In August 2020, as part of an overhaul of Reg S-K, the SEC adopted a new requirement to discuss human capital, taking a principles-based approach.  (See this PubCo post.) For the most part, the initial response to the new requirement was underwhelming; early subsequent reporting suggested that companies “capitalized on the fact that the new rule does not call for specific metrics,” as “[r]elatively few issuers provided meaningful numbers about their human capital, even when they had those numbers at hand.” (See this PubCo post.) However, recent studies have shown some expansion of disclosure, with one study showing that the number of companies disclosing their EEO-1 workforce diversity data “has more than tripled between 2021 and 2022, from 11% to 34%” and that nearly three-quarters of companies in the Russell 1000 disclose some form of race and ethnicity data. Headway, but apparently not enough to deter Corp Fin from moving forward with a proposal to enhance company disclosures regarding human capital management.  Or is it?   The SEC’s most recent reg-flex agenda shows a target date for a proposal of April 2024, but that date represents a delay from previous target dates of October 2022, April 2023 and October 2023. In February 2022, Senators Sherrod Brown and Mark Warner, the Chair and a member, respectively, of the Senate Committee on Banking, Housing, and Urban Affairs, submitted a letter to SEC Chair Gary Gensler, calling on the SEC to include in its proposal a requirement that companies report about—not just employees—but also the number of workers who are not classified as full-time employees, including “gig” workers and other independent contractors. (See this PubCo post.) Now, perhaps triggered by the latest SEC agenda, the pair have once again submitted a letter to Gensler, this time to make known that they “were disappointed to see that the SEC’s recently released fall 2023 regulatory agenda suggests the release of a proposed rule on ‘Human Capital Management Disclosure’ is likely to be delayed.”  In this second attempt, they pressed the SEC “to act expeditiously to bring an improved human capital management disclosure proposal to a vote before the full Commission.” Will this letter goad the SEC into taking action on this rulemaking?

Happy holidays!

In the letter, the two Senators also ask the SEC to “ensure that the proposal requires disclosure of companies’ use of temporary and contract workers, employee turnover data, information on employee compensation and benefits, workforce health and safety information, and demographic data. The disclosure of this data is vital to help investors understand how companies treat their most critical asset—the workers.” Noting that they recently reintroduced the Workforce Investment Disclosure Act—a highly prescriptive bill that would require the SEC to adopt fairly granular regulations—the Senators contended that the requirements of the current rule are inadequate to produce the information necessary to understand companies’ workforce investment. “These shortcomings,” they urged, “must be addressed in the upcoming proposal, which should be issued without further delay.” 

Was the SEC, in the two Senators’ view, perhaps a bit dilatory in pursuing this rulemaking? They observed that, when Gensler testified before their committee in September, he had indicated that a new rule on human capital disclosure was “still in development,” but first required that the SEC study the data from the 2020 rule and “ensure that any proposed requirements on workforce and turnover data are properly targeted.” But adequate data, the Senators suggested, has been available for a while: “most public companies have now filed annual reports under the 2020 rule for three years. These filings provide sufficient data to determine how companies have responded to the current human capital disclosure rules, and it is clear that those rules are not working.” Citing a survey of 2022 company annual reports, the Senators asserted that few companies provided much in the way of “informative, material information”: only “17% of companies included a quantitative breakdown of the number of full-time versus part-time employees the company employed;  23% of companies included data on employee turnover rates; and 12% of companies provided quantitative data on the pay gap between employees in different demographic groups.” They attributed this paucity of information to the limits and vagueness of the current rules, and asked “that the SEC move forward with a revised human capital disclosure rule as quickly as possible.”

In conclusion, they asked that, as the SEC moves forward, it

“keep in mind that a robust human capital disclosure rule must require companies to release information regarding the numbers of fulltime, part-time, and contingent workers, as well as the compensation provided to each of these groups. Investors deserve transparency about whether corporations choose to invest in their people, or rely on underpaid contingent workers in pursuit of quick profits. Short-term thinking hinders workforce investment, increases rates of turnover, and negatively impacts long-term productivity. Honoring the dignity of employees’ work is not just a moral imperative, it also has material implications for companies’ bottom lines. Likewise, requiring companies to disclose key workforce management metrics, including investment in skills training, workforce safety, and employee retention, would provide investors with a clearer picture of how public companies are managing, supporting, and investing in their workers—factors that significantly influence a company’s ability to innovate and compete in the long-term.”

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