Will New SEC Disclosure Rules on ‘Human Capital’ Further Befuddle Companies?
Morris F. DeFeo, chair of Herrick's Corporate Department, spoke to Corporate Counsel about the SEC guidelines requiring public companies to disclose their human capital resources and the corollary practical challenges. According to the article, since August 2020, the SEC "starting requiring public companies to reveal more information about their 'human capital resources'" without clarifying the meaning of "human capital." Different companies interpreted these instructions differently, which led to inconsistent reporting across public companies.
The article stated, "The SEC’s 2020 rule change altered what public companies have to include in the 'business' section of their annual 10-K reports. While previously, the SEC only required companies to report the number of employees they had, the amended rule instructed companies to also describe their human capital resources 'to the extent material to the understanding of that registrant’s business taken as a whole.' This includes any measures 'that address the development, attraction and retention of personnel.'" However, the SEC did not provide an explicit definition of "human capital." The SEC is now slated to introduce more explicit guidelines on what they want human capital disclosures to look like.
Morris reflected, "A lot of companies and perhaps professionals who advised those companies, including lawyers, were a little bit puzzled," referring to when the SEC first revealed its rule change. He added, "I remember when the rules were first adopted, I had public company clients calling me and saying, 'We literally have no idea what to do here. We don’t exactly understand what the SEC is driving towards and what it is that they’re expecting us to do.'" Morris noted that the SEC's move away from "'check the box, fill in the blank'" process is not surprising.
Morris explained, "I think the SEC in some effect has told the marketplace, 'We’ve told you repeatedly and for many years that we want companies to move away from formulaic disclosure, toward disclosure that really focuses on the specifics of the company and the industry, in markets in which they operate,'" adding that the SEC has also been focusing on environmental and governance-related disclosures for years. He said, "It sort of was only a matter of time before the SEC began to focus on the S"—social—"category of ESG[.]"
The article reviewed how multiple surveys confirmed that companies have reached inconsistent conclusions on how to interpret "human capital." The SEC chairman indicated that the agency "could eventually seek out quantifiable data on turnover, skills and development training, compensation, benefits, health and safety, and workforce demographics."
Since U.S. companies have adapted to new laws and industry pressures to be more transparent, Morris noted that "[a] lot of companies already pretty much had a good idea of what their human capital was[.]" Though he also acknowledged that this could be difficult for companies to demonstrate with data, stating, "I think that that’s going to be something that a lot of companies are going to struggle with … shedding too much insight—particularly to the marketplace, to their competitors—about their strengths and weaknesses[.]"
He highlighted, "This tension between disclosure that is really important to investors, and disclosure which companies believe will adversely affect them, at least in a competitive sense, or give rise to issues in the investment community that they would like to avoid is going to be an ongoing thing."
Morris concluded, "This is an area where I think the SEC and investors are going to push for more, and companies are going to have to figure out how to deal with it."
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