Maximizing Human Capital Disclosure Under New Guidance

Pillsbury Winthrop Shaw Pittman LLP

TAKEAWAYS

  • A new SEC rule requires, to the extent material to a company’s business as a whole, expanded human capital disclosures, but its disclosure requirements are very general and give companies the ability to “tell their own story” about how human capital factors are essential to the strategy and success of the business.
  • Human capital disclosures required in the annual report can also be made part of the Environmental, Social, and Governance (ESG) or Corporate Social Responsibility (CSR) section of the annual meeting proxy statement.
  • A company’s board of directors may consider amending the charter of an existing committee (usually the compensation committee, if not a separate ESG/CSR Committee) to oversee human capital management and related disclosure.

Human Capital Disclosure

This new rule is part of the SEC’s effort to reframe human capital resources as a source of company value instead of a cost, consistent with the developing market consensus. The new rule is best viewed as an opportunity to generate shareholder confidence in company human capital management practices similar to what the compensation discussion and analysis (CD&A) disclosure does in the executive compensation context.

What Is the Rule?

For Form 10-K filings after November 9, 2020, the new human capital disclosure requirements under Item 101(c) of Regulation S-K (description of business) call for a description of the company’s human capital resources and any human capital measures or objectives that the company focuses on in managing its business. The rule indicates that these measures or objectives can include the development, attraction, and retention of personnel. Disclosure is only required to the degree that this information is material to a company’s business taken as whole, and must be tailored to a company’s unique business, workforce, and facts and circumstances.

The lack of specific disclosure requirements gives companies a great deal of discretion when selecting which human capital measures to disclose. Consistent with the prior rule, companies must continue to disclose the size of their employee base if material to an understanding of their business as a whole. Below is a list of potential additional disclosure areas that companies can address in next year’s filings:

  • The number of full-time, part-time and seasonal employees
  • Usage of independent contractors
  • Demographics of workforce
  • Productivity
  • Hiring
  • Training/development
  • Retention
  • Compensation
  • Succession planning/governance
  • Employee safety/wellbeing
  • Culture
  • Other trends or impact

If some of these factors apply only to a segment of a company’s business, that segment should be identified.

Why and How to Maximize Human Capital Disclosure with your Proxy Statement.

The Regulation S-K amendment reflects a rising trend as more companies voluntarily include ESG/CSR disclosures in their annual reports and proxy statements. To satisfy the rule, companies can easily build off of the human resource COVID-19 guidance issued pursuant to other SEC rules. While the new rule targets annual reports, we expect companies to integrate and expand human capital disclosures into the ESG/CSR disclosures in the proxy statement as well.

As companies seek to organize their disclosure for maximum impact, expanding ESG/CSR disclosures in the proxy statement should be considered, for a few reasons:

  • Proxy advisory firms, like ISS, which give companies an “Environmental & Social Disclosure QualityScore”, coupled with shareholder feedback, have driven companies to treat the annual proxy statement as the primary place to report on ESG initiatives, of which human capital management is a critical part of “S.”
  • Human capital factors bolster a proxy statement’s discussion of ESG/CSR.
  • Companies that have already undertaken internal sustainability reports can easily distill key elements and findings in such reports to share in their proxy statement.
  • Human capital disclosures will likely be particularly relevant in the 2021 proxy season, as the COVID-19 pandemic has amplified the importance of workplace safety measures, employee benefits, and other policies for protecting and investing in employees, ultimately highlighting that a company’s ability to adapt and succeed is measured in part by the outcomes of human capital investments.
  • Proper human capital management adds value to companies and their communities, which is why investors are interested in this type of disclosure and why companies should robustly describe their human capital factors in the ESG/CSR portion of their proxy statements.

The Role of the Compensation Committee

Given the importance of human capital management to investors, employees, and the company’s strategy, the board of directors should appoint a committee to assist the board’s oversight of the company’s human capital management and related disclosures. Some companies have created standalone “ESG” or “CSR” committees, which would be well suited to oversee human capital management and related disclosures. However, if the company does not yet have such a committee, the compensation committee is a fitting choice. To do so, the compensation committee’s mandate could be expanded from executive officers to include employees. As noted above, the proxy statement could contain a Human Capital section or an expanded ESG/CSR section with a similar purpose as the CD&A.

Below we have included sample language that boards may use to amend the appropriate committee’s charter to include human capital matters:

“…assist the Board in its oversight of the development and implementation of the Company’s human capital management, including those policies and strategies regarding recruiting, retention, career development, opportunity and advancement, and succession, diversity and employment practices. Discuss with management, as appropriate, their reports regarding the development, implementation and effectiveness of the Company’s policies relating to human capital management.”

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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