In early August, the SEC issued a 116-page release proposing to "modernize" Item 101 (business description), Item 103 (legal proceedings), and Item 105 (risk factors) of Regulation S-K. I did not post on it at the time, because none of those items seemed to relate to executive compensation. As Johnny Carson famously used to say "Wrong again buzzard breath." On closer inspection, some of the proposed new disclosure requirements directly apply to human capital management issues.
The proposal would replace the Item 101(c) requirement to disclose the number of employees with a description of the company's human capital resources, including in such description human capital measures or objectives that management focuses on in managing the business, to the extent such disclosures would be material to an understanding of the company's business. The proposed amendment provides non-exclusive examples of human capital measures and objectives, such as measures or objectives that address the attraction, development, and retention of personnel.
The proposal requests comment on at least three specific issues related to human capital disclosure, including:
- Should disclosure regarding human capital resources, including any material human capital measures or objectives that management focuses on in managing the business, be included under Item 101(c) as a listed disclosure topic, as proposed? Should we define human capital? If so, how?
- With respect to human capital resource disclosure, should we provide non-exclusive examples of the types of measures or objectives that management may focus on in managing the business, such as, depending on the nature of the registrant's business and workforce, measures or objectives that address the attraction, development, and retention of personnel, as proposed? Would providing specific examples potentially result in disclosure that is immaterial and not tailored to a registrant's specific business? Would not including such examples result in a failure to elicit information that is material and in some cases comparable across different issuers?
- With respect to human capital resource disclosure, should we include other non-exclusive examples of measures or objectives that may be material, such as the number and types of employees, including the number of full-time, part-time, seasonal and temporary workers, to the extent disclosure of such information would be material to an understanding of the registrant's business? Could other examples include, depending on the nature of the registrant's business and workforce: measures with respect to the stability of the workforce, such as voluntary and involuntary turnover rates; measures regarding average hours of training per employee per year; information regarding human capital trends, such as competitive conditions and internal rates of hiring and promotion; measures regarding worker productivity; and the progress that management has made with respect to any objectives it has set regarding its human capital resources? Would providing specific examples potentially result in disclosure that is immaterial and not tailored to a registrant's specific business? Would not including such examples result in a failure to elicit information that is material and in some cases comparable across different issuers?
Interestingly, what brought the relevant changes to my attention was a Joint Statement on Proposed Changes issued last week by the two dissenting Commissioners, Robert J. Jackson, Jr. and Allison Herren Lee. Although commending the proposal for adding disclosure on the critical topic of human capital ("This reflects an understanding of what American families have known for generations: companies that invest in their workers perform better over time.") the dissenting Commissioners add that, "But, because it favors flexibility over bright-line rules, the proposal may give management too much discretion—sacrificing important comparability—when describing a company's investments in its workers."
That's why investors representing trillions of dollars, and our Investor Advisory Committee, have urged the SEC to require specific, detailed disclosures reflecting the importance of human capital management to the bottom line. We hope that commenters will make sure we get this balance right by letting us know what, if any, specific measures would be useful for investors.
Incidentally, they would replace the Item 101(c) requirement to disclose the material effects on the company of compliance with environmental laws - with a disclosure topic that covers the material effects of compliance with material government regulations, including environmental laws.
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