HR's Emerging Role in Required Human Capital Reporting

​Human resource professionals have a relatively new role to perform at public companies: contributing to the organizations' required human capital reporting in annual reports, an obligation that the Securities and Exchange Commission (SEC) mandated last year. This role, which is ongoing and evolving with collaboration across organizations, could elevate the HR profession.

For public companies, "gone are the days when management could make decisions regarding human capital completely behind closed doors, with no risk and with complete disregard for the implications of those decisions in terms of diversity, pay equity, employee safety and the like," said Daniel Messeloff, an attorney with Tucker Ellis in Cleveland, Ohio.

"To an ever-increasing degree, investors are caring more and more about those measures," he added.

Employees and customers are paying attention, too, noted Laura Richman, an attorney with Mayer Brown in Chicago.

Updated SEC Regulation

In an update last year to Regulation S-K, which governs annual corporate report filings such as the Form 10-K, the SEC required human capital disclosures.

"This was driven by investors for years now," said Sheri Wyatt, environmental, social and corporate governance partner with PricewaterhouseCoopers (PwC) in Chicago. "Investors recognized the importance of human capital structuring," but companies weren't providing this information.

Now the SEC requires disclosure of information that would be material to investors on how the company uses human capital, which can include employees and independent contractors, Wyatt said.

The reporting mandate is a principles-based requirement that leaves room for companies to determine what needs to be disclosed. "It will vary from company to company," said Howard Fischer, an attorney with Moses & Singer in New York City and Hackensack, N.J.

Investor Curiosity

The COVID-19 pandemic has heightened interest in HR, with investors interested in workplace safety, remote-work issues, succession planning and the impact of these matters on business continuity, Richman said.  

"While the rule does not provide line-item measures for each company to discuss other than the number of employees, the rule itself mentions measures or objectives that address the development, attraction and retention of personnel, depending on the nature of the company's business and workforce," she said.

Diversity, Equity and Inclusion Disclosures

"In addition, protests over racial and social injustice have sparked conversations relating to workplace discrimination, as well as to the role played by public companies in social change," Richman said. "Therefore, many companies address board and workforce diversity and inclusion, opportunities for training and development, and pay equity in their human capital disclosures."

Diversity disclosure might address not only current diversity but also how a company is going to ensure diversity in the future, Fischer said.

There's usually a story behind an employer's diversity, equity and inclusion efforts, Wyatt noted. One reason to include discussion of diversity in the Form 10-K is the company gets to tell the story itself and will have less chance of being questioned about it later.

But there is much variation in what diversity information companies disclose, Wyatt said.

Some companies focus on quantitative data while others rely on qualitative information. Organizations may provide data on employees' gender, minority versus nonminority status, and perhaps break out race and ethnicity, she said. Some provide data on LGBTQ employees, veterans and people with disabilities. But Wyatt said that "most focus on gender, ethnic and racial diversity."

She emphasized that the preparation of reports is an ongoing process. In the first round of disclosures, the information may be qualitative, she said, but the groundwork may be laid for more quantitative data in years to come.

"Don't assume anything done today is sufficient for the future," said Elizabeth Bieber, an attorney with Freshfields in New York City.

Before disclosing data, companies should ensure that it is "investment grade," Wyatt said. In other words, organizations need to be confident that the numbers disclosed are accurate.

Team Effort

Creation of the required human capital disclosures is a team effort, Wyatt said. Finance and accounting should work with the CHRO, investor relations and communications teams to determine what will be disclosed.

Those in finance understand how to report human capital disclosures. Auditors know how to have controls in place to ensure data is investor grade. HR and chief diversity officers know what is presented to the board. Investor relations understands investors' expectations, and the communications team will think through possible reactions to the disclosures.

If there are topics that HR is regularly presenting to the board of directors or CEO, or a company is regularly addressing in proxy filings or news releases, they may be material, Wyatt said.

"Disclosures are not required for proxies," Wyatt said. But companies sometimes provide environmental, social and governance disclosures in proxy statements, particularly on diversity, equity and inclusion, she said.

A company may choose to make human capital disclosures in a corporate responsibility report; stand-alone diversity, equity and inclusion report; on its website or in a press release, she added.

Elevating HR

The Sarbanes-Oxley Act holds CEOs and CFOs of publicly held companies personally accountable for the integrity of published financial statements and disclosures, noted Randy Samsel, president of eSearch Talent Solutions, an executive search, talent management consulting and career coaching services firm in Cleveland.

"That means CEOs and CFOs are also personally liable for misleading and incorrect disclosures," he said. "Executives give tremendous attention to everything disclosed. By adding human capital reporting disclosures, the HR function will have greater visibility at the C-suite and board level."

Although the disclosures are a team effort, HR should take ownership for developing and reporting these disclosures, he said.

"For years, the HR profession has clamored for a seat at the table," he said. "This is HR's opportunity to take the lead in a very visible way."