Notwithstanding the deregulatory emphasis of the current administration, two campaigns are currently being waged to convince the SEC to adopt new regulations mandating more disclosure—one related to human capital management and the other related to a frequent target, corporate political spending. Are these just pipe dreams? Is it time for a reality check? Or might there be some basis for believing that this SEC might act on these requests?
In a recent petition for rulemaking, the Human Capital Management Coalition, a group of 25 institutional investors with more than $2.8 trillion in assets under management, has asked the SEC to adopt rules requiring “issuers to disclose information about their human capital management policies, practices and performance.” Although the petition is not explicit with regard to the details of any proposed regulation, it does identify the broad categories of information that the proponents view as “fundamental to human capital analysis”:
- “ Workforce demographics (number of full-time and part-time workers, number of contingent workers, policies on and use of subcontracting and outsourcing)
- Workforce stability (turnover (voluntary and involuntary), internal hire rate)
- Workforce composition (diversity, pay equity policies/audits/ratios)
- Workforce skills and capabilities (training, alignment with business strategy, skills gaps)
- Workforce culture and empowerment (employee engagement, union representation, work-life initiatives)
- Workforce health and safety (work-related injuries and fatalities, lost day rate)
- Workforce productivity (return on cost of workforce, profit/revenue per full-time employee)
- Human rights commitments and their implementation (principles used to evaluate risk, constituency consultation processes, supplier due diligence)
- Workforce compensation and incentives (bonus metrics used for employees below the named executive officer level, measures to counterbalance risks created by incentives)”
The petitioners leave it to the SEC to achieve an appropriate balance between “specific, rules-based disclosures, such as the amount spent on employee training in the past year, and more open-ended principles-based disclosures like how training expenditures are aligned with a changing business strategy.”
Although the petition is admittedly short on prescription, it is, at 29 pages, long on rationale. The proponents contend that disclosures regarding human capital management will benefit investors and the public, as well as promote capital formation:
- “Given the key role of human capital, investors under current Commission disclosure requirements cannot adequately assess a company’s business, risks and prospects, for investment, engagement or voting purposes, without information about how it is managing its human capital.
- Greater transparency would allow investors to more efficiently direct capital to its highest value use, thus lowering the cost of capital for well-managed companies.
- Consistent mandatory disclosure standards would obviate the need for issuers to respond to a multitude of investor requests for human capital-related information; make that information easier for all investors to collect and analyze; and level the playing field for investors that are not large enough to demand or otherwise access individualized disclosure.
- There is broad consensus that long-term investing strategies are needed to stabilize and improve our markets and to effect the efficient allocation of capital. Human capital management metrics are precisely the type of information that enables investors to take the long view.”
More specifically, the petitioners argue that, because human capital is responsible for innovation and implementation of day-to-day operations, it is “key to getting and maintaining competitive advantage,” and its “paramount importance” is widely recognized.” Moreover, there is a large body of empirical work that supports the association of “thoughtful management of human capital” with “better corporate performance, including risk mitigation.” The petition cites, for example, a Wharton study showing that “investing in a value-weighted portfolio of companies in the Fortune 100 America’s Best Companies to Work For from 1984 through 2009 generated excess risk-adjusted returns of 3.5% per year.” Similarly, studies showing that “policies and practices designed to reduce turnover, encourage greater employee commitment and motivation and enhance employee skills” affect company productivity and financial performance. Training or higher training expenditures have also been “linked to better performance on intermediate measures, such as productivity and customer satisfaction, as well as financial performance.” Likewise, employee engagement “has also been found to have a positive association with firm performance,” as has board and workplace diversity.
There are also material risks, the petition maintains, related to human capital management, which can damage corporate reputation, generate legal liabilities and undermine relationships with key stakeholders, particularly where “employment relationships are… supplanted by contractual ones.” In subcontracted relationships, the petition argues, “the incentives of the company’s contracting partners are not necessarily aligned with those of the company” and could motivate contractors and subcontractors “to cut corners through nonpayment of owed wages, safety shortcuts and other violations.” The proponents observe that, in light of recent well-publicized tragic events, such as horrific accidents and discovery of human slavery,“[e]volving norms are calling for more due diligence and transparency on human capital risks in the supply chain.”
