Image: Unsplash

“Investors want to better understand one of the most critical assets of a company: its people,” Securities and Exchange Commission (“SEC”) Chair Gary Gensler stated earlier this month amid an ongoing conversation about adding mandated “human capital” disclosures to the existing list of things that publicly-traded companies are required to report. In a string of tweets in mid-August, Gensler revealed that he has called on SEC staff “to propose recommendations for the Commission’s consideration on human capital disclosures,” which he stated “could include a number of metrics, such as workforce turnover, skills and development training, compensation, benefits, workforce demographics including [gender and racial] diversity, and health and safety.” 

In addition to consumers looking to get a handle on climate-related risks that companies are facing, which Gensler said in a London City Week speech in June that he is seeking staff recommendations for (namely “around governance, strategy, and risk management related to climate risk”), the SEC chair stated that a focus on mandatory uniform disclosures related to public companies’ work forces would also be beneficial in a number of ways for companies and consumers, alike. “Disclosure helps companies raise money. It helps the efficient allocation of capital across the market,” he stated. “And it helps investors place their money in the companies that fit their investing needs.”

Should the SEC adopt uniform disclosure requirements for publicly-listed companies in line with a larger focus on bringing standards for Environmental, social and corporate governance (“ESG”) reporting into the picture, it would not be the first time that the stock market regulator showed interest in this arena. Around this time last year, the SEC issued new rules under Regulation S-K that require companies to include “a description of [their] human capital resources” in their annual corporate filings “to the extent such disclosures would be material to an understanding of the registrant’s business.” 

Specifically, the current SEC rule on human capital requires public companies to provide a “description of [their] human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant 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 development, attraction and retention of personnel).” The immediate result of that disclosure mandate, which went into effect in November 2020, was less than earth-shattering, Intelligize discovered. The data provider revealed in April that most companies made a “sincere effort to fulfill the scantly defined disclosure obligation.” At the same time, however, most of those entities “capitalized on the fact that the new rule does not call for specific metrics,” and thus, few actually “provided meaningful numbers about their human capital, even when they had those numbers at hand.

In a report of its own, Seyfarth Shaw LLP reviewed proxy statement human capital management disclosures by companies in the retail space and found that they primarily “focused on culture, recruitment and retention, and talent development programs,” with “many of the companies in this category including some type of numbers on employee diversity and inclusion.”

A more detailed approach to the SEC’s currently limited rule, complete with uniform reporting metrics, appears to be on the horizon based on a number of statements from Gensler over the past few months.   

Not a New Concern

The push to get companies to reveal uniform data on diversity, staff compensation and employee turnover that is otherwise largely unavailable to the public in order to enable individuals to make investment decisions – including by more easily comparing companies based on these metrics – comes as shareholders have taken to seeking such information from public giants, such as Nike and Walmart. “Ten shareholder proposals to disclose ‘EEO-1’ data revealing a company’s workforce race, ethnicity, and binary gender makeup – or to produce diversity, equity and inclusion reports similar to that data – have gone to a shareholder vote as of June 1,” Bloomberg reported early this summer, noting that that number is “likely to increase as public companies face increased pressure from investors, customers, and even their own employees.” 

Bloomberg notes that “companies with at least 100 employees, as well as some federal contractors, are already required to submit annual EEO-1 reports on the race, ethnicity, and binary gender of multiple categories of employees,” but the government and most companies keep that information confidential. 

In light of rising attention from employees, consumers, and regulators in the ESG sphere, including the role of companies’ labor forces, Tucker Ellis attorney Daniel Messeloff says that “the days when management [for publicly-traded companies] could make decisions regarding human capital completely behind closed doors, with no risk and with complete disregard for the implications of those decisions in terms of diversity, pay equity, employee safety and the like are gone.” 

Regardless of whether the SEC does, in fact, implement with more stringent human capital disclosure requirements, companies are, nonetheless, being urged to consider – sooner rather than later – how they plan to handle rising pushes for more transparency when it comes to their work forces. To date, many companies have pushed back against making the bulk of this information public on the basis that “such data could prove embarrassing, create legal risks or be exploited by labor unions,” per Reuters

All the while, Seyfarth Shaw LLP attorneys Giovanna Ferrari, Jennifer Kraft, and Ameena Majid state that while SEC’s rulemaking process will “take years to play out, the risk calculation equation for organizations is shifting,” with ESG issues playing a larger role than ever before, including in providing value for a company. “How an organization delivers value and develops trust with its stakeholders hinges, in part, on authentic action and how it reshapes the conversation with their stakeholders,” they note, asserting that in this vein, the “disclosure of more quantitative and qualitative information on what has been historically seen as the softer side of a business is [coming] front and center.”