Bloomberg Law
Aug. 28, 2020, 6:59 PMUpdated: Aug. 31, 2020, 4:02 PM

SEC Wants More Human Capital Disclosures But Won’t Say How Much (1)

Andrew Ramonas
Andrew Ramonas
Securities Regulation Reporter

Companies will have to report details about the management of their workforces under new SEC rules, though what they reveal could be anyone’s guess.

The Securities and Exchange Commission made changes Aug. 26 to Regulation S-K, which focuses on companies’ non-financial reporting requirements. But the agency’s 131-page document explaining the changes didn’t define human capital or tell companies exactly what new disclosures it wants from them.

Companies have to describe material “human capital measures or objectives that the registrant focuses on in managing the business,” which could include information on developing, recruiting, and retaining employees, according to the final rule document. But the disclosure examples are only suggestions, not mandates, the document said.

“While the rule-making represents important progress in acknowledging the importance of the workforce, the new rules give public companies too much latitude to determine the content and specificity of the human capital-related information they report,” Cambria Allen-Ratzlaff, corporate governance director of the UAW Retiree Medical Benefits Trust, said in a statement. The trust co-chairs the Human Capital Management Coalition, which represents institutional investors pushing for more workplace disclosures.

Companies only need to report how many workers they have now. The SEC approved the new disclosures on a 3-2 vote, with Democratic Commissioners Allison Lee and Caroline Crenshaw opposing the changes and calling for more prescriptive requirements.

The commission could have mandated disclosures related to part-time and full-time workers, workforce expenses, turnover, and diversity, for example, Lee said.

The commission should have a combination of general, principles-based disclosure requirements along with specific mandates, said Jeff Mahoney, general counsel of the Council of Institutional Investors, which has advocated for more human capital disclosures.

“Requiring a breakdown of the numbers of full-time, part-time, and contingent workers and disclosure of employee turnover provides useful information to investors and should be part of the rules based requirements for human capital management disclosures,” Mahoney said.

Disclosure Challenges

The commission declined to define human capital because the term “may evolve over time and may be defined by different companies in ways that are industry specific,” according to the final rule. Creating human capital metrics also would have been in conflict with agency efforts to make certain Regulation S-K disclosures more principles-based, the document said.

SEC Chairman Jay Clayton, a Republican-leaning independent, defended the new disclosures Aug. 26, saying explicit and inflexible metrics wouldn’t effectively capture differences among companies, which have a wide variety of human capital considerations. But companies still need to provide meaningful quantitative and qualitative information under the new rules, he said.

Clayton said he couldn’t remember working with a successful company that didn’t concentrate on attracting, developing, and enhancing its workforce.

“To the extent these efforts have a material impact on their performance, I believe investors benefit from understanding the drivers of that performance,” he said.

General Motors Co. and Chevron Corp. were among companies that expressed concern about the new rules when the SEC first proposed them in 2019. The disclosures would be redundant and difficult to make, without a corresponding benefit to investors, they said in letters to the agency last year. The companies said they already make human capital disclosures in voluntary reports on their websites or in SEC filings when the information is considered material.

Representatives for GM and Chevron didn’t immediately respond to a request for comment.

The SEC had support from the U.S. Chamber of Commerce. Thomas Quaadman, executive vice president of the Chamber’s Center for Capital Markets Competitiveness, praised the commission for updating Regulation S-K after its vote. The changes included moves toward more principle-based reporting in Regulation S-K, in addition to the new human capital disclosures.

“The U.S Chamber Center for Capital Markets Competitiveness has long advocated for these changes that modernize and simplify disclosure requirements for public companies while ensuring investors are still provided with material information,” Quaadman said in a statement.

(Updates with comments from SEC Chairman Jay Clayton in 11th and 12th paragraphs)

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