Tag: human capital disclosure
SEC’s Spring 2024 agenda delays most actions until 2025
As reported by Bloomberglaw.com, during an interview in February on “Balance of Power” on Bloomberg Television, SEC Chair Gary Gensler said that he does not intend to “rush” the SEC’s agenda “to get ahead of possible political changes in Washington,” that is, in anticipation of the November elections. According to Bloomberg, Gensler insisted that he’s “‘not doing this against the clock….It’s about getting it right and allowing staff to work their part.’” The SEC has just posted the new Spring 2024 Agenda and, looking at the target dates indicated on the agenda, it appears that Gensler is a man true to his word. The only new item (relevant to our interests here) slated for possible adoption this year is a distinctly apolitical proposal about EDGAR Filer Access and Account Management. And, while a few proposals are targeted for launch (or relaunch) this year—two related to financial institutions and, notably, a proposal for human capital disclosure—most are also put off until April next year—post-election, that is, when the agenda might look entirely different. (Of course, the SEC sometimes acts well in advance of the target.) According to the SEC’s preamble, the items listed in the Regulatory Flexibility Agenda for Spring 2024 “reflect only the priorities of the Chair.” In addition, information on the agenda was accurate as of May 1, 2024, the date on which the SEC staff completed compilation of the data. In his statement on the agenda, Gensler said that “[i]n every generation since the SEC’s founding 90 years ago, our Commission has updated rules to meet the markets and technologies of the times. We work to promote the efficiency, integrity, and resiliency of the markets. We do so to ensure the markets work for investors and issuers alike, not the other way around. We benefit in all of our work from robust public input regarding proposed rule changes.”
Senators urge SEC to propose human capital disclosure regulations “without further delay”
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!
Investor Advisory Committee recommends human capital management disclosure
On Thursday last week, the SEC’s Investor Advisory Committee voted to approve, with two abstentions, a subcommittee recommendation regarding human capital management disclosure. You probably remember that, in 2020, during the tenure of then-SEC Chair Jay Clayton, the SEC adopted a new requirement to discuss human capital as part of an overhaul of Reg S-K that applied a “principles-based” approach. The new rule 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).” (See this PubCo post.) With workforce having grown in importance as a value driver, many viewed the amendment as a step in the right direction, but one that fell short. 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” (although more recent studies have shown some expansion of disclosure). (See this PubCo post.) As you know, Corp Fin is currently working on a proposal to mandate enhanced company disclosures regarding HCM, and, according to the most recent Reg-Flex agenda, October is the target for issuance of the proposal. (See this PubCo post.) Recommendations from SEC advisory committees often hold some sway with the staff and the commissioners. Will the IAC recommendations have any impact?
SEC’s Investor Advisory Committee discusses human capital and beneficial ownership
On Wednesday, the SEC’s Investor Advisory Committee held a jam-packed meeting to discuss, among other matters, human capital disclosure and the SEC’s proposal on Schedule 13D beneficial ownership. Wait, didn’t this Committee just have a meeting in June about human capital disclosure, part of the program about non-traditional financial information? (See this PubCo post.) Yes, but, as the moderator suggested, Wednesday’s program was really a “Part II” of that prior meeting, expanding the discussion from accounting standards for human capital disclosure to now consider other labor-related performance data metrics that may be appropriate for disclosure. The Committee also considered whether to make recommendations in support of the SEC’s proposals regarding cybersecurity disclosure and climate disclosure.
More financial information about human capital? FASB looks to require disaggregation of expenses on the income statement
In June, the Working Group on Human Capital Accounting Disclosure, a group of ten academics that includes former SEC Commissioners Joe Grundfest and Robert Jackson, Jr. and former SEC general counsel, John Coates, submitted a rulemaking petition requesting that the SEC require more disclosure of financial information about human capital. According to the petition, there has been “an explosion” of companies “that generate value due to the knowledge, skills, competencies, and attributes of their workforce. Yet, despite the value generated by employees, U.S. accounting principles provide virtually no information on firm labor.” (See this PubCo post.) The Group may be about to have its wishes granted—at least in part—but not by the SEC. Rather, the FASB is hard at work on a project to disaggregate income statement expenses, and high on all of the FASB board members’ lists was the need to separately disclose labor costs/employee compensation. Of course, as reported by Bloomberg (here and here), there has been a push for disaggregation of expenses on the income statement since at least 2016, but in 2019, the FASB voted (5 to 2) “to put its once-high priority financial reporting project on pause.” It’s been quite a lengthy pause, but, in February 2022—perhaps hearing the call from investors and others—the FASB decided to restart work on the project to “improve the decision usefulness of business entities’ income statements through the disaggregation of certain expense captions.” It seemed from the FASB Board discussion that the Board members were favorably inclined to proceed with a disaggregation requirement—especially with respect to labor costs.
