New Reporting Requirements by the SEC Will Provide More Transparency on Human Capital Management

The U.S. Securities and Exchange Commission recently adopted a rule requiring companies to reveal more information regarding their workforces, including a description of their "human capital" resources to the extent such information would be material to investors.  The SEC already requires public companies to disclose their number of employees.  In addition, companies will now be required to identify "the skills and knowledge of workforce and how those attributes impact the value of the business."  This could include information on recruitment, retention, talent development, training, diversity, culture, productivity, mobility, and profit per employee.  This policy change was proposed last year and acknowledges "that intangible assets like human capital have become more significant in a global economy and that companies should go beyond describing physical properties in their disclosures."

Why This Rule is Important to Shareholders

A company's intangible assets, which include human capital and culture, are now estimated to comprise on average 52% of a company's market value.  The Human Capital Management Coalition, a cooperative of influential institutional investors with $5.9 trillion in assets, contends that human capital "is the engine that drives our economy and allows companies to compete in an environment where ingenuity and the ability to adapt to novel technologies are the keys to lasting success.  Investors must have the tools to understand how well a company manages its human capital in order to make optimal decisions about where we direct our financial capital."

"Companies that invest in their workforces have greater long-term value than those that don't; therefore, it is in investors' interest to have access to greater information on companies' human capital practices," argues Patrick Oakford at JUST Capital.  Some companies are already voluntarily disclosing human capital data.  Such disclosures "provide clarity to investors and external stakeholders about how a company is focusing on human capital and culture for long-term growth."

Not Enough

While many see the adoption of the new rule as a positive step towards increasing the visibility of human capital metrics, the SEC's Democratic commissioners believe the rule did not go far enough.  Rather than setting out specific disclosure guidelines, the SEC is taking a "principles-based" approach, and "leaving it to the discretion of the companies to determine what more material information is needed for its human capital description."  They point to the "missed opportunity to require more disclosure regarding diversity in company management and hiring practices."  They are also disappointed in the rule's failure to address climate-change risks. Similarly, general counsel of the Council of Institutional Investors, which has advocated for more human capital disclosures, would have liked to have seen "a combination of general, principles-based disclosure requirements along with specific mandates."

Although there is dispute regarding the rule's clarity and the uniformity of the rule's application, all agree that it is a necessary first step in properly recognizing the impact of human capital on a company's valuation and providing shareholders with transparency in making investment and voting decisions.

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Sources: Law360, Eightfold, Globenewswire