October 25, 2019
In a joint comment letter submitted this week, HR Policy Association and its Center On Executive Compensation detailed the common misconceptions about the utility of requiring specific and “standardized” human capital metrics disclosures and urged the Securities and Exchange Commission to adopt a principles-based disclosure framework based on a materiality standard if it is going to regulate in this space.
Announced in early August as part of the SEC’s ongoing disclosure effectiveness review, the proposed amendments to the 10-K annual report included a new required disclosure of human capital management resources that “management focuses on in managing the business, to the extent such disclosures would be material to an understanding of the registrant’s business.” The proposal also questioned whether several illustrative examples should be included in a final rule.
Letter encourages adoption of principles-based framework over prescriptive approach… The principles-based framework utilized in the proposal, according to the Association’s letter, provides companies with the “flexibility to continue to use Human Capital Metrics tailored to their individual needs while appropriately requiring registrants to disclose [metrics] that are ‘material’ to the registrant’s organization.” If the SEC decides to require greater disclosure, the principles-based approach provides useful insight into how the Board monitor human capital risk while avoiding the numerous drawbacks associated with requiring a prescriptive set of disclosures, according to the joint letter.
…And warns against inclusion of “illustrative examples.” Among the specific areas of input requested by the SEC was whether a final rule text should include “non-exclusive examples of the types of measures or objectives that management may focus on in managing the business.” The Association and Center strongly advised against the inclusion of such a list in the text of the rule, which, they argued, would have the consequence of imposing a “soft” set of prescriptive requirements, thus undermining the goal of the disclosure of being principles-based derived from materiality.
Proponents of prescriptive approach urge SEC to define specific human capital disclosures. Numerous groups and individuals urged the SEC to completely change its proposal and adopt a set of specific disclosure requirements on human capital metrics. Among the commenters was Senator Mark Warner, a moderate Democrat from Virginia, who stated that the “more appropriate route should be a principles-based approach that incorporates some prescriptive elements” and that without the hard disclosure requirements the disclosure would not capture “the entire picture.”
SEC’s proposal marks the first regulatory foray into human capital measures, the outcome of which is far from certain. The SEC’s proposal marks what is likely the first entry into a long series of discussions over whether the disclosure of human capital metrics provides any value—and if so, how they should be presented. The timing of a final rule is unclear.