In remarks for a telephone call on February 6 with SEC Investor Advisory Committee members, SEC Chair Jay Clayton briefly discussed three topics: disclosure requirements in general, human capital disclosure and proxy plumbing, the latter two topics being subjects of the committee’s call.
Framework for analyzing disclosure rules. As a preliminary matter, Clayton observed that the SEC’s disclosure requirements are based on a framework that is
“rooted in the principles of: (1) materiality—as so well defined by Justice Marshall; (2) comparability—as demonstrated by our commitment to U.S. GAAP; (3) flexibility—as requirements that are too rigid can lead to superfluous and, in some cases, misleading disclosure; (4) efficiency—as the question generally is not rule or no rule, but rather what rule is most effective with the least cost; and (5) responsibility (or liability)—as rules have little long-term value if they cannot be effectively monitored and enforced. I also believe that our disclosure requirements and guidance must evolve over time to reflect changes in markets and industry while being true to the principles I articulated.”
Human capital disclosure. Items 101 and 102 of Reg S-K, which address, to a limited extent, people and properties, were adopted back when companies’ most valuable assets were plant, property and equipment, and human capital was primarily a cost. But now, human capital and intellectual property often represent “an essential resource and driver of performance for many companies. This is a shift from human capital being viewed, at least from an income statement perspective, as a cost.” However, developing standardized disclosure requirements for “human capital” is not so easy. Given that disclosure requirements should elicit information that is material to making investment decisions, Clayton observed, those requirements may need to differ significantly, depending on the industry and even the company. It may not be possible, Clayton observes, to identify metrics that offer market-wide comparability and perhaps not even industry-wide comparability:
“Each industry, and even each company within a specific industry, has its own human capital circumstances. For example, I would expect that the material human capital information for a manufacturing company will be different from that of a biotech startup, and different from that of a large healthcare provider. Further, the human capital considerations for a car manufacturer will be different from that of a home manufacturer. Because of those differences and the principles of materiality, comparability, and efficiency, I am wary of jumping in with rules or guidance that would mandate rigid standards or metrics for all public companies.”
As a result, Clayton believes that, for human capital, “it is important that the metrics allow for period-to-period comparability for the company.” Importantly, Clayton believes that human capital should be viewed through the eyes of management, whether the focus is on turnover rates, education or experience of the workforce, availability of workers to fill open positions or other factors. And, he wanted to know, what are investors looking for?
Proxy Plumbing. With regard to proxy plumbing, Clayton acknowledged that there is a near-consensus that the current system for proxy solicitation and voting “needs a major overhaul.” The question is what that should entail, both in the short-term and long-term. New Commissioner Elad Roisman will be taking the lead on proxy plumbing and other “efforts to consider improvements to the proxy process generally.”