SEC Still Weighing Human Capital Disclosures by Public Companies

While some Securities & Exchange Commission observers doubted the SEC would act on a formal petition to require public companies to disclose Human Capital investments during this administration, SEC Chair Jay Clayton recently made it clear to its Investor Advisory Committee that such disclosures are still under consideration. In the call, he acknowledged that human capital can now be considered an investment rather than a cost. 
 

On the heels of the recent release of the new ISO 30414 Human Resources reporting guideline, SEC Chair Jay Clayton recently told the commission’s Investor Advisory Committee it is grappling with identifying the specific metrics that would be required for Human Capital disclosures by public companies.

According to an article in Mondaq, an online business journal, Clayton recently discussed his views related to Human Capital disclosures in Items 101 and 102 of SEC Reg S-K, which include information on people and properties. The SEC is considering a petition by multiple investor groups to include Human Capital disclosures, but which did not include the precise information that should be required. 

 

Requiring public companies to make formal human capital disclosures would have a significant affect on management practices because it would force CEOs to focus on a strategic and systematic approach to engaging all stakeholders and to better scrutinize the efficacy of current human capital investments and practices. 
 

According to the Mondaq article, these disclosure rules “were adopted back when companies' most valuable assets were plant, property and equipment, and human capital was primarily a cost. But now, human capital and intellectual property often represent what Clayton described in a recent call as ‘an essential resource and driver of performance for many companies. This is a shift from human capital being viewed, at least from an income statement perspective, as a cost.’” 
 

However, he added, it is a challenge to develop standardized disclosure requirements for Human Capital. He reportedly told the committee on the call that given the need for disclosing information that is material to investors, disclosure requirements may need to differ between companies and industries. He questioned whether it’s possible to identify metrics that offer market-wide or industry comparability. 
 

He reportedly said: “Each industry, and even each company within a specific industry, has its own human capital circumstances. For example, I would expect that the material human capital information for a manufacturing company will be different from that of a biotech startup, and different from that of a large healthcare provider. Further, the human capital considerations for a car manufacturer will be different from that of a home manufacturer. Because of those differences and the principles of materiality, comparability, and efficiency, I am wary of jumping in with rules or guidance that would mandate rigid standards or metrics for all public companies.” 
 

Clayton reportedly believes that for Human Capital, “it is important that the metrics allow for period-to-period comparability for the company.” He said he feels that Human Capital should be viewed “through the eyes of management, whether the focus is on turnover rates, education or experience of the workforce, availability of workers to fill open positions or other factors.” He specifically asked the group on the call what information investors are looking for and is continuing to consult with experts on what such disclosures should look like. 
 

According to the Sustainability Accounting Standards Board, Human Capital management “addresses the management of a company’s human resources (employees and individual contractors) as key assets to delivering long-term value. It includes issues—such as labor practices, employee health and safety and employee engagement, diversity, and inclusion—that affect the productivity of employees, management of labor relations, and management of the health and safety of employees and the ability to create a safety culture.” 

 

The Mondaq article’s author noted that the new ISO 30414 Human Resource Management guidelines for external and internal capital reporting are designed to “allow investors and others to benchmark companies’ performance on human capital management.” The new ISO standard calls for companies to publicly report on certain metrics and “to report internally on other metrics related to core human capital areas such as compliance and ethics, costs, diversity, culture, recruitment, mobility and turnover, skill and capabilities, organizational health and safety and productivity.”

ISO 30414 guidelines for Human Capital reporting call for: “A formal engagement strategy to support the proactive involvement of employees to consistently address the needs of external and internal customers that aligns activities related to leadership training, engagement assessment, communications, learning, innovation and collaboration, rewards and recognition, analytics, and feedback.” (see ESM: “First ISO Human Capital Disclosure Guidelines Now Available”).