A PDF version of this publication is attached here: New human capital disclosure rules: Getting your company ready (PDF 161kb)

With up to 85% of a company's costs tied up in people (pwc.com), stakeholders looking to allocate investment dollars want to understand how management sees the company’s strategic and operational requirements. The SEC introduced new disclosure requirements in August 2020 designed to provide stakeholders insight into human capital—from the operating model, to talent planning, learning and innovation, employee experience, and work environment. The disclosures may help stakeholders evaluate whether a business has the right workforce to meet immediate and emerging business challenges and the nature and magnitude of the related investments. However, there are questions as to what is required to comply with the principles-based rules.

In certain SEC filings, a public company is now required to disclose:

The rules do not include a definition of “human capital” or a list of required measures to disclose. The principles-based approach (1) reflects an expectation that disclosures will be tailored to a company’s own business or industry using management’s judgment and (2) allows for the disclosures to evolve in response to changes in a company’s environment.

The new rules, which are part of the SEC’s broader project to modernize Regulation S-K, became effective November 9, 2020. As a result, 2020 Form 10-Ks and other filings subject to Regulation S-K filed on or after this date need to include the new disclosures.

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While every company will differ, the following can help guide your approach.

Companies are evaluating which objectives or measures to disclose to comply with the principles-based requirements and meet investor and regulator expectations. Jay Clayton, then SEC Chairman, noted that he expects to see “meaningful qualitative and quantitative disclosure, including, as appropriate, disclosure of metrics that companies actually use in managing their affairs." But beyond that general guidance, companies have broad flexibility. Although specific to each company depending on its workforce strategy, we recommend companies consider the following, including a specific focus on two areas that significantly impacted most companies in 2020: COVID-19 and diversity, equity, and inclusion (DEI).

Human capital resources, while not defined in the rules, may include employees, non-employees, such as contract workers, and others.

The rules require disclosure of human capital objectives or measures used to manage the business if material to an understanding of the business. Companies need to consider whether to include a qualitative objective and/or a quantitative measure in each area of human capital.

The rules require companies to consider the measures used by management in running the business, which may include those reported in an enterprise balanced scorecard, or board or executive reporting, or considered in executive compensation.

Companies might also consider what aspects of human capital have been previously communicated as being critical to the business, whether in public filings, investor and employee briefings, or other public statements. For example, companies may have included explicit references to their human capital resources in their proxy filings; environmental, social, and corporate governance (ESG) disclosures; as well as during shareholder engagement.

The requirements are rooted in materiality. The SEC considers information material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment or voting decision. This may be an appropriate benchmark in identifying which human capital measures or objectives are material to the business.

As the rule indicates, human capital disclosures should evolve over time as companies respond to risks and challenges. There are perhaps no better examples of risks and challenges a company needs to address than the COVID-19 global pandemic and the need for diversity, equity, and inclusion. In this first year of adoption, we suggest focusing human capital disclosures in these areas if material to the business.

The COVID-19 crisis spotlighted the importance of having policies that protect employees and invest in their well-being. For months, companies have grappled with how to adapt their human capital management to retain their workforce, provide a safe workplace, accommodate remote workers, and respond to difficulties in supply chains. Areas of a company’s human capital management that might be impacted by COVID-19 include the following.

DEI has become not only an area of public policy, but also an issue of corporate responsibility. Stakeholders want to know how companies are creating an equitable workplace, and how they plan to respond to other DEI matters, including ensuring diversity at the management and board levels. DEI measures or objectives to consider that might be material to a company’s business include the following:

Metrics alone may not tell the full story of a company’s values, the scope of its DEI programs, or the true investment it has made in its employees. A thorough narrative that is linked to a company’s corporate purpose and mission can help bridge this gap.

The new human capital disclosures should be supported by effective controls and procedures. For example, when included in the annual report, they will be subject to the company’s disclosure controls and procedures (DCP), but when included in other filings, such as registration statements, separate controls may be needed. As your company considers the appropriate controls over these new disclosures, questions could include:

Quality data is foundational to disclosures. Companies may face challenges in obtaining, analyzing, and reporting on the data, including the following.

We looked at more than 2,000 Form 10-Ks filed from November 9, 2020, the effective date of the new rules, through February 28, 2021. In these Form 10-Ks, we noted:

Other trends include:

The change of administration in the White House and the SEC could influence the focus on human capital disclosures. Two SEC Commissioners dissented to the final rule and pushed the Commission to play a more active role in enhancing reporting for topics such as ESG, including climate change.

Amid these broader unknowns, a company should make sure it accurately and thoroughly describes the impacts on human capital of current events, COVID-19 and the focus on DEI in particular, if material. In addition, it should periodically assess whether the human capital measures disclosed continue to be the most relevant. Appropriate controls and processes will need to be maintained, especially when it comes to the underlying data supporting human capital disclosures.

Effective and transparent disclosure of human capital initiatives will provide stakeholders with a new window into how a company manages its workforce and invests in its people to create long-term value.