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SEC Human Capital Proposal Draws Nearly 80 Comments, No Media Attention

Comments are overwhelmingly in favor of even more specific disclosures of human capital investments than proposed in new Securities & Exchange Commission Regulation S-K disclosure requirements, with investors and individual commenters in support of more specifics and business interests generally opposed to any additional disclosure requirements. Despite the fact that about 80 leading corporations, academics, associations, and investors, as well as interested individuals, responded to a new Securities & Exchange Commission proposed rule for human capital disclosures, the general media has largely ignored this historic proposed rule that would for the first time require public companies to reveal material information about human capital management practices to shareholders. Note: The International Center for Enterprise Engagement was the first to submit a comment to the proposal and recommended that the SEC follow the general principles outlined by the Chairman Jay Clayton in meetings with the SEC’s investors advisory board.
 
A review of the 80 or so comments to the proposed Securities & Exchange Commission changes to S-K regulations rules for public disclosures finds that all investors and academics who commented on this reform are in favor of even more detailed disclosures than proposed by the Securities & Exchange Commission, and that the proposed rules are generally opposed by public companies such as Fed Ex and General Motors and organization such as Heritage Foundation. Those in favor argue that companies with a strategic focus on ESG (Environment Social and Governance) issues outperform other organizations and reduce risks and that therefore investors need to have such information. Those opposed argue that such companies are inherently “socialistic” and are less profitable, or that compliance would be burdensome or of little value to investors due to the alleged inability to provide comparable data. 
 

The Pro’s

John Streur, President & CEO, Calvert Research and Management, a leading proponent of ESG (Environmental, Social, Governance) investing, favors more detailed disclosures. “As an investor, Calvert employs a proprietary framework that generates quantitative key performance indicators {KPls) derived from public information reported by companies and employees, concentrated on environmental, social and governance (ESG) factors. KPls allow analysts to measure qualitative information, and rate and rank company performance relative to peers. Analysts are able to use this information to identify companies that are improving, leading or lagging compared to the industry standard….According to research we have supported, firms that score highly on material ESG issues financially outperformed firms with poor ESG ratings on those same issues while firms with high marks on immaterial ESG issues actually underperformed their peers. These findings underscore the importance of materiality as it relates to an issuer's exposure to an ESG risk or opportunity.”
 
Brandon J. Rees Deputy Director, Corporations and Capital Markets, AFL-CIO, writes that: “While we welcome the Commission’s recognition that improved human capital disclosure is needed, we believe that Regulation S-K Item 101(c)(1)(xiii) should be strengthened with additional quantitative, bright-line disclosure rules. For example, companies should be required to disclose quantitative data on the geographic locations of employees, the percentage of full-time vs. part-time employees, the use of temporary employees and independent contractors, employee average tenure and turnover rates, unionization rates, and employee diversity information. We note that many companies voluntarily disclose aspects of this data in supplemental sustainability reports or in a narrative discussion to provide context for their Item 402 pay ratio disclosures. Uniform rules-based disclosure will greatly aid investors in comparing and analyzing companies.”
 
The US Chamber of Commerce tentatively supported some human capital disclosures. The chamber “concedes that certain matters concerning human capital resources may be material to investors in certain circumstances. Accordingly, we are cautiously supportive of the Commission’s proposal to require a principles-based disclosure regime around these matters. In doing so, we believe it is critical that such disclosures remain limited, as described in the Proposing Release, ‘to the extent material to an understanding of the registrant’s business taken as a whole.’ In keeping this disclosure principles based, we do not see a need for the Commission to provide examples of the types of measures or objectives that management should focus on its disclosure…Additionally, we do not believe that the Commission should retain the requirement to disclose a particular number of employees for a registrant. With the rise of employee outsourcing and leasing arrangements; greater use of outside consultants, seasonal workers and independent contractors; and the emergence of the ‘gig’ economy, providing the number of pure employees as of a date certain no longer reflects a meaningful statistic for many companies.”
 
