Human Capital Disclosures Can Impact Share Price – But Only When Material

The existing SEC principles-based human capital metrics rule has already resulted in a significant increase in quantitative HCM disclosures, with nearly 80% of companies disclosing at least one quantitative metric in 2022. These findings and more come from a new academic study by Harvard’s Ethan Rouen, Columbia’s Thomas Bourveau and others titled “Regulated Human Capital Disclosures” and published last month. Professor Rouen is part of the Working Group on Human Capital Accounting Disclosure, which petitioned the SEC in June to create a new accounting framework that would allow investors to better understand the value of a firm’s investment in human capital.

The new study had a number of interesting findings:

• 85% of companies now have a section in the 10-K devoted to human capital;
  
  
• Firms with more institutional investors or with weaker accounting performance are more likely to disclose human capital metrics (this latter may be explained by the higher expense reducing profits); and
  
  
• Importantly, the increase in quantitative disclosure has made the 10-K more “value relevant,” meaning that disclosures are correlated to stock returns in the three-day period around filing date. However, this is only true for human capital metrics defined by SASB as material to that industry. In other words, “quantitative human capital disclosures matter to investors, but only in industries where these issues are material and when firms disclose metrics defined as financially material (SASB metrics).”

On the question of whether a principles-based regulation is sufficient, the paper focuses intensely on an analysis of comment letters to the SEC regarding its recent climate disclosure rule, in which 20% of letters mentioned human capital and of these, 35% came from institutional investors. The authors conclude from this that large investors need more human capital metrics data and therefore the current rule is inadequate. Considering that the vast majority of comment letters said nothing about human capital, this seems to be a tenuous conclusion, but it will almost certainly be used by the SEC and proponents of a prescriptive human capital metrics rule to support a new mandate.