SEC Issues New Disclosure Requirements for Human Capital Disclosure
Take Advantage of the SEC’s ‘Wiggle Room’ to Build High-Impact Human Capital Disclosure
In August, after years of pressure from large investors, the SEC revised the Reg S-K disclosure requirements to “modernize” the descriptions of business, legal proceedings, and risk factors for public companies. Arguably, the most significant change was the enhancement of disclosure requirements for human capital – a topic that has recently entered the spotlight and is here to stay given the impact of COVID-19 on global workforces. People are a company’s most important asset. And, according to outgoing SEC Chairman, Jay Clayton, they are an important driver of long-term value.
That gives investors a right to know more about how companies are overseeing this most sensitive of assets – and it adds yet another critical item to management teams’ mounting list of priorities for 2021.
Unfortunately, the actual to-dos are not as clear as they could be.
There is no denying that the new SEC reporting requirements are not as prescriptive as companies would like, creating grey area around what constitutes “good enough” disclosure. Given the SEC’s lack of defined requirements, coupled with traditionally limited human capital disclosure across public companies, it’s no wonder that Laura Wanlass, Partner and Head of Global Governance Consulting at Aon, expects to see little appetite for trailblazing in this area in 2021. In fact, in the first year, we will likely see limited human capital disclosures in the 10-K.
Let your actions drive your communication.
Yet, with no “one size fits all” strategy, an opportunity exists for companies to be truly thoughtful in their approach to disclosure and perhaps even set the bar. Importantly, the SEC’s cryptic requirements allow for a principles-based approach. This means that disclosure is only required to the extent that the information is material to a company’s operations. Furthermore, it reflects an expectation that the disclosures will be tailored to a company’s own business or industry using management’s judgment. And, it allows for the disclosures to evolve in response to changes in a company’s environment (PwC).
Therefore, companies must first look inward at their own human capital programs, strategies, and goals before communicating externally. This will ensure more accurate reporting on a company’s intentions and progress as it relates to human capital. In short, it will drive more meaningful communication based on what a company is actually doing to optimize the value of its people.
Start shaping your disclosure today.
As a first step, companies should lean on their HR teams to understand their current data, policies, and actions. This will provide a base from which to move forward. You can also use the above examples as a baseline.
If you’re worried about your current data, don’t be. And don’t let it hold you back. It is unlikely that companies will be subject to criticism if they set clear goals for improvement and start to introduce actions and policies that drive greater attraction and retention of diverse employees. Make engagement and transparency your priorities for 2021, then commit to communicating action for 2022 and beyond.
As a final thought, do not forget to share your goals and actions with your employees. Thoughtful internal communication, in addition to your external disclosure, can go a long way in helping retention, improving your narrative, and strengthening your company.