Carine Smith lhenacho, Chief Corporate Governance Officer, and Séverine Neervoort, Senior Analyst, Corporate Governance; Norges Bank Investment Management, write: “We note the principle-based approach proposed by the SEC on this topic, which provides companies with the flexibility to determine which disclosures they consider material for an understanding of their business. We encourage companies to use recognized international reporting frameworks, such as the standard on human capital developed by the Sustainability Accounting Standards Board (SASB). SASB standards provide guidance to companies on materiality assessments, as well as on sector-specific disclosure metrics. The use of such frameworks helps improve consistency and comparability of corporate disclosures.” 
 
Scott Stringer, Controller of the New York City, managing $6.2 billion in assets, write that its office seeks: “(1) to promote fair labor practices and diverse and equitable workplaces at companies and in their global supply chains that we believe will contribute to employee diversity, morale, productivity and retention and (2) disclosure of quantitative metrics that will better enable us to evaluate the performance of our portfolio companies in terms of their ability to hire, retain, promote and equitably compensate women and minorities. Consistent with the NYCRS’ commitment to robust human capital management practices and disclosures, we are founding members of the Human Capital Management Coalition (HCMC), a collaboration of 28 institutional investors representing over $4 trillion in assets seeking to further elevate human capital management as a critical component in company performance and in the creation of long-term value.”
 
Also in support of more specific disclosure information, Marcie Frost, CEO of CALPERS, the largest employee pension fund in the US, asserts that: “By expanding the discussion on human capital, we note that the Commission has recognized the value of human capital. While we would like to see this new focus result in additional transparency, we do not believe that the Commission's current approach will provide sufficient comparable disclosure to aid investors. Thus, we and others will make recommendations for metrics that should be disclosed by all registrants including: the number of full-time, part-time and contingent workers; employee turnover rates, and diversity statistics. These disclosures should not be overly burdensome as many US public companies already collect some of these metrics as part of their human capital efforts and others, such as diversity statistics, are required by the Department of Labor such as the Employer Information Report or EE0-1. Furthermore, one of our team members sits on the SEC Investor Advisory Committee (IAC). The IAC provided recommendations on Human Capital Management Disclosure dated March 28, 2019. We read and applauded that submission, which stated: At the most basic, issuers could be required to comply with a principles-based disclosure requirement asking them to detail their HCM (human capital management) policies and strategies for competitive advantage and comment on their progress in meeting their corporate objectives.” 
 
Renaye Manley, Director of Capital Stewardship, Service Employees International Union, contends that “Consistency and comparability in reporting promotes efficiency, both for issuers who would have concrete guidance on what to report and how, and for investors who would no longer need to pore through reams of documents to find basic information on the workforce. It allows investors to easily and efficiently compare companies and benchmark performance. Consistency and comparability also levels the playing field between large institutional investors who can demand (and afford) more data from companies on human capital, and smaller retail investors who, on a practical basis, often cannot. There are also tangible financial benefits to enhanced disclosure--recent research from Embankment Project on Inclusive Capitalism (EPIC) linking financial value to human capital reporting found that firms that disclose data on their ability to create value by leveraging human capital perform better than non-disclosers. In the UK, where issuers are required to report detailed human capital information, firms with stronger human capital reporting show a return on invested talent (ROIT)—defined as the dollar return per one dollar invested in talent—that is nearly three times higher than the ROIT of non-disclosers and operating margins that are 3% higher than those of non-disclosers…
 
“The proposed principles-based requirements alone are unlikely to yield the more robust human capital information investors need to make well-informed investment decisions. Given the importance of human capital management to business performance, a ‘hybrid’ approach would be more appropriate, where the SEC establishes a limited set of well-defined, baseline disclosure standards for information that is of particular interest to investors and universally-applicable across issuers, regardless of industry or business strategy. These metrics should include the number of full-time, part-time and contingent workers; workforce costs; workforce diversity; and employee turnover (or comparable workforce stability metric). Mandatory information would be provided in addition to other information on material aspects of human capital resources management which a company would report based on its industry and business strategy. The SEC should provide a list of potentially material factors such as worker recruitment, employment practices and hiring practices, employee benefits and grievance mechanisms, investment in employee training, workplace health and safety, strategies and goals related to human capital management, legal or regulatory proceedings related to employee management, and coverage by collective bargaining agreements.”
 
