Seyfarth Synopsis: On August 23, the Securities and Exchange Commission (the "Commission"), in a release entitled "Modernization of Regulation S- K Items 101, 103, and 105", proposed changes to Regulation S-K significantly revising disclosure requirements that registrants are required to follow, including those relating to "human capital," the focus of this blog. 84 Fed. Reg. 44358.
While the text of the proposed regulation itself appear to be reasonable in scope, pending further analysis, it is important that this language be read against ongoing developments in this area and the disclosure questions in the proposed rules with respect to which the Commission has solicited public comments as part of the rulemaking process. Without close attention by the business community to the rulemaking process, it's possible that the disclosure requirements could be expanded, perhaps significantly, beyond the disclosure currently contemplated by the proposed rules.
There has been growing pressure to require companies, similar to that in the so-called ESG (environmental, social, and governance) areas, to disclose increasing amounts of information with regard to their workforces. See, for example the July 6, 2017 petition to the SEC by the Human Capital Management Coalition indicating that necessary categories of disclosure should include workforce demographics; workforce stability; workforce composition; workforce skills and capabilities; workforce culture and improvement; workforce health and safety; workforce productivity; human rights commitments and their implementation; and workforce composition and incentives. The International Organization for Standardization has issued guidelines setting out even broader expectations for companies to meet. See ISO 30414.
The proposed regulation discusses much of this background but adopts a principles-based approach in lieu of a prescriptive test, by requiring disclosure, to the extent "material," of "A description of the registrant's human capital resources, including in such description any human capital measures or objectives that management focuses on in managing the business (such as, depending on the nature of the registrant's business and workforce, measures or objectives that address the attraction, development, and retention of personnel.") See the proposed new Item 101(c)(2)(ii) of Regulation S-K. Importantly, this formulation retains the requirement for materiality that is generally applicable to most public company disclosure requirements under Regulation S-K specifically and the federal securities laws generally, and leaves to the registrant a degree of judgment on how to appropriately respond. As it is the registrant which intimately knows its business and how its workforce underpins the success of that business, this seems an appropriate approach.
However, Commission requests for comment numbers 21 through 24 in particular, open the door to whether more prescriptive requirements should be included in the final rule and whether or not generally the test for disclosure should be more encompassing. If one reads the record discussed in the proposed rules and the comments submitted, there is no question, as night follows day, that certain groups will be pressing for much broader and intrusive disclosure requirements, see e.g., footnotes 17, 166 and 172. Without here going into how detailed public information about workforce profiles and management policies could be misused by competitors or the plaintiffs' bar, and possibly lead to an inundation of information which buries useful information for investors, see, generally, "Essential Information: Modernizing Our Corporate Disclosure System", US Chamber, Center for Capital Markets, it will be important for the business community to participate in this rulemaking and make its views known to offset what will likely be many comments forcefully advocating for broader, prescriptive disclosure.
The comment period closes October 22.
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