Legal Implications For Human Capital Reporting
Human capital represents the economic value of the knowledge, skills, and experience of employees. It is a company’s human capital that is its most valuable resource. Since human capital, while critically important to business success, can be difficult to define and assess, human capital reporting — which offers metrics and analyses of a company’s human capital is important. In addition, recent developments have made human capital reporting even more important — not only for purposes of improving company financial performance, but as a
matter of legal compliance
SEC Rules For Human Capital Reporting
Previous requirements from the SEC had been very limited in scope. Nothing more than headcount (ie the “disclosure of the number of persons employed by the registrant”) was required
In 2020 the SEC introduced new requirements for human capital disclosure required by all US publicly traded companies. The purpose of these new rules is to improve investor access to important information, helping investors to be fully informed about the companies they invest their money in, such that they can make more informed investment decisions.
The new rules expanded what is expected from companies. In addition to headcount, the SEC’s now requires the inclusion of “A description of the registrant’s human capital resources”, and “any human capital measures or objectives that the registrant focuses on in managing the business (ie development, attraction and retention of personnel).
Even still, it is notable that these new rules leave businesses significant latitude in determining what exactly they will report to the SEC. The new rules issued in 2020 follow a “principle-based methodology”, meaning that the nature of the disclosures made are left to the company’s discretion. Rather than requiring specific metrics, the SEC held that companies are expected to report on things that the business already “focuses in on”1 when managing the business.
In the period following the release of the SEC’s 2020 rules, the Harvard Law School Forum on Corporate Governance produced a report on the best practices being developed for human capital reporting. It was found that leading companies reported on: employees, governance and oversight, diversity and inclusion, employee engagement, total rewards, talent development, and health and safety.
The SEC is now considering whether to “propose rule amendments to enhance registrant disclosures regarding human capital management.”3 A Bloomberg Law analysis explains that these changes will reduce the current broad leeway that companies have in determining what data and information to provide to the SEC.4 The future rules will be “prescriptive” rather than “principle-based”. As Bloomberg Law explains, companies will be required to provide more information on “workforce composition”, including the breakdown in “full-time, part-time, and seasonal workers” workers.
Though the latest changes the SEC is considering have not formally gone into effect, it is still advisable for businesses to ramp up their efforts to gather relevant data. While it is always possible to only respond to exigencies when they arise, that is an unwise approach. A proactive strategy — rather than a reactive strategy — allows businesses to stay ahead of the game. Particularly, since the costs of non compliance is so high.
Cost of Non Compliance
Given that the SEC is a government agency and legal authority with the power to issue requirements with which businesses must comply, their rulings then are law. Therefore, complying with the SEC’s new rules for human capital reporting — and preparing for the updated rules coming down the pike — is critical for complying with the law. The penalties for non compliance, for not adhering to SEC rules, unsurprisingly, are serious.
In fiscal year 2022, the SEC’s enforcement resulted in $6.4 billion in penalties over 760 separate enforcement actions.5 On the specific matter of disclosing required information, the SEC states that they place “a high priority on pursuing issuers or their employees who make materially inaccurate disclosures, as well as auditors and their professionals who violate applicable laws and rules in connection with such disclosures.”5 If that wasn’t enough to scare you, the SEC “often refers certain cases, particularly those involving recidivists or violators who engage in intentional misconduct, to criminal authorities” often resulting in “charges filed by the SEC and criminal law enforcement.”
The bottom line: companies should not play around when it comes to SEC regulations. Strict compliance with the SEC’s human capital reporting requirements is vital for eliminating the risk of significant financial and legal problems. There are some areas of business where toeing the line is smart business.
Create a Strategy For Complying with Human Capital Reporting Requirements
Bloomberg Law’s analysis goes on to identify the challenges companies face in complying with the SEC. At the top of the list is, first, the skills gap that now exists to execute on this new requirement and, second, the cost of labor hours to produce said reports.
To address these concerns, the best practice for companies new to reporting on their human capital has been to adopt the reporting practices of companies in their industry leading the way in reporting. While adopting the reporting practices of leading companies sounds like an easy lift, it is not a sustainable strategy, as it does not differentiate one company from another.
In a world where data is knowledge, and knowledge is power, it is not only investors who benefit from human capital reporting. So too does Management and Talent. Human capital reporting provides “more transparency into the health of a company’s workforce”. This transparency, in addition to informing investors to know where best to invest their dollars, informs Leadership to know which management practices are most effective and which are parasitic, and informs Talent which companies are healthiest so as to influence where they might want to invest their labor.
Therefore, sooner than later, companies should create their own strategy for reporting on their human capital, one that incorporates their plans to stand out, to differentiate themselves in the way they manage their workforce and their human capital investments, not only to comply with the SEC legal requirements, but as well to attract future investment and future talent.
Authored and Researched by Anton Platt
Commission and Edited by Hason Greene
Sources:
1. https://www.sec.gov/rules/final/2020/33-10825.pdf
2. https://s3.us-east-2.amazonaws.com/capartners.production/wp-content/uploads/2019/07/15125840/CAPintel-21-01-07-New-Human-Capital-Disclosure-Requirements-An-Early-Read-on-Developing-Best-Practices-v5.pdf
3. https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=202210&RIN=3235-AM88
4. https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-a-new-sec-human-capital-rule-is-coming-so-is-pushback
5. https://www.sec.gov/news/press-release/2022206#:~:text=SEC%20Announces%20Enforcement%20Results%20for%20FY22%20
Commission%20filed,RELEASE%202022-206%20Washington%20D.C.%2C%20Nov.%2015%2C%202022%20%E2%80%94
6. https://corpgov.law.harvard.edu/2022/07/17/a-jam-packed-spring-2022-agenda-for-the-sec/
7. https://www.shrm.org/resourcesandtools/legal-and-compliance/employment-law/pages/hr-role-human-capital-reporting.aspx