Sen. Mark Warner, D., Va., also argues for more specific disclosures. “I understand that you have expressed concerns about the value of mandating certain metrics as disclosure items across all industries, but I encourage the Commission to consider the value of quantitative information that is of a high value to investors across a variety of industries. Specific disclosures make it easier to compare registrants, which is important to potential investors. You have commented on the importance of comparability yourself, for instance in February 2019 during a phone call with Investor Advisory Committee Members: ‘For human capital, I believe it is important that the metrics allow for period to period comparability for the company.’ There are certain disclosure items, such as whether workers are full-time or contractors, turnover rates, and spending on employee training opportunities, that can provide universal value across all industries. I recognize the risk that prescriptive metrics can pose--that companies may ‘manage to the metric,’ as the SEC Investment Advisory Committee put it. However, I encourage the Commission to engage with investors, registrants, and experts further to learn more about metrics that may serve useful purposes while minimizing unintended consequences.” 
 
Ernst & Young wrote: “The Commission has proposed to require, to the extent material to an understanding of the registrant’s business, either taken as a whole or with respect to an identified segment, disclosure of a description of human capital resources, including 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). We believe this proposal should elicit more meaningful disclosures about human capital and its management. We note that a few of the Fortune 100 have begun to identify key performance indicators (KPIs) with respect to human capital, and some quantify actual KPI performance.
 
“We also believe the SEC should encourage transparency and comparability of any quantitative disclosures companies choose to make about the human capital measures on which management focuses. To provide transparency, companies should disclose whether the measure conforms with a published framework or, if not, the basis of its computation. To promote comparability, companies could present or supplement human capital measures in proportion to inputs or outputs (e.g., measures per employee, full-time employee, salaried employee, unionized employee, hour worked, unit of production, store, revenue dollar). That is, a registrant could disclose that actual or planned performance was ‘30 hours of training per employee’ instead of or in addition to ‘1 million training hours for the company.’”
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The Cons

The pros overwhelm the cons but these come from leading organizations. Mark Allen, Executive Vice President, General Counsel for Fed Ex Corp., writes: “ While FedEx recognizes that human capital may represent an important resource and driver of performance for certain companies, we strongly believe that any new disclosure regime focused on this topic should rely on the concept of ‘materiality’ that generally guides disclosures under the federal securities laws and avoid prescriptive requirements.”
 
David A. Inchausti, Vice President and Comptroller, Chevron Corp., writes: “As discussed in the Proposing Release, with the shift to a service-based economy, there is more variability among companies in the composition and employment patterns of the workforce, limiting the comparability of even a relatively simple metric such as employee headcount. Retaining human capital management disclosures in voluntary publications, versus including specific metrics in SEC filings, facilitates a broad discussion of the related considerations specific to each company and provides the flexibility for such discussion to evolve as the focus of investors changes over time in this area. We also believe that providing a list of specific non-exclusive examples of human capital management metrics that may be material creates a risk of encouraging companies to include additional disclosure that is immaterial, fails to take into account the differences and lack of comparability across business sectors and may ultimately obscure or distract from more relevant information about a company's business. In addition, we do not believe the additional cost of providing these types of metrics as part of a Form 10-K filing would provide a corresponding benefit to investors. In lieu of adopting additional rules, given the indeterminate and evolving nature of investor interest regarding human capital management, we recommend the Commission instead consider providing interpretive guidance to registrants to provide clarity and promote comparability among registrants. “
 
General Motors writes: “We believe human capital matters are of interest to certain of our investors and stakeholders. That is why we provide extensive disclosure in the ‘Talent’ section of our annual Sustainability Report, which addresses our efforts in the areas of talent acquisition, employee benefits and wellness, talent development, talent engagement, building an inclusive culture and labor relations. However, we believe that the Commission’s proposal to expand Item 101(c)(xiii) of Regulation S-K to require human capital disclosure would not further the goals of the Proposed Rule, which are ‘to improve these disclosures for investors, and to simplify compliance efforts for registrants,’ for two key reasons. 
 
