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SEC’s New Rule on Human Capital Disclosures

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In all businesses, the single largest asset and investment are the people. As any company leader knows, the biggest cost of doing business is most oftentimes the cost of labor; inclusive of wages, benefits, payroll, or other related taxes. This investment of organizational funds has been a rising hot button topic amongst lawmakers, politicians, and organizational employees. This general traction from these external forces has moved its way towards policymakers such as the Securities and Exchange Commission (“SEC”) impacting their reporting standards and requirements.

Specifically, the SEC recently issued amendments to Regulation S-K, which contains the detailed disclosure requirements (other than financial statements) applicable to registration statements, periodic reports, proxy statements, and other filings under the United States federal securities laws. The policy guidelines include a new requirement that public companies disclose information about “Human Capital Resources”. The final rule is principles-based versus prescriptive, which is reminiscent of Sarbanes-Oxley. These measures may include employees, non-employees (such as contract workers and consultants), and others. Prior to the amendment, companies were only required to provide the number of employees. Investors played a role in the adoption of these new disclosures by requesting the SEC to consider adding a rule that would provide greater insight into how companies manage their employees, especially in markets that rely heavily on talent to generate profits and create value.

The SEC has identified the areas of attraction, development, and retention as examples of material categories of focus. Workplace cost and productivity, diversity and inclusion at the leadership level, and cultural thoughts from employee surveys are others. These are merely examples of types of measurements and focus areas, as there is no set standard. The SEC has not clearly defined the term of Human Capital but has indicated disclosures should consist of information that a reasonable person would find important in the overall mix of deciding factors on whether to buy or sell a given company’s stock. This lack of clear definition was left generally vague as an intentional practice. Specifically, the SEC understands this disclosure will be an ongoing evolution of focus areas and measurements as time passes and disclosures begin making their way into published works.

Further, this policy was left somewhat flexible and “futureproof” as the requirements of what each organization and sector/industry deem as material information can and will change. As such, Human Capital Resources reporting will need to be periodically assessed to determine whether the Human Capital measures previously or historically disclosed continue to be the most relevant for managing the business and provide investors the necessary information to make more informed investment decisions. What will be evolving will be the need for consistency and comparability so that companies can get better comparisons as they strive to be more transparent.

It’s worth noting that human capital management is particularly important to investors during these times of distress as companies grapple with the effects of COVID-19. Investors want to know exactly how the shift to remote working environments and the implementation of new policies to protect workers have affected business operations.

There were two dissenting commissioners that wanted even more disclosure, but this is a welcome step forward. Further, it’s worth noting that members of Congress are actively talking with the SEC as well to further enhance Regulation S-K. The amended SEC disclosure requirements are vague and left to the judgment of each respective organization as the legal definition of “material” is subjective. But, as mentioned above and similar to Dodd-Frank and other regulatory updates, the spirit of the amendment is intended to provide information that an investor would want to know before buying or selling a stock, bond, or derivative. However, L&A believes in complying with regulatory requests while not providing excess information that would create competitive harm.

Don’t hesitate to reach out to us if you have questions regarding the new rule, or need help putting together this or other proxy statement disclosures.