Human Capital Disclosure: What is it? and Why is it Important?

1. What is human capital data and why is it important?

• Human capital is the value of a company’s workforce including its skills, education, training, retention, and other factors that distinguish it in the sector.
• Human capital data, if material, has become an increasingly important asset to certain companies in certain sectors.
• This data’s importance has grown as a result of changes in the overall economy where the skills of the workforce are seen as increasingly important.

2. Prior to 2020, what type of human capital data has been disclosed?

• Historically, under Regulation S-K of the U.S. Securities Act of 1934 where human capital data is disclosed, a company would only have to disclose the number of people it employs.
• However, if a company has more than 100 employees then it would have to disclose demographic data including race, ethnicity, sex, and job categories to the Equal Employment Opportunity Commission per the 1964 Civil Rights Act.

3. What do the revisions to Regulation S-K, enacted in 2020, require?

• It requires companies to expand and clarify their human capital data to the extent that it is material to an investor’s understanding of the company.
• The rule provides a non-exhaustive list of disclosures topics including a description of a company’s human capital resources.
• It further requires a description of any measures or objectives that a company’s management focuses on in managing its business including how it “attracts, develops, and retains personnel.”
• The rule also requires that companies disclose all material regulations that affect the business. This includes the disclosure of material environmental issues.

4. Who decides what’s “material” for a company to disclose?

• The company ultimately decides what’s material to a reasonable investor based on the total mix of relevant data.
• The SEC has made clear that a company’s human capital disclosure must be tailored to facts and circumstances of its unique business and workforce.

5. What is expected in the upcoming rule?

• In June of 2021, current SEC Chair Gary Gensler asked his staff for recommendations on how to move from a principles-based disclosure framework to a more prescriptive version.
• He argued that a principles-based disclosure will not provide human capital data that is consistent, reliable, and comparable across sectors.
• Human capital data has become exceedingly important for companies. As a result, the SEC is likely to mandate disclosure regardless of a company’s own materiality analysis. 

6. What are the likely arguments against the proposed changes?

• The 2020 rule was a compromise based on an analysis of public comments.
• The 2020 rule has only been in effect for two years, and importantly, human capital disclosure has increased in S&P 100 companies.
• A one-size-fits-all prescriptive disclosure framework was never the intent of Regulation S-K.
• The SEC is deciding what is material without congressional authority.
• Reasonable investors want material information, not an exhaustive list of nonrelevant data just to compare across sectors, especially if disclosing such data adds unnecessary costs to the disclosure process.