New Human Capital Disclosure Requirements

Margaret Engel is a founding partner at Compensation Advisory Partners. This post is based on her CAP memorandum.

Effective November 9, 2020, the Securities Exchange Commission (SEC) issued final rules that modernized the requirements of Regulation S-K applicable to disclosure of the description of the business (Item 101), legal proceedings (Item 103) and risk factors (Item

105). The new rules require companies to greatly expand their human capital management disclosure using a principles-based approach. Relatively few aspects of the rules are prescriptive, giving companies wide latitude to tailor disclosure. Given this latitude, we anticipate that companies will struggle when deciding what human capital disclosure should be included in their 10-Ks. CAP has reviewed early disclosures to provide some guidance to calendar year end companies on the topics that early human capital disclosures address and how much detail companies have typically provided.

Compensation Advisory Partners (CAP) provides a summary of the amendments of Regulation S-K related to human capital disclosure below. We also reviewed a sample of human capital disclosures made by early filers with fiscal years ending before December 31, 2020. Insights gleaned from our review will be helpful to calendar year companies who will soon be crafting their own human capital disclosure for the first time early in 2021.

Summary of Revisions to Item 101(c)(2)(ii)

The final rules amend Item 101(c) (Description of Business) to include a description of a registrant’s human capital resources to the extent the disclosure is material to an understanding of the business as a whole, except that, if the information is material to a particular reportable segment, that segment should be identified. The SEC also describes its rationale for the principles-based approach it advocates which may be helpful to registrants as they expand their description of their businesses to cover the human capital disclosure. The final rules are designed to provide investors with information on material aspects of a business’ operations, financial condition and prospects that reflect how management and the board of directors manage the business and assess its performance.

Amended Text of Item 101(c)(2)(ii):

Provide “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).

Prior to this amendment, required disclosure related to human capital was limited to the registrant’s number of employees. Clearly, a broad mandate to disclose material measures or objectives related to human capital and used to manage the business substantially raises the bar for corporate disclosure.

The new rules are also creating some concern and confusion for companies trying to comply with the amendments for the first time. For example, the SEC declined to define human capital management, instead taking the position that it was likely to evolve over time. In addition, input received during the public comment period prior to the release of the final rules makes it clear that companies are concerned that potential metrics are not standardized or defined in any way, making comparative assessments very difficult.

What We Are Seeing

To date, only a limited number of well-known companies have issued human capital disclosure. Nevertheless, certain trends are developing. To date, examples of more robust disclosure are running to 1,000—1,500 words. Wells Fargo is among the leaders with voluntary disclosure provided in its proxy statement prior to the implementation of final rules of almost 6,800 words. Less detailed disclosure is provided by other companies, usually in about 300—500 words.

One company offered limited information on the number of employees in only 63 words. We can only conclude that they believe that the human capital metrics and objectives used in their business are not material to their business results.

Most companies publish their human capital disclosure in the Description of the Business found at the beginning of 10-Ks. A few companies—QUALCOMM and Visa, for example—provide a few paragraphs on human capital in the 10-K and refer the reader to a much longer discussion in their proxy statement or documents posted to company websites

Popular topics commonly addressed include:

  • Facts about the make-up of the work force, including total number of employees, number or percentage in each major geography, breakdowns by type of employee, including full-time, part-time and seasonal, as well as management, administrative, engineering, skilled trades and hourly workers whether union or non-union;
  • A statement of company culture and identification of core values;
  • Description of governance and oversight of human capital initiatives by the board of directors, senior management and, in some cases, various councils or advisory groups composed of employees;
  • Initiatives and statistics relating to diversity and inclusion;
  • An overview of total rewards, with greater emphasis on all-employee programs, such as retirement and welfare benefits or a commitment to living wages;
  • Discussion of talent development and training;
  • Recruiting and retention practices;
  • Use of employee engagement surveys;
  • Pay equity; and
  • Health and safety initiatives and metrics.

Note that the companies that we reviewed generally do not address all of these topics. Instead, most companies chose the 3 to 6 topics from this menu that they see as most relevant to their industry and business strategy.

Quite clearly, human capital management disclosure will be highly individualized and it will be difficult—if not impossible—to make comparisons between companies, even direct competitors operating in the same space.

CAP’s Assessment

As a review of the examples provided above makes clear, most disclosures to date depend heavily on a qualitative description of core values, programs and practices. Very few companies are disclosing actual objectives and/or metrics used to manage the business. Examples of specific metrics or objectives are limited to the following among the companies reviewed here:

  • Tyson Foods discloses that increasing its employee retention rate is a goal but does not disclose numerical objectives. Actual results (i.e., a 1% increase) are disclosed. (See “Diversity and Inclusion” in the complete publication.)
  • Visa stands out by disclosing that it recently established goals to increase the number of employees from underrepresented groups at the vice president level and above in the U.S. by 50 percent in three years and to increase the number of employees from underrepresented groups in the U.S. by 50 percent in five years. (See “Diversity and Inclusion” in the complete publication.)
  • Wells Fargo discloses the adjusted pay gap between (1) women and men and (2) people of color and their white peers (both are more than 99 cents for every $1) and reports that the unadjusted pay gap is higher than the company would like them to be. (See “Annual Pay Equity Review” in the complete publication.)
  • Both Broadcom and QUALCOMM reported metrics on voluntary attrition that were lower than a technology industry benchmark survey published by Aon. (See “Talent Development” in the complete publication.)
  • Jacobs Engineering and Tyson Foods both reported their recordable incident rates, citing OSHA benchmarks. Tyson Foods further disclosed a goal of a 10% annual reduction in recordable incidents. (See “Health and Safety” in the complete publication.)
  • TE Connectivity lists key talent metrics but provides no data. (See “Other” in the complete publication.)

Surprisingly, we did not see companies disclose productivity metrics—for example, revenue per employee, growth in sales relative to growth in compensation costs, or compensation costs as a percentage of revenue.

We think this indicates that human capital management will change over time. Consulting firms, data analytics shops and government will publish more information on benchmarks. Human capital metrics will become more standardized. This will allow for more robust disclosure as companies try to find better measurements of the ROI on human capital and link it to financial metrics important to shareholders and the investment community at large.

The complete publication, including footnotes, is available here.

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