Most Firms Withhold Hard Data In Human Capital Disclosures

By Tom Zanki
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Law360 (April 27, 2021, 8:52 PM EDT) -- A report released Tuesday shows many public companies have begun complying with new U.S. Securities and Exchange Commission rules that require more detailed disclosure of workforce information — often dubbed human capital — albeit in minimal fashion.

Analytics provider Intelligize, which is owned by Law360's parent company, LexisNexis; generated its study after examining 427 annual reports from S&P 500 companies filed between Nov. 9 and March 5. The new SEC rules were approved last August.

New SEC policy requires companies to bolster disclosures regarding "human capital" without specifying what that term means, though it is generally associated with workforce information. The SEC rules also allow companies discretion to determine what is material. For instance, companies must disclose employee head counts, but many other details are left to them.

The SEC, by a slim 3-2 majority, last year adopted a flexible policy, saying it did so because relevant data about labor forces vary among industries. Both Democratic commissioners dissented then, saying they wanted more concrete disclosure, especially regarding workforce diversity.

Given the flexible nature of the SEC's rules, which do not require specific metrics, Intelligize said many companies were providing general disclosure regarding their human capital policies. Intelligize notes that companies are required to provide the federal Department of Labor a breakdown of their workforces by race, gender and other characteristics, but only 16 companies included such information in their recent annual 10-K reports to the SEC.

"Filers capitalized on the fact that the new rule does not call for specific metrics," Intelligize's report states. "Relatively few issuers provided meaningful numbers about their human capital, even when they had those numbers at hand."

At the same time, Intelligize concluded that companies are addressing human capital questions in more detail than before new SEC rules were enacted. The research firm said company filings as a whole "suggested sincere effort to fulfill the scantly defined disclosure obligation."

"Our review of more than 400 filings suggested that while companies lacked a detailed instruction manual for how to address human capital disclosures, they made sincere efforts to describe their workforces in meaningful ways," Intelligize said. "They were learning on the job, giving us reason to hope that they will only get better with time."

Intelligize's research also found a wide disparities in how companies approached their disclosure obligations. Inc., which employs more than 1 million workers, described its human capital policies in two paragraphs. Real estate investment trust Extra Space Storage, which has fewer than 5,000 employees, generated a disclosure triple that length.

Filers generally eschewed hard data, according to Intelligize. When discussing workforce diversity commitments, the firm said, many companies chose instead to identify "aspirational" or forward-looking goals rather than disclose historical data. The Goldman Sachs Group Inc., for instance, disclosed that it aims for women to represent 40% of its vice presidents by 2025.

The SEC's new rules were passed last August during a summer of protests for racial justice. Given that backdrop, Intelligize noted that many companies have publicly affirmed their belief in the value of diversity to their workforces and society. But disclosure remains mostly terse.

"Balanced against the S&P 500's widespread acknowledgment of D&I's [diversity and inclusion] importance, however, was its reluctance to disclose company-specific metrics," Intellgize said.

Intelligize acknowledged that a small group, mentioning Merck & Co. Inc. and Morgan Stanley, disclosed more robust data. These companies provided tables and graphs explaining workforce data, including diversity, retention, and compensation figures.

The report also suggested that companies are paying attention to each other's filings. Rob Peters, senior director customer experience at Intelligize and an author of the report, said companies began to flesh out more information after November as more precedents became available.

The coronavirus pandemic also factored into disclosures, given its impact on corporate health and safety policies. Of 425 filers that discussed safety, Intelligize said 62 companies included a separate header to explain how they were responding to COVID-19.

The firm said companies' coronavirus focus will likely fade as vaccine distribution spreads and public health worries diminish. The SEC, in rejecting calls to require more hard data in disclosures, did so on the premise that human capital management would "evolve over time."

This reflects a "principles-based" approach to disclosure, meaning companies should follow general principles rather than strict rules. Given the new composition of the new SEC, which is now 3-2 in favor of Democrats under chairman Gary Gensler, Peters said it would be worth watching to see whether the agency takes a stricter approach on disclosure policy.

The securities watchdog has already begun outlining plans for more detailed disclosures on environmental, social or governance matters, or ESG.

"The question is: Will the SEC become more prescriptive under the new administration and new leadership?" Peters said. "Is this the start sort of dipping their toes into the ESG world?"

--Editing by Peter Rozovsky.

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