October 08, 2020

New SEC rule amendments require companies to describe how they manage their human capital resources to the extent the disclosures would be material to an understanding of their business. In the adopting release, the SEC recognizes that human capital is often a material resource for companies, a focus of management, and an important driver of performance. Resisting calls from investors to take a more prescriptive approach, the SEC retained the proposed rule’s “principles-based” approach — giving companies broad latitude to tailor disclosures to their unique business and industry. The new requirement is an opportunity for companies to explain their workforce strategy, and the quantitative and qualitative measures they use to make workforce decisions and track the strategy’s effectiveness.

Rules take principles-based approach

Current human capital management (HCM)-specific disclosures are limited to the size of a company’s workforce.  But under the amendments, upcoming annual reports on Form 10-K and registration statements will also have to describe how a company manages its human capital to the extent the disclosures would be material to investors in understanding its business. (Note: This is distinct from SEC staff guidance urging companies to address the effects and risks of COVID-19 on their businesses in real-time, including efforts to protect the health and well-being of their workforce and material increases or decreases in human capital resource expenditures.)

 

Although many investors pushed for a more prescriptive rule, the SEC decided to take a principles-based approach — giving companies broad latitude to select measures that are relevant to their business. The final rule doesn’t define “human capital” or require a specific human capital reporting framework (e.g., Sustainability Accounting Standards Board (SASB)). Instead, companies must tailor their disclosures to their “unique business, workforce, and facts and circumstances.” This approach is consistent with Mercer’s recommendation in our comment letter on the proposed rule.

 

The rule provides three broad examples of measures that may be material depending on a company’s business and workforce: attraction, development, and retention of personnel.  Also, the adopting release includes a specific example stating that to the extent a measure of a company’s part-time employees, full-time employees, independent contractors and contingent workers, or employee turnover, in all or a portion of its business, is material to an understanding of the business, the company must disclose this information.

 

SEC Chair Clayton stated he expects “meaningful qualitative and quantitative disclosure, including, as appropriate, disclosure of metrics that companies actually use in managing their affairs” and that companies “maintain metric definitions constant from period to period.”

 

No time to waste

The mandate applies to US companies and foreign private issuers that file on US domestic forms, in each case including smaller reporting companies, emerging growth companies and controlled companies. The first companies that will have to comply are those that file registration statements for IPOs or spin-offs, or file Form 10-Ks on or after Nov. 9. Deadlines for Form 10-K filings vary by company size as follows:

 

  • Large accelerated filers: 60 days after fiscal year end
  • Accelerated filers: 75 days after fiscal year end

  • Non-accelerated filers: 90 days after fiscal year 

 

What do investors want to know?

When considering what to cover, companies can look to the categories listed in a rulemaking petition from the Human Capital Management Coalition, a group of 25 investors, urging the SEC to require HCM disclosures:

 

  • Workforce demographics (number of full-time and part-time workers, number of contingent workers, policies on and use of subcontracting and outsourcing)
  • Workforce stability (turnover (voluntary and involuntary), internal hire rate)
  • Workforce composition (diversity, pay equity policies/audits/ratios)
  • Workforce skills and capabilities (training, alignment with business strategy, skills gaps)
  • Workforce culture and empowerment (employee engagement, union representation, work-life initiatives)
  • Workforce health and safety (work-related injuries and fatalities, lost day rate)
  • Workforce productivity (return on cost of workforce, profit/revenue per full-time employee)
  • Human rights commitments and their implementation (principles used to evaluate risk, constituency consultation processes, supplier due diligence)
  • Workforce compensation and incentives (bonus metrics used for employees below the named executive officer level, measures to counterbalance risks created by incentives)

Disclosures should give investors information to determine whether the company has the right workforce — the right mix of skills, capabilities, and experience — and whether it’s managing the workforce to drive productivity. Rapid technological change and business transformation, for example, in response to COVID-19, have resulted in workforce transformation and investors need to know companies have solid, evidence-based workforce strategies to address challenges such as worker wellness and development, and diversity, equity and inclusion (DEI). Where possible, disclosures should demonstrate how workforce strategies and tactical decisions are informed by hard evidence drawn from the application of workforce analytics.

 

Focus on diversity, equity & inclusion

The amendments don’t specifically address DEI, but the strong press for gender equity and the impact of the Black Lives Matter movement and other developments may drive DEI disclosures, including:

 

  • Influential investors such as BlackRock actively monitor and engage with companies to understand how they are improving diversity in leadership positions and the broader workforce.
  • Responsible investment groups and other activist investors — for example, Arjuna Capital and Just Capital — call for pay equity, fairness and commitment to workforce diversity and employment equity.
  • Proxy adviser Institutional Shareholder Services sent a letter to select companies to voluntarily disclose self-identified race/ethnicity of directors and officers, and may incorporate the data into its ESG ratings and voting policies.
  • The New York City Comptroller called on 67 S&P 100 companies that have made racial equality or diversity claims to affirm their claims via EEOC data in EEO-1 reports. The comptroller recently reported that nearly half of S&P 100 companies have agreed to provide this data.
  • The Chamber of Commerce sent a letter to the Senate Banking Committee to pass a House bill that would require companies to disclose the racial, ethnic, gender, and veteran composition of boards and executive teams, and explain how they will promote diversity.
  • A Bloomberg article discusses workforce targets adopted by several companies to expand racial diversity, including Wells Fargo (will increase Black leadership to 12%), Ralph Lauren (aims to make 20% of its global leaders people of color and will double the percentage of Black officers and directors by 2025).

How should companies respond?

As with any principles-based requirement, there will be a variety of disclosure approaches — ranging from “less is more” (at least for the first go around) to getting ahead of the curve. Either way, the board should establish the “tone at the top” and, before drafting disclosures, companies should:

 

  • Select measures that support the company’s mission, values and business objectives and define them to ensure consistent application and proper oversight
  • Use tools to identify and assess risks and opportunities, including employee engagement surveys and employment analytics like internal labor market (ILM) mapping and analysis
  • Develop disclosure controls and procedures to ensure information is accurate, and establish a process for reporting up to the board in its oversight role
  • Update compensation committee charters to clarify the committee’s role in overseeing HCM
  • Understand key investors’ human capital policies and prepare to engage with them
  • Consider the extent to which voluntary disclosures in other documents (e.g., proxy statements, sustainability/corporate social responsibility(CSR)/environmental, social and governance (ESG) reports and HCM reports) should be included in Form 10-Ks and vice versa (see the appendix for examples of voluntary proxy disclosures on HCM)
  • Take advantage of the opportunity to tell the company’s human capital story

Download the full article for what you need to know about the SEC calling for tailored Human Capital Management disclosures.

 

Amy Knieriem
Amy Knieriem

Senior Principal, Senior Legal Consultant

Carol Silverman
Carol Silverman

Partner, Senior Legal Consultant

Haig R. Nalbantian
Haig R. Nalbantian

Senior Partner, Co-Leader of Mercer’s Workforce Sciences Institute