Center On Executive Compensation

SEC Proposed Rule Adds Human Capital Metrics...

Published on: September 3, 2019

Authors: Timothy J. Bartl, Gregory Hoff

Topics: Corporate Governance, ESG and Diversity & Inclusion

Proposed Rule Places Emphasis on Intangible Assets as an “Essential Resource for Many Companies”

After various petitions for stand-alone rules and mounting rhetoric from SEC Chairman Jay Clayton regarding human capital disclosures, the SEC introduced a proposed rule that would require companies disclose human capital information such as worker demographics, human rights, compensation, and workforce health and safety. The human capital disclosures are among broader disclosure changes in the proposed rule “to modernize the description of business, legal proceedings, and risk factor disclosures.” The proposed rule comes in the wake of several comments from Chairman Clayton indicating support for human capital disclosures as part of an overall effort to “modernize and improve our disclosure framework, including recognizing that intangible assets, and in particular human capital, often are a significantly more important driver of value in today’s global economy”. A coalition of 25 mostly American pension funds and issue investors had submitted a human capital metrics rulemaking petition in July of 2017, and in March of 2019 the SEC’s Investor Advisory Committee approved a recommendation by its Investor as Owner Subcommittee that the SEC explore disclosures required of public companies to include various human capital metrics.  The proposed rule will spur debate among investors and companies over whether certain human capital metrics should be required and if so, how they should be disclosed.

The Proposed Rule

The proposed rule is entitled “Modernization of Regulation S-K Items 101, 103, and 105” and was published to the Federal Register on August 23, 2019. The rule is an attempt to modernize descriptive disclosures that registrants are required to make as part of their annual reports which have not undergone significant revisions in over 30 years. The most notable change associated with the proposed rule is the requiring of material human capital disclosures for the first time. Specifically, the proposed rule would revise Item 101(c) to include as a disclosure topic:

Human capital resources, including any human capital measures or objectives that management focuses on in managing the business, to the extent such disclosures would be material to an understanding of the registrant’s business.

This disclosure would replace the current requirement to disclose the number of employees. However, it would only apply if human capital considerations are material to an understanding of the company as a whole.  Although for certain companies, this will be the case, it is not clear that human capital concerns are yet mainstream enough to warrant broad disclosure.  Information is material if it would be a factor to a reasonable investor in deciding to invest in the company or in voting for directors.  

The proposed rule does not provide exact human capital measures or objectives, but instead includes a non-exclusive list of examples including workforce demographics, workforce stability, workforce composition, workforce skills and capabilities, workforce culture and empowerment, workforce compensation, and human rights commitments and their implementation, among others. 

Comment Period to Focus on Scope and Content of Disclosure

In the preamble to the proposed rule, the SEC emphasizes that “human capital may represent an important resource and driver of performance for certain companies,” but does not provide specifics on what sort of metrics or objectives might be considered material enough for required disclosure. Further, the proposed rule acknowledges that “the exact measures or objectives included in a registrant’s human capital resource disclosure may change over time and may depend on industry.” As mentioned above, the proposed rule provides only macro-level categories into which more specific metrics might fall into, rather than more specific examples of what a company might include in its human capital disclosures. In fact, the proposed rule specifically eschews “prescribing fixed, specific line item disclosures in this are for all registrants,” and instead notes that “investors would be better served by understanding how each company looks at its human capital, and in particular, where management focuses its attention in this space.” Unsurprisingly, the proposed rule includes several questions soliciting feedback on the scope of the disclosure, including whether the rule should include an illustrative list of specific material topics. 

Questions surrounding the more vague and undefined aspects of the proposed rule have come from SEC Commissioners themselves. On August 27, 2019, Commissioners Jackson and Lee released a joint statement detailing what they believed to be two significant shortcomings of the proposed rule. First, Jackson and Lee took issue with the rule’s principles-based approach to disclosure rather than “balancing the use of principles with line-item disclosures as investors – the consumers of this information – have advocated.” The statement raised concerns that such an approach to disclosures “may give management too discretion” and “will fail to give American investors the information they need about the companies they own.” Jackson and Lee instead advocate for the SEC to require specific, detailed disclosures reflecting the importance of human capital management to the bottom line. Finally, Jackson and Lee expressed disappointment that the rule proposal does not seek comment on whether to include the topic of climate risk in the Description of Business, which they view as an important factor in the investor’s decision-making process. 

Thus, at this stage of the rulemaking process, the SEC is soliciting comments on when human capital metrics or objectives are material enough to require disclosure on the 10-K and examples of what those metrics and objectives should be.  It acknowledges that disclosure is likely to vary between companies and across different industries. How to properly measure intangible assets related to human capital is already a challenge for companies, and the SEC clearly prefers a principles-based approach to allow companies to describe the factors or metrics most important to their businesses. 


The proposed rule represents a response to shifting investor priorities that emphasize intangible assets as a primary driver of corporate decision-making and value as the United States shifts from an industrial economy to one based on technology and services. The proposed rule will be open to comments for at least 60 days, and HR Policy Association and its Center On Executive Compensation will seek member input and jointly file comments on the proposal.  


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