When, in August 2020, the SEC considered adopting a new requirement to discuss human capital as part of an overhaul of Regulation S-K, the debate centered largely on principles-based versus prescriptive regulation—a debate that continues to this day. In that instance, notwithstanding a rulemaking petition and clamor from numerous institutional and other investors for transparency regarding workforce composition, health and safety, living wages and other specifics, the “principles-based” team carried the day; the SEC limited the requirement to a “description of the registrant’s human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant 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 development, attraction and retention of personnel).” What was the result? In this new Human Capital Disclosure Report: Learning on the Job, Intelligize took a look at how companies responded to the new disclosure mandate. Its conclusion: most companies made a “sincere effort to fulfill the scantly defined disclosure obligation”; nevertheless, the report contends, 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.”
For its report, Intelligize analyzed 427 Annual Reports on Form 10-K filed by companies in the S&P 500 between November 9, 2020, and March 5, 2021. As noted above, Intelligize considered the disclosure to largely reflect a sincere effort, evidenced most notably by the near-universal inclusion of discussions of issues with the most profound impact this past year—diversity and racial injustice and health and safety of the workforce. Intelligize determined that 424 filings discussed diversity and inclusion, while 425 discussed health and 425 discussed safety. But few companies provided much data or detail. In terms of form and content, Intelligize found wide disparities, ranging from brief unstructured paragraphs that did not differ significantly from prior disclosure, to detailed tables and graphics. Some of the disclosure focused on identifying primarily aspirational goals. Others focused their discussion on selected topics, and a smaller group provided “more robust disclosures, which included data in the form of tables and graphs.”
Although the rule did not mandate discussion of any particular measure, other than the number of employees, it did call for disclosure regarding human capital “measures or objectives” that the company “focuses on in managing the business,” suggesting as examples, “measures or objectives that address the development, attraction and retention of personnel.” Intelligize found that, in response, many companies discussed “development” (or training) and “attraction” (or recruiting); “retention” of employees was discussed by over half of companies in the survey. “Turnover” was discussed by over 140 companies and succession planning by about 200 companies. Many companies also discussed oversight of human capital, both by the board and management.
But many companies also went beyond the specific examples provided by the SEC. As noted above, over 90% of companies discussed diversity and inclusion, sometimes under a separate caption. However, very few provided much in the way of statistics—only 16 disclosed the diversity statistics that they file with the EEOC on Form EEO-1, a form filed by all public companies. Instead, some described their goals and objectives, as well as personnel charged with responsibility for diversity, such as diversity councils and committees.
As noted in the SideBar above, Clayton had commended the SEC’s principles-based system for its flexibility in eliciting necessary information when the nation has faced unanticipated events, such as the pandemic. And, consistent with that view, Intelligize found a high incidence of disclosure regarding workforce health and safety. Of the 425 companies that discussed safety and/or health, many discussions were also under separate captions. Topics included safety enhancements in light of the pandemic, continuity planning in connection with remote work, as well as company wellness programs and employee assistance programs (EAPs). Beyond the pandemic, one frequent topic was workplace injuries.
Compensation was also discussed by 425 companies, although, in the main, companies did not discuss pay numbers, but rather focused on their compensation philosophies, as well as incentive and benefits programs. Of course, as Intelligize observes, “only 16 filers included their EEO-1 data, which includes pay rates broken down by race, sex, and ethnicity, and which employers already have to prepare for the government.”
According to Intelligize, 382 companies surveyed mentioned company culture or values, a topic that has risen to the fore in light of recent company ventures into the political sphere consistent with company values. Intelligize reports that these descriptions frequently centered around “codes of conduct, core principles and commitment to ethical behavior, including, most often, “employee engagement.” Interestingly, here, companies were apparently not averse to providing data: most of the companies “disclosed some form of survey on employee engagement,” with some providing data such as the percentage of employees that indicated in the survey that they were proud to work at the company. In the same vein, 330 companies discussed their community efforts, including volunteering and charitable contribution matching programs.
Labor relations was another topic that was widely addressed, with 332 companies touching on this topic. Some companies with unionized employees discussed collective bargaining and provided data about the number of employees belonging to various unions.
Is what’s past prologue or does practice make perfect? Intelligize observes that, with no clear guidance about what to disclose and consistent with common practice, companies appeared to have learned from each other: “In a sign that they have been building on each other’s work, human capital descriptions filed later in the study period were, on average, longer than those filed toward the start.” That practice will likely continue. Will the pattern of excluding specific data continue? Or will pressure from institutional investors and social activists for inclusion of data—such as diversity and compensation data from EEO-1s that companies are already required to collect and provide to the government—lead more companies to provide that data, becoming a more mainstream practice? Will the SEC take further action to elucidate the disclosure mandate? In remarks to the Center for American Progress, entitled A Climate for Change: Meeting Investor Demand for Climate and ESG Information at the SEC, Lee advocated that, in the near term, the SEC should offer “guidance on human capital disclosure to encourage the reporting of specific metrics like workforce diversity, and consider more specific guidance or rulemaking on board diversity.” She also asked whether the SEC should consider imposing an ESG-specific policies-and-procedures requirement? (See this PubCo post.) Stay tuned.