“First, the proposal to add human capital measures as a separate disclosure item in the business section is unnecessary because this information, to the extent necessary to an investor’s understanding of a registrant’s business, would already be required to be disclosed.
 
“Thus, the current rules already elicit disclosures regarding human capital to the extent they are material to the understanding of a registrant’s business. For example, registrants frequently include risk factor disclosures describing the ‘challenges of integrating, developing, and motivating a rapidly growing employee base’ or that they ‘must attract and retain highly qualified personnel’ and that ‘competition for these employees is intense’ or similar risks. Second, the inclusion of human capital matters in the 10-K would present new timing and operational challenges. Many companies are providing extensive human capital information outside of the 10-K, either in the proxy statement or a separate report, as we do in our annual Sustainability Report. However, these same companies would not be able to provide such extensive information, which needs to be gathered from varied sources and which would require new disclosure controls and in-depth internal and external audit procedures, within the 10-K filing timeline. Because many registrants are already providing this disclosure in the 10-K, to the extent material, and are providing extensive additional disclosure in other investor materials, we believe that the Commission should take an alternative approach. Due to the swiftly evolving and highly company-specific nature of human capital resources disclosure, we believe the Commission’s issuance of interpretive guidance, such as that provided on cybersecurity and climate change, would be particularly helpful to registrants. As the Commission noted with respect to Item 303 of Regulation S-K, the periodic guidance on MD&A (Management Discussion and Analysis) disclosure “has resulted in disclosures that keep pace with the evolving nature of business models without the need to continuously amend the text of the rule.’ Accordingly, we believe that the issuance of interpretive guidance and the attendant ability for the Commission to respond to investor and company interests and practices is preferable to promulgating new disclosure requirements prematurely.
 
“However, if the Commission ultimately mandates human capital disclosure in the final rule, we believe that a principles-based approach, as opposed to one that is prescriptive, would be more appropriate. The evolving company-specific information currently sought by investors requires registrants to exercise judgment about the relevant items to be disclosed. It would be extremely difficult for GM and other registrants to distill the essence of their complex organizations, especially in the area of human capital management, into a set of standardized human capital metrics. Given the more qualitative nature of human capital disclosures, a principles-based approach would be more appropriate than a static, prescriptive regime that may be rendered less relevant or obsolete by market trends and/or evolving investor understanding of the most probative aspects of human capital management. For example, GM’s current disclosure of human capital matters, included in our annual Sustainability Report, is specifically tailored to our business and our industry, and is the result of our engagement with investors and other stakeholders. In addition, we do not believe that there is a consensus as to the most appropriate metrics or methodology needed to support prescriptive bright-line disclosure. Even if reliable and proven metrics were available.”
 
Even the Heritage Foundation weighed in. David Burton, Senior Fellow, Economic Policy, comments that: “The purpose of businesses is to deploy investors’ capital and employees’ labor in the service of consumer needs and wants with the aim of making a profit. But ESG, CSR (Corporate Social Responsibility) and stakeholder theory proponents are trying to alter the very purpose of businesses. Their aim is to pursue plethora of social objectives rather than earning profits or meeting consumer wants. This would reduce social welfare. It would make American businesses less competitive and cost workers their jobs. It would make the American economy less efficient and productive, raising prices to consumers. It would make businesses become poor stewards of scarce resources. It would make management less accountable since the metric of ‘success’ will become extremely amorphous. It would reduce the returns to investors and have an adverse impact on the pension plans and defined contribution retirement accounts of well over a hundred million people.”

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