SEC Proposes Changes to Corporate Disclosures That Include Material Human Capital Metrics
August 9, 2019
As part of its disclosure modernization and effectiveness process, the SEC has proposed changes to how companies describe their businesses, legal proceedings and risk factors, and for the first time, the Commission has explicitly proposed to require companies to disclose human capital measures or objectives to the extent they are material. Although the broader proposed disclosure changes are likely to be helpful to companies, by explicitly mentioning human capital, the proposal is likely to call additional attention to human capital issues within the context of ongoing investor and activist interest in environmental, social and governance disclosures.
Proposal Part of Ongoing SEC Disclosure Effectiveness Process. The proposal stems from a staff review of disclosure requirements mandated by the Jumpstart Our Business Startups (“JOBS”) Act that resulted in “evaluation of the information our rules require registrants to disclose, how this information is presented, where this information is disclosed, and how we can better leverage technology as part of these effort”. The proposed amendments to Regulation S-K (which provides reporting requirements for public companies) are generally designed to streamline disclosure by focusing on materiality of information and limiting duplication.
Human Capital Disclosures Required If Material. The proposal amends the company’s description of its business in the annual report (Form 10-K), which currently includes a disclosure of the number of people employed by a company. The proposal notes that “Today, intangible assets represent an essential resource for many companies. Because human capital may represent an important resource and driver of performance for certain companies, and as part of our efforts to modernize disclosure,” the Commission is proposing to refocus companies’ disclosures on human capital resources. Specifically, the proposal requires any 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 registrant’s business” as a whole, such as attraction, retention and development. The proposal states that the human capital disclosure will vary by industry and company, and rather than prescribe line item disclosures, companies should describe where management focuses its attention with respect to material human capital matters. The proposal asks for feedback on several questions, including whether an illustrative list of specific material topics for disclosure (e.g., turnover, training hours per employee, promotion rates) or those immaterial to disclosure should be included in the proposal.
Chairman Clayton Has Indicated Support for Human Capital Disclosures. In the press release announcing the changes, Chairman Clayton echoed earlier remarks the Center has reported, stating. “I applaud the staff for their efforts to modernize and improve our disclosure framework, including recognizing that intangible assets, and in particular human capital, often are a significantly more important driver of value in today’s global economy. The proposals reflect a thoughtful mix of prescriptive and principles-based requirements that should result in improved disclosures and the elimination of unnecessary costs and burdens.”
The proposal will carry a 60-day comment period from the date of publication in the Federal Register, and the Center will file comments on the proposal.