Reporting regulations for publicly traded companies put in place by the United States SEC in 2021
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The SEC Human Capital Disclosure Rule, also known as “The Securities Exchange Commission (SEC) Modernization of Regulation S-K Items 101, 103, and 105,” entered into effect on November 9, 2021.
At its core, these rules require management at publicly traded companies to disclose information about their workforce, including attraction and retention metrics, among others.
A company’s workforce is often its largest and most expensive asset; effectively managing this is paramount.
Stakeholders (including employees, customers, investors, and regulators) want to understand how a firm manages its human capital.
Important HCM metrics include NPS, DEI data, average employee tenure, compensation statistics, and more.
What Disclosures are Required Under the Human Capital Disclosure Rule?
Under the new rule, companies may choose to disclose a variety of metrics, including the following:
The number of employees categorized as full-time, part-time, and seasonal.
Information about the company’s human capital objectives, including how it manages, develops, and retains its workforce.
The company’s policies and practices related to workplace health and safety.
The company’s policies and practices related to workforce diversity, equity, and inclusion (DEI).
The company’s training and development programs, including those related to DEI.
The company’s workforce composition, including information on employee turnover rates and the number of contingent workers.
Other information that the company believes is necessary to understand its workforce and any related risks or opportunities.
These rules require public companies to significantly expand their human capital management disclosures but to do so using a principles-based approach. This means that management has some flexibility to report on whatever issues and data points are deemed contextually relevant to their business.
Why are the Human Capital Disclosure Rules Important?
These rules solidify the importance of the “S” in ESG, portraying the central social aspect of running a successful business. The SEC’s Human Capital Disclosure Rules emphasize the role of human capital management as a driver for a company’s successes (or failures).
Additionally, by setting standards around what management should report about its workforce, these rules also set a de facto standard for what companies should be doing on behalf of their workforces.
For example, firms must disclose their DEI policy (or policies), meaning that firms without such policies must quickly establish them.
Use Cases for HCM Disclosure
The following help illustrates the importance of this regulation and how it may impact stakeholders:
Informing capital providers
Human capital is a critical factor in a company’s success, and both investors and creditors increasingly want to understand how a management team is improving the effectiveness of (arguably) their most important asset – the workforce.
These rules reflect that importance and ensure investors have access to the information they need for their due diligence and decision-making.
Ensuring accountability for public ESG commitments
These rules increase the transparency of and details around the social commitments that management teams choose to make public.
For example, after the 2020 death of George Floyd and the global reckoning on systemic racism, corporate leaders around the world made public commitments to address racism, implement DEI initiatives, and generally improve the welfare of vulnerable communities. These regulations provide a mechanism for ensuring corporate transparency and accountability in living up to social commitments like these.
Improving employee welfare
Disclosing how a company engages, retains, and improves the welfare of their workforce means that people can make more informed decisions on where to work and why.
As stakeholder expectations around HCM continue to increase, these regulations ensure that prospective employees have the information they need to decide what companies to join (or stay with).
Who Should be Concerned About the HCM Disclosure Rules and Why?
Although the Human Capital Disclosure Rules are targeted at public companies, they actually impact a large variety of stakeholders.
Why? Because they increase the visibility of these issues, putting reputational pressure on companies (even those that aren’t publicly traded) to be more thoughtful and equitable when designing HCM strategies.
These disclosure requirements may also increase the likelihood that companies can secure and maintain the “social license to operate” that’s required in a given community, which in turn supports corporate reputations more broadly.
Two groups, in particular, should take heed of these rules:
Pre-IPO companies: Worker welfare was the #1 ESG issue of concern for American consumers in 2022, according to ESG rankings entity Just Capital, and there’s a compelling business case to go public with as many reputational tailwinds as possible.
And while private, pre-IPO companies aren’t required to monitor or report HCM metrics, they will be for their prospectus and on a going-forward basis once public.
Investors: As investors evaluate a company’s chances for success, they should consider further integrating HCM into their investment criteria. This will ensure they are managing potential regulatory noncompliance risk within their portfolio, as well as the financial burden associated with high employee turnover and potential future litigation.
Key Considerations for Human Capital Disclosure Compliance
Complying with the SEC’s Human Capital Disclosure Rules can be challenging for companies but is critical for talent retention, investor acquisition, and overall organizational effectiveness. The following key questions/considerations can help ensure compliance:
Does the company disclose information about its human capital? If so, when was the last time the company held an inventory and assessment of its methods? Was there alignment with the new rules issued in November 2021?
Does the company have mechanisms to collect, track and report data regarding its workforce?
Does the company have workforce and human capital management policies, such as a diversity, equity, and inclusion policy? If so, how are those policies executed company-wide?
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