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US Securities and Exchange Commission

Investor Groups: SEC Should Write Prescriptive ‘Human Capital’ Disclosure Rule

Thomson Reuters Tax & Accounting  

· 5 minute read

Thomson Reuters Tax & Accounting  

· 5 minute read

By Soyoung Ho

Investor groups, in comment letters, are continuing to ask the SEC to establish a rule that uses both a prescriptive and principles-based approach in requiring public companies to disclose how they manage their workforce.

Investor advocates have been clamoring for a “human capital” disclosure requirement in the past few years, and the SEC in August 2019 issued a proposal for such a disclosure. However, the SEC decided against a prescriptive requirement under Regulation S-K to allow companies to decide for themselves whether their human capital is important enough to their business to warrant disclosure. Currently, companies are only required to provide the number of employees, and investors asked the SEC to consider writing a rule that would give them more insight about how companies—especially IT companies who heavily rely on their employees to create value—manage their talent.

This particular item was included in a larger proposal that would update the disclosure requirements for the description of business, legal proceedings, and risk factors to better reflect today’s business environment and reduce compliance costs for companies in Release No. 33-10668, Modernization of Regulation S-K Items 101, 103, and 105. (See Proposal Includes New Disclosure About How Companies Manage Their Employees in the August 12, 2019, edition of Accounting & Compliance Alert.)

Comments were due by October 22, but organizations have continued to write letters past the deadline.

Investors believe some requirements should be prescribed so companies are compelled to provide more information. They also say that prescriptive rules make comparison among competitors easier.

The Workforce Disclosure Initiative (WDI), supported by 138 investor groups with over $14 trillion in assets under management, said it was concerned about the significant flexibility given to companies in the information they select to disclose.

WDI said it is also concerned about the use of a subjective materiality threshold for determining disclosure since the commission already requires companies to report material information.

The SEC bases its concept of materiality on the Supreme Court’s 1976 decision in TSC Industries v. Northway, Inc. that said “an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.”

“Removing the rules based approach could have the effect of reducing the amount of information that is disclosed and available to investors,” Martin Buttle, head of Good Work with ShareAction which manages WDI, said in a December 21 letter. “Given the opportunity, many companies continue to exclude certain material human capital topics from their public disclosure such as the number of employees and turnover. It is therefore problematic to rely on a registrant’s management to evaluate the significance of this information given the current poor state of disclosure on human capital topics.”

The Human Capital Management Coalition (HCMC), which had petitioned the SEC to write a human capital disclosure rule in 2017, already expressed similar concerns in October. The coalition is led by the UAW Retiree Medical Benefits Trust and includes 28 institutional investors that collectively manage over $4 trillion in assets. They said that studies show that companies that manage their employees well provide better returns to their investors.

The CFA Institute also voiced its concerns.

As proposed, the requirement “could result in fairly generic, boilerplate disclosure such as ‘We strive to hire top quality talent,’” Sandra Peters, senior head for global financial reporting policy with the CFA Institute, wrote on November 27. “Accordingly, we strongly urge that the Commission make clear that specific metrics, to the extent they are available, applicable, and/or reviewed by management, should be disclosed.”

Through research, engagement and review of the most recent literature, reform group JUST Capital wrote on December 12, saying that it strongly believes that there is a baseline set of human capital measurements that are material to all companies. And it asked the market regulator to engage with investors to further determine what specific measures should be required of all public companies.

JUST Capital said the following metrics are emerging as potentially universal to all companies: size and composition of the workforce; total cost of workforce and pay equity analyses; turnover; and demographics of workforce.

On the other hand, the U.S. Chamber of Commerce, which wants the rules to be principles-based to minimize compliance costs, said that “it is critical that such disclosures remain limited” and does “not see a need for the Commission to provide examples of the types of measures or objectives that management should focus.”

The business group is also worried that the disclosures would be hyper-politicized by some groups to shame top managers.

In addition, the Chamber said the SEC should not retain the requirement to disclose the number of employees.

“With the rise of employee outsourcing and leasing arrangements; greater use of outside consultants, seasonal workers and independent contractors; and the emergence of the ‘gig’ economy, providing the number of pure employees as of a date certain no longer reflects a meaningful statistic for many companies,” said Tom Quaadman, an executive vice president with the Chamber. “In light of those developments, adjusting the disclosure to require a range or bucketing employees into arbitrary groups would not seem to provide material information to investors either, and we do not support such a requirement.”

The proposal is part of the agency’s broader effort to simplify and modernize the disclosure rules in Reg S-K, which lays out the reporting requirements for periodic reports.

Release No. 33-10668 would also revise: Item 101(a) , which requires the company to describe the general development of business; Item 101(c), which requires the company to provide a narrative description of business; Item 105, which requires the company to describe risk factors; and Item 103, which requires the company to describe legal proceedings.


This article originally appeared in the January 3, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.

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