoutAsia

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December 6, 2022 3 min read
Human Capital Disclosure, From the fiscal year ended March 2023, For the 4,000 largest companies

The details of the system that the Financial Services Agency has been studying for mandatory disclosure of “human capital,” which considers human resources to be a company’s capital, have been finalized. The survey targets 4,000 major companies that issue financial statements and requires that financial statements for fiscal years ending March 2023 and thereafter include information such as the amount of investment in human resources and employee satisfaction levels. Companies with fiscal years ending in March, which comprise the majority of listed companies, will be forced to take immediate action.

Human capital refers to human resources or the knowledge, skills, and motivation possessed by human resources. In recent years, there has been a growing trend, particularly in the US and Europe, to view employees not as a cost but as “capital that generates added value,” and to search for the intrinsic value of a company that cannot be measured by financial information alone.

In Japan, the ratio of corporate capacity development expenditures to gross domestic product (GDP) is lower than in the US and Europe. Fumio Kishida’s administration has made investment in people a pillar of “new capitalism,” and the person had indicated that the person would require companies to disclose information in order to accelerate investment.

Under the new system, companies that issue financial statements for the fiscal year ended March 31, 2023 or later are subject to mandatory disclosure. Retailers and other companies with fiscal years ending in February of the same year are not eligible, but companies with fiscal years ending in March will need to prepare for the current fiscal year.

One listed company expressed concern about “I am not used to describing non-financial information in writing, and it is burdensome” and its early mandate. The FSA took these voices into consideration and made items that are relatively easy to disclose mandatory.

As the first disclosure, a new column for sustainability information was added to the financial statements. It calls for the specification of strategies, indicators, and goals regarding human capital. First, companies are required to formulate a “human resources development policy” linked to their business strategy and an “internal environment development policy” for creating a comfortable workplace.

Numerical indicators and targets will also be set to show the degree of realization of these goals. For example, employee satisfaction, retention and turnover rates, and the amount of investment in human resources will be used as indicators, and targets will also be set. It is up to the discretion of the company to decide what specific indicators to use and at what level to set the target.

The second is an indicator of the diversity of human resources. It calls for the disclosure of three new indicators: The ratio of female managers, the rate of male parental leave taken, and the wage gap between men and women.

Companies above a certain size are required to disclose these information under the Law for the Promotion of Women’s Activities and other laws, and companies that do so are also required to include them in their financial statements.

In Japan, there are few female managers and a large wage gap between men and women. According to a study by the Organisation for Economic Co-operation and Development (OECD), Japan has the third largest wage gap between men and women among its 37 member countries.

The FSA encourages each company to strive for fair treatment and ease of work. In disclosing the gender wage gap, the ratio of women’s wages to men’s wage levels, rather than the actual amount of wages, is used as an indicator. It will be disclosed for each of the following categories: All employees, regular employees, and non-regular employees.

Financial statements are one of the statutory disclosures under the Financial Instruments and Exchange Act, and false statements are subject to penalties. The company’s policy is not to charge all forward-looking statements regarding human capital with misstatements, even if the actual results differ from the statements. Care should be taken to ensure that a company’s disclosure stance does not atrophy due to concerns about pursuing liability for misstatements.

FSA expects companies to identify their own problems through disclosure and to be proactive in investing in human resources and the work environment. If the investment in Human Resources improves corporate value and contributes to business performance, a virtuous cycle will be created that will lead to further investment.

While an increasing number of companies are voluntarily disclosing information, the requirement to include such information in financial statements will make it easier for companies to compare their efforts. If investment money and human resources are more easily attracted to companies that emphasize human capital, companies that have viewed employees as a cost will be forced to change their mindset.

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The English translations provided through this service are the result of automatic and mechanical translation of contents written in Japanese and created by Nikkei or licensed by a third party, by an automatic translation system provided by a third party after certain processing of the contents by Nikkei. Nikkei disclaims all warranties, express or implied, related to the English translations, including any warranty of accuracy, reliability, validity and fitness for a particular purpose. Users shall use this service with the full understanding that it employs an automatic translation system that automatically and mechanically recognizes and analyzes information and outputs the results.