A jam-packed Spring 2022 agenda for the SEC
The SEC has posted its Spring 2022 Reg-Flex agenda and it’s crammed with pending and new rulemakings—and they’re all going to be proposed or adopted in October! (Ok, admittedly, that’s an exaggeration, but not much of one.) Here is the short-term agenda and here is the long-term agenda. According to SEC Chair Gary Gensler, the “U.S. is blessed with the largest, most sophisticated, and most innovative capital markets in the world….But we cannot take that for granted. As SEC alum Robert Birnbaum and his team said decades ago, ‘no regulation can be static in a dynamic society.’ That core idea still rings true today.” Gensler’s public policy goals for the agenda are “continuing to drive efficiency in our capital markets and modernizing our rules for today’s economy and technologies.” As with recent prior agendas, SEC Commissioner Hester Peirce has almost no kind words for the agency’s plans—“flawed goals and a flawed method for achieving them.” In fact, she went so far as to characterize the agenda as “dangerous”: in her view, the agenda represents “the regulatory version of a rip current—fast-moving currents flowing away from shore that can be fatal to swimmers. Just as certain wave and wind conditions can create dangerous rip currents, the pace and character of the rulemakings on this agenda make for dangerous conditions in our capital markets.” There’s no dispute that the agenda is laden with major proposals—human capital, SPACs, board diversity. What’s more, many of these proposals—climate disclosure, cybersecurity, Rule 10b5-1—are apparently at the final rule stage. Whether or not we’ll see a load of public companies submerged by the rip tide of rulemakings remains to be seen, but there’s not much question that implementing them all would certainly be a challenge in any case.
Working Group petitions SEC to mandate financial disclosure requirements for human capital
Do companies disclose enough information about investments in their workforces? Not according to the Working Group on Human Capital Accounting Disclosure, a group of ten academics that includes former SEC Commissioners Joe Grundfest and Robert Jackson, Jr. and former SEC general counsel, John Coates. The Working Group has submitted a new rulemaking petition requesting that the SEC require more disclosure of financial information about human capital. According to the petition, there has been “an explosion” of companies “that generate value due to the knowledge, skills, competencies, and attributes of their workforce. Yet, despite the value generated by employees, U.S. accounting principles provide virtually no information on firm labor.” The petition requests that the SEC “develop rules to require public companies to disclose sufficient information to allow investors to assess the extent to which firms invest in their workforce”—in the same way that “SEC rules have long facilitated analysis of public companies’ investments in their physical operations.” Asked about the petition, Grundfest told Bloomberg that it “aims to move the accounting treatment of a company’s workforce to the same level as its physical capital….’Current accounting rules give us more information into the economic consequences of buying or leasing a drill press than of hiring and training a software engineer….How much sense does that make in today’s world?’”
What about disclosure regarding gig workers?
When, in August 2020, the SEC adopted a new requirement to discuss human capital as part of an overhaul of Reg S-K, the SEC applied a “principles-based” approach, limiting 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).” At the time, SEC Commissioner Allison Herren Lee argued for a more balanced approach that would have included some prescriptive line-item disclosure requirements and provided more certainty in eliciting the type of disclosure that investors were seeking. (See this PubCo post.) Subsequent reporting has 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.) Accordingly, Corp Fin is reportedly working on a proposal to enhance company disclosures regarding human capital management. Now, Senators Sherrod Brown and Mark Warner, the Chair and a member, respectively, of the Senate Committee on Banking, Housing, and Urban Affairs, have written 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 independent contractors. It may be a topic to keep in mind as companies prepare the disclosures for this proxy season.
SEC offers another packed agenda for Fall 2021
The SEC’s new Fall reg-flex agenda is posted and, no surprise, it’s packed. Here is the short-term agenda and here is the long-term version. And just as with the spring agenda, Commissioners Hester Peirce and Elad Roisman have lambasted it in a dissenting statement. The agenda is laden with major proposals that were on the Spring agenda, but didn’t quite make it out the door, such as plans for disclosure on climate and human capital (including diversity), cybersecurity risk disclosure, Rule 10b5-1, Rule 14a-8 amendments and SPACs, as well as a new, already controversial, proposal to amend the definition of “holders of record.” Some of the agenda items have recently been proposed, for example, new rules regarding mandated electronic filings (see this PubCo post) and amendments to the proxy rules governing proxy voting advice (see this PubCo post). Similarly, three items identified as at the “final rule stage” have already been adopted: universal proxy (see this PubCo post), filing fee disclosure (see this PubCo post) and amendments under the Holding Foreign Companies Accountable Act (see this PubCo post). The agenda also identifies a couple of topics that are still just at the pre-rule stage, such as exempt offerings (updating the financial thresholds in the accredited investor definition, amendments to Rule 701 and amendments to the integration framework). Notably, political spending disclosure is not expressly identified on the agenda (see this PubCo post), nor is there a reference to a comprehensive ESG disclosure framework (see this PubCo post). Below is a selection from the agenda.
SEC Chair testifies before Senate Banking Committee—firmly denies paternity of all public companies!
On Tuesday last week, SEC Chair Gary Gensler gave testimony before the Senate Committee on Banking, Housing and Urban Affairs. His formal testimony covered a number of topics on the SEC’s agenda that Gensler (and others) have addressed numerous times in past: market structure and equity markets, predictive analytics, crypto, issuer disclosure, China, SPACs and Rule 10b5-1 plans. (See, e.g., this PubCo post and this PubCo post.) While the formal testimony covered some well-trod territory, the questioning highlighted the political polarization that we are likely to see continue as these proposals are presented for consideration.
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