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SEC Proposes Rule Amendments That Change Human Capital Reporting

The Securities and Exchange Commission is proposing that organizations should start disclosing a description of their human capital. 

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The SEC recently announced that it voted to propose rule amendments to modernize the description of business, legal proceedings and risk factor disclosures that organizations are required to make pursuant to Regulation S-K. Currently, public companies are only required to report on staff size and executive compensation.

The proposed rule amendments come from a push by the Human Capital Management Coalition (HCMC) and the SEC’s Disclosure Effectiveness Review and Modernization project. Various studies show that organizations are enjoying increases in their market values from intangible assets like human capital. However, there is not investor clarity on how to assess this value at individual organizations. 

Despite the obvious impact human capital management (HCM) has on a company’s bottom line, the proposal could meet some resistance from these public companies, according to Don Delves, Andrew Goldstein, Ryan Resch and Steve Seelig of Willis Towers Watson.

“We’ve long been a proponent of many of the committee’s ideas and have done considerable research on how HCM can positively impact company performance,” they wrote in an executive compensation bulletin. “We are mindful, however, that some companies would find mandatory disclosures onerous, particularly when they’ve not focused previously on HCM or have a different perspective on the key measures that are deemed important to their success.”

The SEC’s proposal would replace the existing requirements to disclose only the number of employees with a principles-based requirement to disclose, to the extent material, a “description of the registrant’s human capital resources, including in such description any human capital measures or objectives that management focuses 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).” The exact measures or objectives discussed in a company’s disclosure could change over time and vary with the industry. Instead of specific line item disclosures, the proposal provides non-exclusive examples of potentially material human capital measures and objectives, wrote Cydney Posner of Cooley.  

The release asked for comment on whether the SEC should add more examples of measures or objectives that may be material, such as the number of full-time, part-time, seasonal and temporary workers; 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.

Willis Towers Watson noted that if the process of how a company’s human capital is being managed ends up in the proxy, the compensation committee will be tasked with understanding how that works, whether the process is sound and perhaps even offering its view on new directions.

“We don’t think this means the compensation committee will set workforce pay, but it may now participate in the oversight of the company’s compensation philosophy and strategies, and other questions of pay fairness, inclusion and diversity policies, and hiring and retention strategies currently outside of its purview,” wrote Delves, Resch, Goldstein and Seelig. “Previously, we’ve forecast that the urging from numerous stakeholders on HCM issues would lead to an expansion of the compensation committee’s role and have recommended ways to respond to these demands.” 

The proposal is currently in a 60-day public comment period. 

About the Author

Brett Christie Bio Image

Brett Christie is a staff writer at WorldatWork.


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