SEC May Soon Require Human Capital Reporting

 

Allen Smith, J.D. By Allen Smith, J.D. October 21, 2019
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​Public companies will have to submit reports on their human capital if the Securities and Exchange Commission (SEC) finalizes a rule it proposed Aug. 8. Human capital reporting may result in a hiring boon for HR professionals, legal experts say, as HR will play a pivotal role in reporting this information. Nonetheless, some worry that human capital reporting would put public companies at a competitive disadvantage to companies that aren't public.

The House of Representatives passed a bill on Oct. 18 to include an additional SEC reporting requirement for public companies to disclose how many employees work abroad and how many work stateside. The Senate has referred companion legislation, sponsored by Sen. Gary Peters, D-Mich., to the Committee on Banking, Housing and Urban Affairs.

Reported Information Under Proposed Rule

Sanjay Shirodkar and Deborah Meshulam, attorneys with DLA Piper in Washington, D.C., noted in a joint statement that the information companies might report to the SEC under its proposed rule could include:

  • Measures related to employee retention, mobility and turnover, such as the average time to fill vacant positions and the percentage of positions filled internally.
  • Human capital productivity, such as profit per employee.
  • Policies to reward employee innovation and productivity, and the expenses for any rewards.
  • The number and types of employees, such as how many seasonal and part-time workers the company hires.
  • Total workforce costs, including training costs as well as payroll and nonpayroll expenses.

The exact measures to be disclosed would depend on what the company believes is needed to inform investors of its HR resources, said Laura Richman, an attorney with Mayer Brown in Chicago.

SEC Subcommittee's Recommendations

Other data points that the SEC's Investor-as-Owner Subcommittee has suggested might be included in human capital reporting to the agency are:

  • Data on race, ethnicity and gender diversity.
  • Promotion rates.
  • Workforce safety measures related to injuries, illnesses and deaths, such as frequency, severity and lost time.
  • Average hours of training per employee per year.
  • Employee satisfaction surveys.

The subcommittee also recommended that the SEC augment existing executive compensation disclosure to include summaries about compensation and incentive structures, such as:

  • How performance is considered in setting pay and making promotion decisions.
  • Organizational structures, such as whether the head of HR reports directly to the board of directors' compensation committee.

[SHRM members-only toolkit: Designing Executive Compensation Plans]

The types of measures disclosed in human capital reporting "may vary among companies depending on the type of business and the nature of the workforce," Richman said.

Investor Interest in Human Capital Reporting

Some investors have been advocating for more-detailed human capital disclosure, she added.

Shirodkar and Meshulam said one large institutional investor is looking at "employee development, diversity, and a commitment to equal employment opportunity, health and safety, labor relations, and supply-chain labor standards." The same investor views human capital as not just a societal challenge but an investment issue.

"Several potentially important pieces of information that companies could report, which some other government agencies have already required, are pay and hiring statistics for women and minorities," said Daniel Messeloff, an attorney with Tucker Ellis in Cleveland.

"Companies whose shareholders have been pushing for more information on human capital issues may want to determine what particular measures and objectives such shareholders are seeking and evaluate how any such requested disclosures would impact the company's business," Richman said.

Competition Concerns

The human capital reporting requirement is not a done deal, as the rule has not yet been finalized.

Workforce composition metrics are likely to raise competition concerns for a public company because they can reveal details to competitors about the company's business strategy and deployment of human resources, Shirodkar and Meshulam observed. "Companies may view such strategies as proprietary. This is particularly the case where a public company is competing with a nonpublic company that is not required to report such information, so that there is an uneven playing field," they stated.

Messeloff said if there is a high number of part-time, seasonal or temporary workers, competitors may conclude that a company is more volatile than another business that has a consistent number of full-time employees.

Michael Lotito, an attorney with Littler in San Francisco, said if a company revealed it was engaged in extensive training in artificial intelligence (AI) for its workforce, a competitor would know the company is investing heavily in AI and robotics. "That fact might be of enormous importance to a competitor," he said.

HR's Involvement

"On the plus side, a decision to report such information will lead management to focus on these metrics and to work toward improvement as necessary," Shirodkar and Meshulam stated.

HR should anticipate playing a key role in helping companies develop disclosure strategies, they said.

Should the rule be finalized, Richman remarked, HR is "well-suited to be sure that the tone of such disclosure reflects the company's goals and priorities in this area." But, she added, "it is very important that the securities lawyers versed in the SEC's principles-based disclosure requirements and who understand how to assess materiality for securities law purposes be involved in any human capital disclosure because disclosure in SEC filings can give rise to securities law liabilities."

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