In mid-June, a large group of nonprofits, socially responsible investors, labor unions and others submitted a letter to SEC Chair Jay Clayton, stating that, while the guidance related to COVID-19 disclosure that he and Corp Fin Director Bill Hinman provided in April exhorting companies “to provide as much information as practicable” was a “step in the right direction” (see this PubCo post), it really did not go far enough in mandating the necessary transparency. They urged the SEC to impose new requirements for disclosure about how “companies are acting to protect workers, prevent the spread of the virus, and responsibly use any federal aid they receive.” With the SEC’s current propensity for principles-based disclosure, will it be persuaded to adopt these mandates?
In particular, the letter noted the importance of protection of workers’ health and safety for the benefit not only of workers, but also of customers and suppliers. For example, failure to provide paid sick leave or appropriate PPE to workers could lead to infection of customers or “undermine the functioning of supply chains and lead to declines in productivity or, worse, the need to temporarily shut down operations.” They cite multiple closures of plants in the meat-packing industry and corollary damage to farmers as one illustration of a failure of workforce protection leading to a broad failure of business continuity.
COVID-19, they maintain, has shown that values affect value: “Prior to the onset of COVID-19, it was often argued that human rights, worker protection and supply chain matters were moral issues not relevant to a company’s financial performance. As millions of workers are laid off and supply chains unravel, the pandemic has proven that view wrong. Businesses that protect workers and consumers will be better positioned to continue operations and respond to consumer demand throughout the pandemic.” The potential loss to shareholders could be significant. The SEC, they argue, must require companies to provide “consistent, reliable data to investors about the economic impact of the pandemic on their business, human capital management practices, and supply chain risks.”
Moreover, applying the theory of “regulation by humiliation,” otherwise known as “name and shame” (phrases I remember first hearing in a presentation from the late Marty Dunn when he was still at the SEC), the authors suggest that the process of crafting disclosures could motivate companies to engage in a little self-examination of the adequacy of their efforts: “by requiring these disclosures, the Commission has the opportunity to encourage companies to review their current practices and consider whether updates are necessary in light of recent events. The process of preparing these disclosures may help some public companies to recognize that their current practices are not sufficiently robust to protect their workers, consumers, supply chains and, as a result, their investors’ capital given the impact of the pandemic.”
The letter advocates that the SEC require disclosures that would cover these topics:
- COVID-19: More detailed disclosure about the company’s infectious disease prevention and control plan, including its practices regarding hazard identification and assessment, employee training and provision of PPE; its policies for contact tracing and paid leave for infected employees; its compliance with government quarantine orders and phased re-openings and public health recommendations to limit operations; and the financial impact of the pandemic on “cash flows and balance sheet as well as steps taken to preserve liquidity such as accessing credit facilities, government assistance, or the suspension of dividends and stock buybacks.”
- Executive and employee benefits: Disclosure of the “rationale for any material modifications of senior executive compensation due to the COVID-19 pandemic, including changes to performance targets or issuance of new equity compensation awards”; whether the company offers paid leave for worker illness, quarantines, temporary closure of facilities and family leave; the health insurance “coverage ratio” of the workforce; availability of employer-paid health insurance for employees laid off during the pandemic; the extent of employee health insurance, paid leave and other protections and benefits made available for part-time employees, temporary workers, independent contractors and subcontracted workers; and company anti-retaliation and whistleblower policies and contractual provisions designed to protect employees who raise concerns about workplace health and safety.
- Supply chains: Disclosure of whether the company is current on payments to its supply chain vendors, which payments should “help retain suppliers’ workforces and ensure that a stable supply chain is in place for business operations going forward.”
- Political activity: Disclosure of “all election spending and lobbying activity,” especially money spent through third-party organizations such as trade associations and tax-exempt 501(c)(4) social welfare organizations.
What are the chances that the letter could have some effect? Given the current composition of the SEC, it’s unlikely that political spending disclosure would be mandated any time soon. And the SEC may view the recent staff Disclosure Topics to suffice in addressing these issues. However, it’s not inconceivable that the nature and extent of mandated disclosure regarding the workforce could be expanded. Not only has the SEC proposed amendments to Reg S-K (pre-pandemic) that would include an expanded discussion of human capital resources, the SEC has appeared on some occasions to be open to enhancing the requirements proposed.
The current proposal would require a principles-based description of “any human capital measures or objectives that management focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the attraction, development, and retention of personnel).” The proposals provides non-exclusive examples of potentially material human capital measures and objectives. The exact measures or objectives discussed in a company’s disclosure could change over time and vary with the industry. The objective, according to the SEC, was to allow investors “to better understand and evaluate this company resource and to see through the eyes of management how this resource is managed.” (See this PubCo post.) In addition, in the context of considering how to frame human capital disclosure requirements, Clayton has previously sought to understand what questions investors—those who are making investment decisions—ask about human capital. (See this PubCo post and this PubCo post.) In a recent roundtable with investors, SEC Chair Jay Clayton and Corp Fin Director Bill Hinman heard investors clamor for more transparency regarding the composition of the workforce, discussion of “living wage” issues, and other social issues regarding human capital in general—and seemed to be persuaded by those appeals. (See this PubCo post.) We could be seeing a more expansive requirement for human capital disclosure taking shape.