SEC Publishes Final Rule on Human Capital Reporting

by David Vance, Executive Director, Center for Talent Reporting

The U.S. Securities and Exchange Commission (SEC) just published its final rule on human capital reporting on August 26, 2020. This follows the proposed rule issued one year ago. The final rule makes very few changes to the proposed rule and mandates for the first time, public reporting of human capital metrics by companies subject to SEC reporting requirements, which includes all US companies issuing stock, bonds, or derivatives. The rule becomes effective 30 days after publication in the Federal Register which should happen in September, 2020.

Today, companies have to report only one human capital metric—number of employees. The new rule will still require the reporting of full-time employees, but additionally, encourage companies to report part-time and temporary employees if they are important to a company’s financial results.

More importantly, the new rule mandates for the first time that companies provide “to the extent such disclosure is material to an understanding of the registrant’s business taken as a whole, a description of a registrant’s human capital resources, including any human capital measures or objectives that the registrant focuses on in managing the business.”

The qualifying word: “material” means anything that an investor would want to know before buying or selling a stock, bond, or derivative. The SEC goes on to specifically call out the areas of “attraction, development, and retention of personnel as non-exclusive examples of subjects that may be material, depending on the registrant’s business and workforce.”

SEC Chair Clayton commented in the public release, “I cannot remember engaging with a high quality, lasting company that did not focus on attracting, developing, and enhancing its people. To the extend those efforts have a material impact on their performance, I believe investors benefit from understanding the drivers of that performance.”

In other words, the SEC expects to see these three areas discussed and reported if they are material, and it is hard to imagine companies where they are not. Consequently, public companies will need to start disclosing and commenting on them as early as  October , 2020. And this is just the starting point. The rule calls for all material matters to be disclosed; therefore each company will need to decide what other human capital matters might be considered material by an investor. Depending on a company’s  situation, this might include total workforce cost or productivity, diversity (especially at the leadership level), and culture (revealed by employee engagement and leadership surveys). Discussion may also be required about the implementation of a new performance management system or a significant change in compensation and benefit philosophy.

Where can companies get guidance on specific metrics they might use to meet the new rule? The 2018 recommendations by the International Organization for Standardization (ISO) includes 10 metrics for public reporting by all organizations and an additional 13 for reporting by large organizations. ISO also recommends 36 other metrics for internal reporting, which are organized by area or cluster. The recommended metrics for the three SEC focus areas with metrics recommended for all organizations include:

  • Attraction: Time to fill vacant position, time to fill critical vacant positions, percentage of positions filled internally, percentage of critical positions filled internally
  • Development: Development and training cost, percentage of employees who have completed training on compliance and ethics
  • Retention: Turnover rate

These metrics provide a starting point for a company’s human capital reporting strategy to meet SEC requirements. Additional metrics are available from ISO for the area of development, including percentage of employees who participate in training, average hours of formal training per employee, percentage of leaders who participate in training, and percentage of leaders who participate in leadership development.

In addition to the metrics for the three focus areas, ISO recommends a number of others that could address areas of material concern such as workforce cost,  productivity, diversity, and leadership trust. Companies will need to identify their own metrics not addressed by the ISO and may wish to supplement with other data (such as employee engagement). They will also need to report on material initiatives which may not have metrics.

Publication of the final rule by the SEC, combined with the comprehensive recommendations by ISO, ushers in a new era of transparency in human capital which will fundamentally change the way organizations operate. And these changes will go far beyond US publicly traded companies. In 5-10 years, privately held companies, nonprofits, and other types of organizations will be compelled (or shamed) into adopting the same level of transparency.

In the future of human capital transparency, what investor will buy stock in a company that refuses to disclose material human capital information, which is already the primary driver of value in many companies? What employee will work for an organization that refuses to share its key human capital metrics because they are embarrassed to share? Why would anyone work for an organization where the culture is terrible, they don’t invest in their people, turnover is high, and there are not enough employees to do the work? Today, you can say you didn’t know. Tomorrow, you will know.

Change is coming. The new world of human capital transparency has arrived.

Learn More

The final rule on human capital reporting is part of a much larger revision to what is called Regulation S-K which governs what companies must disclose to investors initially (form S-1), quarterly (form 10-Q) and annually (form 10-K). The name of this effort, which has been underway by the SEC for four years, is Modernization of Regulation S-K items 101, 103, and 105. Item 101 governs description of the business and this is where new rules for human capital reporting are found. (Item 103 covers legal proceedings and item 105 risk factors.) Read the rule at here (pages 45-54) for human capital.

The ISO 30414:2018 Human Resources Management—Guidelines for Internal and External Human Capital Reporting is available for purchase. ISO is just beginning to release technical specifications on how the metrics are defined and used. By mid 2021, specifications should be available on all 59 metrics. The specifications for five of the eight training and development metrics are now complete and in publication. They should be available soon.

Attend Our Free Webinar On Public Reporting

Join us September 16 for our Public Reporting webinar, where cover both the SEC rule and ISO recommendations in greater detail.

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Attend our Free Virtual Conference

We will be covering the subject of Human Capital Reporting at length at our Virtual Conference, October 27-29. Jeff Higgins, Adjunct Professor – Data Science(DSO), Human Capital Analytics at University of Southern California – Marshall School of Business, has been actively involved in both the SEC and ISO efforts and will be keynoting on the subject. We will also have a panel on the SEC and ISO as well as a follow-up session on the recommended metrics.

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