Human Capital Management Disclosure

Doreen E. Lilienfeld is a partner and Max Bradley is an associate at Shearman & Sterling LLP. This post is based on their Shearman memorandum.

Current law does not require much from a public company in the way of disclosing information concerning its workforce (its “human capital”) outside the C-suite or with respect to the philosophies, policies and practices it implements to select, oversee, nurture and develop that workforce (its system of “human capital management”). Under SEC disclosure requirements (Item 101 of Regulation S-K) a public company need disclose no more than its total number of employees, and common practice is to do no more than that. Recently, though, a growing number of stakeholders—special interest groups, investors, the SEC and public companies themselves—have questioned and publicly discussed whether human capital management disclosure requirements should be expanded or, if not, whether a public company should voluntarily disclose its approach to ensuring that its human capital is diverse, developing, motivated and positioned to contribute to the long-term value of the company. To that end, the SEC, on August 8, 2019, issued proposed amendments to Item 101 of Regulation S-K that would require principles-based disclosure of matters related to human capital.

This post surveys the current landscape and provides recommendations to public companies considering how to approach disclosure in this increasingly important area.

A Call for Enhanced Disclosure

On March 28, 2019, the Investor Advisory Committee (IAC) to the SEC recommended that the SEC
recognize the significance of human capital management and “incorporate it as a part of the Commission’s Disclosure Effectiveness Review and the Commission’s approach to modernizing corporate reporting and disclosure.” [1] As explained in the written recommendation, the U.S. economy has transitioned from one based on industrial production and tangible assets to one based on intangible assets and human services, and the current disclosure rules—based on the antiquated view that human capital is a cost rather than a driver of financial performance—have failed to respond. Since, in the view of the IAC, human capital is the “primary source of value” of many of the most dynamic U.S. companies, it encouraged the SEC to engage with investors, issuers and the academic community in an effort to improve and augment existing human capital management disclosure.

SEC Chairman Jay Clayton seems interested. In remarks published in connection with the IAC recommendation, Chairman Clayton referred to human capital as, for some companies, a “mission-critical asset,” explaining that “the historical approach of disclosing only the costs of compensation and benefits often is not enough to fully understand the value and impact of human capital on
the performance and future prospects of an organization.” [2] In light of this potential inadequacy of the current disclosure rules, Chairman Clayton expressed the view that investors might be better served by a principles-based (rather than a rules-based) disclosure framework that would allow them to understand “the lens through which each company looks at its human capital.”

The recommendation of the IAC and the remarks of Chairman Clayton were not made in a vacuum; instead, they followed a sustained series of calls for enhanced human capital management disclosure from special interest groups and investors. On July 6, 2017, the Human Capital Management Coalition (HCMC), a cooperative effort of 26 institutional investors representing over $3 trillion in assets, petitioned the SEC for rulemaking seeking more disclosure. [3] Citing a litany of empirical research and academic work that, in its view, shows that “thoughtful management of human capital is associated with better corporate performance, including risk mitigation,” and highlighting the current lack of, and investor demand for, fulsome disclosure of public company human capital data, the HCMC urged the SEC to consider rules requiring human capital disclosures from public companies on workforce demographics, turnover, diversity, culture, and health and safety. The HCMC, in a March 22, 2019 letter to the IAC, reaffirmed its support for the adoption of human capital management disclosure rules; indeed, the IAC included the petition of the HCMC (and the fact that the HCMC represents a number of large institutional investors) as a finding in support of its recommendation to the SEC. [4]

BlackRock, the world’s largest asset manager, has made a similar call. In 2019, BlackRock, as it had in 2018, identified human capital management as one of its five engagement priorities (along with governance, corporate strategy and capital allocation, compensation that promotes long-termism and environmental risks and opportunities), [5] explaining that human capital management is a critical investment issue and “it is therefore important to investors that companies explain as part of their corporate strategy how they establish themselves as the employer of choice for the workers on whom they depend.” [6]

Finally, the Embankment Project for Inclusive Capitalism (EPIC), a project intended “to identify and create new metrics to measure and demonstrate long-term value to financial markets” by the Coalition for Inclusive Capitalism and Ernst & Young, participated in by more than 30 asset owners (such as Allstate, CalPERS and MetLife), asset managers (like Vanguard, State Street and Fidelity) and companies (three of which are in the Top 100 Companies) [7] and claiming to represent more than $30 trillion of assets under management, joined the same call. [8] In its 2018 report, EPIC identified “talent” as one of the four key “factors that define long-term value” for which company disclosure of consistent and comparable metrics are most needed (along with innovation and consumer trends, society and the environment, and corporate governance). According to the report, EPIC participants concurred that employees play a key role in “a company’s ability to create long-term value” and therefore developed and proposed a series of metrics to allow investors to measure a company’s management of its “talent” in the areas of human capital deployment, organizational culture and employee health.

The SEC has begun to respond. On August 8, 2019, it announced proposed amendments to Regulation S-K that include requiring a “description of the registrant’s human capital resources, including in such description 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).” [9] In proposing this principles-based disclosure requirement, the SEC noted that “human capital measures or objectives” that are material to one company may be immaterial to another and may vary over time and by industry.

What Do Stakeholders Want to Know?

