Congress Told Companies' Human Capital Disclosures Lag

By Tom Zanki
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Law360 (July 14, 2020, 9:43 PM EDT) -- A pension fund executive on Tuesday urged Congress and regulators to toughen disclosure requirements for public companies regarding their workforce composition, saying existing policies haven't kept up with economic changes and deprive investors of vital information.

Anne Simpson, director of board governance and strategy at the California Public Employees' Retirement System, described disclosures that the pension manager would like to see in order to make better-informed investments at a House Financial Services subcommittee hearing. Simpson and other panelists addressed various matters pertaining to capital markets and worker protection issues that have become topical amid the coronavirus pandemic.

Simpson, also a member of the U.S. Securities and Exchange Commission's Investor Advisory Commission, said CalPERS has advocated for more rigorous "human capital" disclosures since before the coronavirus pandemic and related economic crisis. She pointed to a recommendation passed last year by the SEC advisory committee, which argued that 85% of S&P 500 company balance sheets consist of intangible assets, such as employees or intellectual property.

This is a contrast from decades ago, Simpson said, when most S&P balance sheets measured assets by tangible things such as factories or property ownership. But she said corporate disclosure policies have not kept pace with these changes, making it harder for investors to assess risk.

"The economy has moved on," Simpson said. "Corporate reporting has not caught up."

Tuesday's hearing coincided with an array of legislation and SEC rulemaking under consideration. The House specifically has several bills pending that would place restrictions on companies receiving coronavirus-related aid, including proposals that would prevent companies from reducing workforce levels or would ban stock buybacks until the pandemic has ended.

One draft bill yet to be introduced would permanently require public companies known as "large accelerated filers" that receive pandemic-related aid to adopt worker representation on their boards of directors and begin disclosing details about their political spending, human capital management and their so-called ESG policies on environmental, social and governance issues.

The House Financial Services Committee in February passed the Workforce Investment Disclosure Act of 2020, introduced by Rep. Cindy Axne, D-Calif., which would require companies to disclose more details about their human capital management. At the same time, the SEC is considering public comment on a proposal to require more human capital disclosures.

Simpson said more disclosure is needed because more investors today regard a workforce as one of a company's greatest assets rather than simply an expense. The SEC's investor advisory committee has said better information is needed regarding workforce stability, workplace safety, and how much a company invests in training. Investors also want more information about a company's hiring and diversity practices in terms of race, gender and ethnicity, Simpson said.

"We need the same standards of quality for this information as we have for accounting information," Simpson said.

But Republican committee members pushed back on the idea of requiring more disclosures of companies on matters they said may be intangible or not considered material by most investors.

Rep. Ann Wagner, R-Missouri, worried that the cost of new mandates will be passed on to investors. That drew a sympathetic response from Neil Bradley, a chief policy officer at the U.S. Chamber of Commerce, who estimated that complying with disclosure rules costs a public company $2.5 million annually, which he said is a large fixed cost for small companies.

"Disclosure sounds simple and easy," Bradley said. "It is actually often time-consuming, particularly in a litigious environment and in a regulated environment."

Bradley said many proposals Congress is considering would march in the opposite direction of the Jumpstart Our Business Startups Act of 2012, which sought to stimulate public offerings by reducing the regulatory costs of going public.

Rep. Steve Stivers, R-Ohio, took issue with CalPERS' performance, suggesting that investors are more concerned about returns than new disclosures. He asked Simpson what CalPERS is doing to improve the returns on its stock fund, which he said gained 6.1% for the 52 weeks ended June 28, 2019, compared with an 8.2% return for the broader S&P 500 index.

Simpson said improving returns are a "top priority" at CalPERS, which seeks annual returns of at least 7% on its investments. The pension fund has reported that its private equity investments gained 7.7% for the previous fiscal year, creating an overall return of 6.7%.

--Editing by Jay Jackson Jr.

For a reprint of this article, please contact reprints@law360.com.

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