The United States Securities and Exchange Commission voted to adopt rules on Wednesday that require public companies to disclose a description of their human capital.
The commission previously asked companies just to report staff size and executive compensation. The new rule amendments require companies to disclose human capital measures or objectives that management focuses on in managing the business.
“Today we modernized our public company business disclosure rules for essentially the first time in over 30 years,” said Chairman Jay Clayton in the SEC’s press release. “Building on our time-tested, principles-based disclosure framework, the rules we adopt today are rooted in materiality and seek to elicit more informed investment decisions. I am particularly supportive of the increased focus on human capital disclosures, which for various industries and companies can be an important driver of long-term value.”
The new rule amendments were proposed in in August of last year and the vote to adopt them was 3-2. Some public companies pushed back on these proposed rule amendments over the past year, claiming that adding this disclosure would be redundant and burdensome to create and wouldn’t lead to increased shareholder value. A key reason for the dissent is that some companies already disclose workforce information in voluntary reports on their websites or in SEC filings when it’s deemed material.
Jeff Higgins, CEO of Human Capital Management Institute, said companies have contradicted themselves for many years by saying people are their most valuable asset while also claiming they are immaterial to the business in annual disclosures.
“From a global transparency standpoint, this is a great step forward,” Higgins said. “It acknowledges human capital as a material thing.”
The SEC said the modernization of Regulation S-K items 101, 103 and 105 is intended to improve disclosures for investors and improve the readability of disclosure documents as well as discourage repetition and reduce the disclosure of impertinent information.
Higgins did, however, note that there’s a lack of clarity about what human capital metrics companies will be required to disclose. Higgins said companies that are looking for guidance on what measurements will be required should reference ISO 30414, which is the standard for human capital reporting and measurement.
In addition to the SEC’s new rule amendments, there’s legislation on the table in the U.S. House of Representatives that would require public companies to disclose information to investors about their human capital management in their annual report. The Workforce Investment Disclosure Act was approved by the House Financial Services Committee in February. Specifically, the bill requires the disclosure of workforce demographics, workforce stability, training and capabilities, health and safety, culture and empowerment, and compensation and incentives.
“This is the first shoe to drop,” Higgins said. “This could become law fairly early next year, so it’s a good reason to start working on it now if you’re a company, because it’s not a matter of if anymore, it’s when.”
The new amendments will be effective 30 days after publication in the Federal Register.
About the Author
Brett Christie is the managing editor of Workspan Daily.