While a growing number of stakeholders are joining the call for enhanced human capital management disclosure, a clear picture of what those stakeholders would like to see disclosed has yet to emerge. Some key points these stakeholders have raised in their calls for enhanced human capital management disclosure are summarized below.

Key Points

A proposed revision of Item 101(c) of Regulation S-K requiring a principles-based “description of the
registrant’s human capital resources, including in such description 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).” [10]

Stakeholder Suggested Workforce Disclosures: [11]

  • Demographics (number of full-time, part-time, contingent, subcontracted and outsourced workers)
  • Stability (turnover, internal hire rate)
  • Composition (diversity, pay equity)
  • Skills and capabilities (training, alignment with business strategy, skill gaps)
  • Culture and empowerment (engagement, union representation, work-life initiatives)
  • Health and safety (injuries, fatalities, lost day rate)
  • Productivity (return on cost of workforce, profit/revenue per full-time employee)
  • Compensation and incentives (bonus metrics, measures to counterbalance risks created
    by incentives)

While engaging with boards on human capital management issues, stakeholders like BlackRock want to hear about: [12]

  • Oversight of policies meant to protect employees, like whistleblowing, codes of conduct and EEO policies, and the reporting structures the board relies on to assess their implementation
  • How the human capital management structure ensures a healthy culture and prevents unwanted behaviors
  • Consideration of linking human capital management performance to executive compensation
  • Reporting to the board on the integration of human capital management risks into risk management processes
  • Board member visits to workplaces to assess the culture and operations of the company
  • Board and employee diversity data

Three Steps to Developing a Human Capital Management (and Disclosure) Approach

In approaching human capital management (and related disclosure), we suggest public companies consider the following three steps.

  1. “Understand the lens” (in the words of SEC Chairman Jay Clayton) through which the company looks at human capital. [13] Not only, as Chairman Clayton pointed out, should any human capital management disclosure approach apply the “lens” through which the
    company looks at human capital, the company’s human capital management approach itself should begin with a clear understanding of that “lens.” Each company’s “lens” requires individualized crafting as the contours will vary from company to company and in different industries and geographies. Companies must consider such questions as, is human capital among the primary concerns of the company, or is it an ancillary one? How does the company approach human capital—as an independent item to be focused on, or is it integrated into discussion of the larger picture (for instance, culture, or long-termism, or risk)? What aspects of human capital—diversity, training, turnover—matter most to the company?
  2. Construct an aligned human capital management strategy. This buildout will initially depend on identifying the groups that are responsible for its construction. Senior management and the board should be key among those groups. Management’s role in developing human capital should be clearly defined by identifying who in management will be responsible for the strategy. Should the CEO be reimagined as a “Chief Talent Officer”? Should the Chief Human Resources Officer be elevated to a strategic management role? [14] As with culture, it is important to add human capital management to the board agenda; as BlackRock noted in its human capital management engagement commentary document, “HCM is both a board and a management issue.” [15] From here, a company should determine whether adding human capital management oversight as a core responsibility of a selected committee aligns with its “lens;” some of the Top 100 Companies have done just that. [16] Doing so will not only result in a board that is better able to develop human capital and manage human capital risk, but will also signal to stakeholders that effective human capital management is an issue the board is fully engaged on.
  3. Determine if, and what, to disclose. Even a company that follows steps 1 and 2 is under no current obligation to disclose it. Determining if, and what, to disclose is a company-by- company consideration. For any company, though, disclosing the “lens” through which the company looks at human capital, and the basic structures of human capital management that the board and the company have built, will allow the company to proactively, and on its own terms, provide the marketplace with the basic human capital management information that many influential stakeholders have called for.


1See Recommendation of the SEC Investor Advisory Committee, Human Capital Management Disclosure (March 28, 2019). The Disclosure Effectiveness Review is a project undertaken by the SEC’s Division of Corporation Finance to review and modernize the form and content of public company reporting.(go back)

2See Chairman Jay Clayton, Remarks to the SEC Investor Advisory Committee (March 28, 2019).(go back)

3See Letter to William Hinman, Director, SEC Division of Corporation Finance, from the Human Capital Management Coalition (July 6, 2017).(go back)

4See Letter to Anne Sheehan, Chair, SEC Investor Advisory Committee, from the Human Capital Management Coalition (March 22, 2019); Investor Advisory Committee, supra note 1.(go back)

5See BlackRock Investment Stewardship Engagement Priorities for 2019 (January 2019).(go back)

6See BlackRock Investment Stewardship’s Approach to Engagement on Human Capital Management (January 2019).(go back)

7DowDuPont, Johnson & Johnson and PepsiCo.(go back)

8See Embankment Project for Inclusive Capitalism.(go back)

9Modernization of Regulation S-K, Items 101, 103 and 105, SEC Release No. 10668 (August 8, 2019).(go back)

10See SEC, supra note 9.(go back)

11See HCMC, supra note 3.(go back)

12See BlackRock, supra note 6.(go back)

13See Chairman Jay Clayton, supra note 2.(go back)

14See Ram Charan, Dominic Barton & Dennis Carey, “People Before Strategy: A New Role for the CHRO,” Harvard Business Review (July – August 2015).(go back)

15See BlackRock, supra note 6.(go back)

16See, e.g., McDonald’s (Public Policy & Strategy Committee); Wells Fargo (Human Resources Committee).(go back)

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