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Human Capital Disclosures

In August 2020, the SEC adopted final amendments to Item 101 of Regulation S-K including adding a requirement for disclosures related to “human capital” (see HERE).  The new rule applies to Form 10-Ks and registration statements filed after November 8, 2020.  This blog will not only discuss how companies are navigating their human capital disclosures, but also the push to add more prescriptive disclosure requirements to the rules, which the SEC is considering.  Amendments to the rule are currently included on the SEC’s regulatory agenda although as of now, the SEC has not published a proposal.

Drill Down on Human Capital Disclosure

Item 101(c)(2) of Regulation S-K now requires that a company discuss, in its Form 10-K and in registration statements, the following information to the extent material to an understanding of the business: “[A] description of the registrant’s 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).” Previously the rule only required disclosure of the number of employees.

The disclosure requirements are principles-based and the SEC even declined to define “human capital,” allowing a company to tailor the concept to its circumstances and objectives.  The rule release included non-exclusive examples of subjects that may be material, depending on the nature of the company’s business and workforce.

As human capital disclosure is an entirely new topic, the usual boilerplate copy-your-competitor, rinse-and-repeat methodology could not be relied upon.  Of course, many organizations have offered insight and advice on crafting appropriate disclosures.  The Sustainability Accounting Standards Board (“SASB”) has published, and updated, a Human Capital Bulletin, summarizing the elements of the SASB Standards that include human capital matters, and providing general guidance for disclosures.

SASB standards were created to identify and standardize disclosure on the most business-critical sustainability issues for companies in each of 77 industries, with the aim of facilitating more effective communication between companies and their investors.  The Human Capital sustainability dimension of SASB Standards addresses issues that affect a company’s workforce and in particular: (i) employee health and safety, (ii) employee engagement, diversity, and inclusion, and (iii) labor practices.  Clearly human capital considerations vary greatly among industries and geographies and as such, any discussion and disclosure should consider the specific risks and characteristics of a company’s industry as discussed in the SASB guides for that sector.

Auditor insights in general have been very helpful and provide a logical “follow the money approach.”  That is, management should consider the facts and information it uses in evaluating performance and allocating resources as a starting point.  Other important considerations in determining materiality and human capital disclosures include: (i) what goals, strategies, or targets have been set for executives in charge of human resources; (ii) what human capital measures and objectives have been provided to the full board of directors or its various committees; (iii) how are human capital objectives and measures linked to management’s performance goals and compensation; and (iv) what human capital information is already provided to stakeholders such as in ESG reports, marketing materials, and communications with rating agencies.

As expected, over the past 2 years we are seeing a trend towards more consistent and unified disclosures though it still has a long road ahead.  Diversity and inclusion have been front and center with many companies providing tabular information on demographics (such as gender, color and ethnicity) throughout their workforce including senior and junior leadership and all employees.  Most companies have also expanded their headcount disclosure to include segments and geography.   Of course, diversity disclosures are also encompassing the requirements under the Nasdaq diversity rules (see HERE).

In addition to data, diversity and inclusion have been taking up greater and greater word counts, expounding on training, recruitment, goal setting, leadership (including board) roles, charitable and community outreach (including minority scholarships), HR policies and the like.  Larger companies are implementing mentoring, clubs and business development groups for specific minority categories such as African American, Asia Pacific, LGBTQ+, Hispanic, disabled, veterans, and women.

The majority of companies also include a discussion on (i) employee benefit plans and competitive pay; (ii) healthcare and safety, including mental health and Covid-19 measures; (iii) recruitment, engagement and retention programs; (iv) employee training and education; (v) company culture, values and ethics; (vi) tenure, turnover, promotions and succession planning; and (vii) overarching human capital strategies, goals and management.

