U.S. SEC Committee Recommends Additional 10-K Human Capital Disclosures

U.S. SEC Committee Recommends Additional 10-K Human Capital Disclosures
October 3, 2023 8 mins

U.S. SEC Committee Recommends Additional 10-K Human Capital Disclosures

U.S. SEC Committee Recommends Additional 10-K Human Capital Disclosures

The IAC recommends the SEC mandate prescriptive requirements in several key areas of human capital management disclosures to provide investors with relevant, timely and comparable data to adequately contextualize a company’s workforce value.

Key Takeaways
  1. The recommendations would be the most prescriptive workforce disclosures to-date, expanding on the SEC’s 2020 rule that some commentators think falls short in providing investors with workforce data.
  2. The IAC stresses that without standardized information, investors rely on limited estimates of human capital data despite the growing recognition of human capital as a tangible business asset.
  3. Companies should assess now how prepared they are to report in accordance with these recommendations should they be approved by the SEC.

On September 21, 2023, at the United States SEC’s Investor Advisory Committee (IAC) meeting, the IAC voted in support of a recommendation that publicly traded companies disclose additional information related to their human capital management practices in their annual 10-K filings. In the detailed recommendation letter, the committee presented a compelling case for the SEC to mandate their recommended disclosures to provide investors with more prescriptive and consistent human capital-related data.

The committee acknowledged the SEC’s 2020 human capital disclosure rule, as well as a recent proposal issued by the Financial Accounting Standards Board (FASB) on this topic as steps in the right direction. However, the committee ultimately concluded that “both fall short of giving investors the full information needed for accurate valuation of human capital.”

The subcommittee provided two key recommendations:

1. Enhance quantitative workforce disclosure requirements to be included in the human resources disclosure under Reg S-K Item 101(c). This includes the disclosure of:

  • Employee headcount, broken down by full-time, part-time and contingent workers
  • Turnover or comparable workforce stability metrics
  • The total cost of people spend broken 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 evaluate the effectiveness of those efforts

2. Provide a narrative disclosure in the Management Discussion & Analysis of the 10-K. This recommendation includes “how the firm’s labor practices, compensation incentives, and staffing fit within the broader firm strategy.” The IAC believes that this information would provide insight into a firm’s labor cost management from a variety of perspectives, including a comparison of labor costs as an investment in firm growth versus labor costs that are necessary to maintain current operations.

How Companies Can Prepare for the Rule’s Potential Impact

While the rule has yet to be finalized and may differ from the exact recommendations presented by the IAC, there are several steps U.S. publicly traded companies can take now to assess their readiness for the potential impact of enhanced human capital disclosure requirements.

1. Take Inventory. Companies should consider taking an inventory of internally and externally disclosed human-capital metrics, statements, reports and more as it relates to the newly proposed disclosure areas while paying close attention to any general short, medium and long-term targets or goals they set for human capital-related efforts to ensure that they are on track.

2. Shore-Up the Data Collection Process If any of the components of the IAC’s recommendations are not already being measured or monitored through a robust data collection and validation process, consider moving quickly to create an auditable process through a reporting improvement plan. This may include assigning new accountabilities, requiring new data checks and data hygiene standards, investing in new ESG technologies to securely collect and house information.

3. Benchmark Peers. Understand how your company is positioned relative to peers across the components of the new recommendations to the proposed rule to be able to highlight differentiated policies and programs, and proactively address underperformance. Aon provides in-depth peer benchmarking data based on our workforce and compensation databases.

4. Disclosure Drafting and Review. The Corporate Governance and ESG team in Aon’s Talent Solutions practice maintains an inventory of disclosures from companies that have proactively disclosed the metrics of the proposed rule over the past few years. By leveraging these leading disclosures and peer benchmarking data, we can help you right-size your disclosure to ensure it meets the requirements of the new rule and remains aligned with market practice.

As we await the finalized rule, Aon is supporting clients through these steps to prepare for the anticipated requirements. If you would like assistance in navigating the proposed requirements, please get in touch.

General Disclaimer

The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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