How to Respond to SEC’s Focus on Human Capital Disclosures

The Securities and Exchange Commission could now shift focus from the “E” to the “S” on environmental, social and governance matters. This was communicated in the March 2022 climate-related disclosure rule, which is currently in proposed form.

And SEC Chairman Gary Gensler pointed to the 2020 revision of rules to require disclosure of human capital in public company filings at the September conference, noting that he was missing certain details.

Gensler has also directed SEC officials to focus on improving that disclosure, echoing a previous statement he made in August 2021.

Disclosure of human capital was also included in the SEC’s near-term rulemaking agenda, released over the summer and highlighted in the agency’s accompanying press release, along with the diversity of its workforce and company boards.

All of this means that the SEC will most likely begin to scrutinize human capital resource disclosures more vigorously, with additional regulations potentially on the horizon. Therefore, public companies must be proactive and take action now to meet their disclosure obligations.

SEC Modernization Efforts

In 2020, as part of the SEC’s ongoing effort to modernize disclosure requirements for publicly traded companies, it amended Item 101 of Regulation SK to require companies to describe their human capital resources. This includes any human capital measure or objective that management focuses on in the business where such disclosure would be material.

The acceptance statement emphasized the SEC’s belief that human capital is an essential resource for companies and an important disclosure for investors, and emphasized a principles-based approach to disclosure. Although the rule lists examples of human capital actions such as developing, attracting, and retaining personnel, the SEC declined to adopt a formal definition of “human capital,” noting the possible evolution of the term over time.

For publicly traded companies, human capital disclosures can cover the full gamut of Covid-19 protocols, hiring practices, workplace culture and employee well-being efforts, overall workforce retention policies and strategies, and diversity, equity and inclusion policies and procedures.

Because the 2020 rules reflect the agency’s traditional, principles-based disclosure approach — rather than the mandated approach reflected in the SEC’s recently proposed climate-related disclosure rules — what companies choose to disclose in public filings can vary significantly.

For some, this discrepancy is an example of the type of tailored disclosure expected in public company disclosures, but the SEC has recently emphasized the importance of consistent and comparable disclosure for all public companies, and Gensler has noted that human capital disclosures absent in this regard.

Disclosure of Accounting

Another possible disclosure option is human capital accounting disclosure, which was introduced by a group of academics, including former SEC officials, in a rulemaking petition filed in June 2022. The petition called on the SEC to “develop rules to require public companies to disclose sufficient information to enable investors to assess the extent to which companies invest in their employees” and recommended improved accounting-related disclosures to reflect aspects of the company’s financial reporting human capital should be viewed as expenditure rather than investment.

This concept echoes what former SEC Chairman Jay Clayton stated in August 2020 when the human capital disclosure rules were finalized. He said he expects “meaningful qualitative and quantitative disclosures,” but some companies don’t provide quantitative information other than headcount.

Since the rule’s passage, investors and other stakeholders have also pressured companies to publicly disclose EEO-1 data describing the gender, race, and ethnicity of their employees in all job categories, including through direct requests to the SEC, order this disclosure. It’s unclear whether these petitions will impact the SEC’s eventual approach to potential revisions to human capital disclosure requirements, but Gensler has emphasized the importance of specific metrics, both qualitative and quantitative, in such disclosure.

While the SEC’s climate-related disclosure initiative is pending — and Gensler recently signaled its willingness to revise certain aspects of the proposal — we expect the SEC to look more vigorously at human capital resource disclosures in the near future as more regulation may be on the horizon.

Take action now

Listed companies should proactively review what aspects of their current human capital resource disclosures could be improved or revised and the following steps should be taken.

Conduct a peer review to assess whether other companies’ disclosures should mimic or avoid, particularly when the disclosures involve a risk of litigation. In particular, avoid being an outlier among peers.

Consider what aspects of human capital management resources are important to your company and your investors in the light of any concerns from shareholders or other stakeholders, including your own employee population.

Also examine your workplace policies and procedures to ensure they align with company values.

Finally, assess health and safety measures that may have changed due to Covid-19, including those that have been retained or abolished.

As always, a holistic approach to public company disclosures will result in meaningful disclosure that is responsive to potential regulatory scrutiny and investor needs.

This article does not necessarily represent the opinion of the Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Information about the author

Erin Martin is a partner at Morgan Lewis and advises public companies on securities regulation, capital markets transactions and corporate governance. She is formerly a member of the SEC’s Division of Corporation Finance and advises on complex SEC disclosure and compliance issues, including ESG considerations and crypto-asset matters.

Celia A Soehner, formerly of the SEC’s corporate finance division, is a partner at Morgan Lewis, which assists public companies with ongoing reporting and voting rights matters. She is currently Deputy Head of the firm’s Capital Markets and Public Enterprises practice and co-chairs the firm’s ESG and sustainable business team.

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