HCM Disclosure Recommendation Moves Forward at SEC Investor Advisory Committee

The SEC Investor Advisory Committee (IAC) voted on September 21st to move forward with a nonbinding recommendation to the SEC on human capital metrics disclosure with two abstention votes. The SEC will likely use this recommendation to inform its proposed rule. The two-part recommendation outlines four prescribed metrics to be included in the current ESG disclosure and a narrative discussion in the Management Discussion & Analysis describing a company’s labor practices, compensation initiatives and staffing practices.
 
Current disclosures inadequate. The recommendation referenced the SEC’s adopted rules of 2020 that required a principles-based disclosure of human capital risks along with the July 2023 FASB proposal to mandate showing employee compensation as a line item on the income statement. However, the IAC indicated “both fall short of giving investors the full information needed for accurate valuation from human capital.” The FASB proposal, the group said, “suffers from a restrictive definition of employee that does not include independent contractors.”
 
Summary of recommendation. The IAC’s recommendation outlines four specific disclosures to be added to existing HCM disclosures in the Annual Report:

• The number of people employed by the issuer, broken down by full-time, part-time, or contingent workers.
  
  
• Turnover or comparable workforce stability metrics.
  
  
• The total cost of the issuer’s workforce, broken down into major components of compensation.
  
  
• Workforce demographic data sufficient to allow investors to understand the company’s efforts to access and develop new sources of talent, and to evaluate the effectiveness of these efforts.

Additionally, the recommendation includes a mandated narrative discussion in the Management Discussion & Analysis that would address the company’s labor practices, compensation initiatives and staffing as a part of the broader business strategy.  

• This should include the percentage of labor costs that the company views as an investment and why and how the workforce costs are allocated across the organization.

Dissenting voices. Republican SEC Commissioner Hester Peirce, in her opening remarks, posed some pointed questions about the recommendation, including whether additional guidance about the existing rule would be more appropriate than proposing a new rule. She inquired about the affordability of complying with the disclosure, citing that larger companies already publish similar disclosures, but a new rule will be particularly costly for smaller companies. Ms. Peirce asked about the financial materiality of such disclosures and the Commission’s ability to draft requirements that would “elicit material information regardless of a company’s size, industry, location and any other distinct human capital challenges.” In addition, she asked about the audience who may benefit from the information and how it may be used beyond the investor community for financial purposes.  

Outlook. The IAC’s recommendation is nonbinding, but the SEC will clearly take it into account when finalizing its proposal. The SEC previously targeted this fall for a proposed rule, but timing is still uncertain. The Center will partner closely with member companies to understand the business impact of a proposed rule and will submit comments to the SEC in support of the employer perspective.