Interestingly, there have not been many SEC comment letters on the disclosures, with the majority of such letters directed to company’s who omitted pretty well any information on the subject. Based on SEC review, additional areas of discussion warranting attention include (i) collective bargaining agreements or other union type arrangements; (ii) core values (learning, development, inclusion, teamwork…); (iii) social impact and social justice initiatives; (iv) impact and response to Covid-19; and (v) use of employee engagement surveys.

Within the general discussions, some companies remain high-level in discussing overall policies and plans, where others drill down significantly, including metrics and statistical data.  Examples of metrics that can be included are: (i) total workforce cost including for all salaries, bonuses and benefits; (ii) % of annual turnover; (iii) return on investment from talent and/or recruitment; and (iv) total annual training hours and/or total training spend per employee.

The new disclosures are all subject to disclosure controls and procedures including compliance with Sarbanes Oxley Rule 404(a).  Further, as the information is included in SEC filings, it is subject to the associated federal liability under the securities laws.  Rule 404(a) requires all publicly reporting companies to maintain internal controls over financial reporting (“ICFR”) and disclosure controls and procedures (see HERE).  An ICFR system must be sufficient to provide reasonable assurances that transactions are executed in accordance with management’s general or specific authorization and recorded as necessary to permit preparation of financial statements in conformity with US GAAP or International Financial Reporting Standards (IFRS) and to maintain accountability for assets.  Access to assets must only be had in accordance with management’s instructions or authorization and recorded accountability for assets must be compared with the existing assets at reasonable intervals and appropriate action be taken with respect to any differences.  These requirements apply to any and all companies subject to the SEC reporting requirements.

Likewise, all companies subject to the SEC reporting requirements are required to provide CEO and CFO certifications with all forms 10-Q and 10-K certifying that such person is responsible for establishing and maintaining ICFR, have designed ICFR to ensure material information relating to the company and its subsidiaries is made known to such officers by others within those entities, and evaluated and reported on the effectiveness of the company’s ICFR (see HERE).

All of this means enhanced governance and procedures throughout an organization and flowing up to the board of directors.  In establishing new, or building upon existing controls and procedures, management should consider: (i) data management and privacy, including cybersecurity measures (see HEREfor the SEC’s new proposed rules on cybersecurity disclosure); (ii) data system flow to ensure aggregation and timely reporting; (iii) current disclosure controls and procedures related to human capital reporting and needed additions to same; and (iv) personnel responsibilities in each functionality related to the control procedures and disclosure review.

As the impact of the new systems become systemic, some companies have been re-titling the usual board “Compensation Committee” to reflect an expanded role such as “Human Capital Management Committee” or “Talent Management & Compensation Committee.”

Institutional Investors

As with other ESG measures, institutional investors such as BlackRock want more human capital information.  Generally investors want more information on human capital management include how a company intends to achieve a competitive advantage.  With the prevalence of contract, freelance, and gig work, and the rising focus on economic and social inequalities, as well as an increasing global workforce, companies often face labor shortages and certainly issues with quality, consistency, and productivity.

Institutional investors are increasingly looking for robust disclosures regarding a company’s approach to human capital matters and how they fit into an overall strategy and business model.  This requires an assessment of how a company identities key human capital priorities, the policies in place to address these priorities, and how the board oversees management to ensure accountability.  Many investors are calling for more prescriptive rules, often consistent with the SASB standards.

Keys areas of concern include: (i) board oversight of human capital risks and opportunities; (ii) commitment to advancing diversity, equity and inclusion; (iii) workforce engagement; (iv) worker rights and protection; (v) workforce compensation; (vi) health and safety and (vii) training and development.

The Author

Laura Anthony, Esq.
Founding Partner
Anthony L.G., PLLC
A Corporate Law Firm

Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including siting on the board of directors of the American Red Cross for Palm Beach and Martin Counties, and providing financial support to the Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others. She is also a financial and hands-on supporter of Palm Beach Day Academy, one of Palm Beach’s oldest and most respected educational institutions. She currently resides in Palm Beach with her husband and daughter.

Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.

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