Notably, however, aside from potential risk-factor disclosure—which, the petition argues, “tend[s] to be boilerplate, designed to limit liability rather than convey meaningful information about human capital management practices—the only specific disclosure requirement regarding human capital is to disclose the number of persons employed. As a result, there is not a lot of data available, leading some investors to resort to shareholder proposals, a process that is not always conducive to obtaining comprehensive information.
Significantly, citing letters from the CEO of BlackRock (see this PubCo post) and other asset managers as well as major initiatives from the Employee Relations Group of the U.N.-supported Principles for Responsible Investment, SASB and the International Integrated Reporting Council, the petition contends that a “wide range of investors have shown interest in obtaining information that will enable them to analyze the effectiveness of companies’ human capital management practices,” especially in the “larger context of concern over short-termism.”
To illustrate, the petition highlights the reporting standards set by the Global Sustainability Standards Board (of the Global Reporting Initiative), which “include standards on training, labor/management relations, diversity, freedom of association and collective bargaining and several other subjects relevant to human capital.” The petitioner believes that investors “are interested in using human capital disclosure for different purposes, depending on their investment strategy. Many investors favor more robust human capital disclosures to permit them to identify and invest in companies that manage their human capital most effectively,” or to assess corporate culture “which investors have regarded as an important indicator of performance but have struggled to define and measure.” Investors can also use the information for risk avoidance and screening, as well as to better understand broader challenges facing the company and the “quality of upper management and the board’s stewardship of the company.”
So is there any chance that this petition will lead to regulation? One commentator quoted in this article in CFO.com indicated that he was “not particularly optimistic that [the SEC] will act on human capital under the current presidential administration.” However, the level of interest from the various institutional investors and the volume of activity by global standard-setters identified in the petition represents a countervailing trend that could have a significant impact. The level of this activity, he suggested, “may put significant pressure on the SEC to act….’What if 150 countries adopt [the human capital standard]? Why would the United States not look at adopting it? While the SEC is never the first to any party,… I think a lot of leading companies will act on their own. After companies that want to be seen as progressive and forward-looking start to see all those initiatives starting to reference the [one of the human capital standards], they’ll want to adopt it as well….And if a lot of companies do that, I think the SEC will have to do something. They’ll feel like their toes are being stepped on.’”
But if the chances for human capital management disclosure regulations in the current environment seem fairly remote, you might be even less sanguine about the chances for adoption of requirements for political spending disclosure. Been there, done that, anyone?
But given that we’re almost at the end of fiscal 2017, Senators Robert Menendez, Jeff Merkley and a substantial list of other Democrats have renewed their quest for mandatory political spending disclosure. First, they have sent a letter to SEC Chair Jay Clayton urging the SEC to “initiate action to require companies to disclose to their shareholders how they use corporate resources for political activities.” Notwithstanding their disagreement with the holding in Citizens United v. FEC, the Senators contended that the “decision clearly recognized the shareholder interest served by disclosure of political spending. Justice Kennedy wrote, ‘prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters. Shareholders can determine whether their corporation’s political speech advances the corporation’s interest in making profits.’ The lack of proper disclosure undermines the very campaign finance system envisioned by the Court.” In addition, even now, they argue, the 2017 Appropriations Act does not preclude the SEC from discussing, investigating and developing plans or possible proposals for a rule or regulation on political spending disclosure.
Further, Senator Menendez, along with the other Senators as co-sponsors, have re-introduced the Shareholder Protection Act (S.1726), intended to require public companies to disclose political spending to their shareholders. The bill would amend the Exchange Act to require shareholder approval (by a vote of the majority of the outstanding shares) before a public company could make certain political expenditures. The bill would also require proxy statements to disclose the specific nature of any expenditure for political activities proposed to be made by the company for the forthcoming fiscal year that had not been so approved, including the total amount of expenditures for political activities proposed to be made, and provide for a separate vote to authorize those expenditures. A violation would be considered a breach of a fiduciary duty by the officers and directors who authorized the expenditure and subject them to potential treble damages. The bill would also require institutional investors to disclose their votes on these proposed expenditures. In addition, the bill would require the exchanges to amend their listing requirements to mandate board approval of political expenditures in excess of $50,000; companies would be required to disclose those votes and to publicly file with the SEC quarterly and annual reports describing their political expenditures for the prior quarter.
