September 13, 2019
The SEC’s two Democratic Commissioners, Robert Jackson and Allison Herren Lee, issued a joint statement applauding the SEC staff for including a human capital disclosure requirement and urging them to "require specific, detailed disclosures" rather than relying on a principles-based approach as proposed.
A principles-based approach would allow companies to determine content of the disclosure—riling Democratic Commissioners. Despite applauding the inclusion of a human capital disclosure, the Democratic Commissioners took issue with the principles-based framework of the proposed disclosure requirements, noting that without requiring specific metrics, “it gives company executives discretion over what they tell investors,” leading to a failure to “give American investors the information they need about the companies they own.”
The proposal does allow companies to evaluate and consider what risks should be reflected in the human capital disclosure element so that the disclosure is specific to their businesses. However, the Democratic Commissioners stated "because it favors flexibility over bright-line rules, the proposal may give management too much discretion—sacrificing important comparability—when describing a company’s investments in its workers."
Reflecting Democratic priorities, Commissioners urge the SEC to “require specific, detailed disclosures reflecting the importance of human capital management to the bottom line.” The statement urges commentators to request the SEC update the proposal to replace the principles-based framework with a set of specific requirements while also providing data and analyses to push the SEC to add climate risks to the disclosure requirement.
Public statements of this nature from SEC Commissioners are unusual, but have been relied on often by Commissioners in the minority party. Because this is notice and comment rulemaking, the move aims to further legitimize the importance of the proposal’s human capital disclosures by inviting comments supporting a metrics-based approach. Additionally, the request that the SEC include specific disclosure requirements, in lieu of the principles-based approach of the proposal, gives insight to the objectives a Democrat-led SEC would embrace if they were to obtain a majority.