On Thursday last week, the SEC's Investor Advisory Committee voted to approve, with two abstentions, a subcommittee recommendation regarding human capital management disclosure. You probably remember that, in 2020, during the tenure of then-SEC Chair Jay Clayton, the SEC adopted a new requirement to discuss human capital as part of an overhaul of Reg S-K that applied a "principles-based" approach. The new rule limited the requirement to a "description of the registrant's human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant 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 development, attraction and retention of personnel)." (See this PubCo post.) With workforce having grown in importance as a value driver, many viewed the amendment as a step in the right direction, but one that fell short. Subsequent reporting suggested that companies "capitalized on the fact that the new rule does not call for specific metrics," as "[r]elatively few issuers provided meaningful numbers about their human capital, even when they had those numbers at hand" (although more recent studies have shown some expansion of disclosure). (See this PubCo post.) As you know, Corp Fin is currently working on a proposal to mandate enhanced company disclosures regarding HCM, and, according to the most recent Reg-Flex agenda, October is the target for issuance of the proposal. (See this PubCo post.) Recommendations from SEC advisory committees often hold some sway with the staff and the commissioners. Will the IAC recommendations have any impact?

The IAC has discussed the issue of HCM disclosure in the past. In March 2019, the IAC recommended that the SEC pursue rulemaking to improve human capital disclosures for investors. That was followed by the principles-based 2020 amendments. More recently, the IAC met twice to discuss the issue of HCM disclosure, first in June 2022, to discuss human capital as non-traditional financial information (see this PubCo post) and, just a few months later in September, expanding the discussion to consideration of other labor-related performance data metrics that might be appropriate for disclosure (see this PubCo post). At the first meeting in 2022, the IAC member moderating the panels observed that investors rely on decision-useful disclosures to "understand and assess a company's business, risks and prospects, to make critical decisions about how and where to direct capital. It is thus critical that this information remain both relevant and reliable. As the sources of value and risk have shifted over the past several decades, investors' informational needs have necessarily evolved." In 1973, when issuers were first required to disclose headcount, 83% of the market cap of the S&P 500 was in physical assets—property, plant and equipment. In the midst of this "fourth industrial revolution," more value resides in intangible assets, such as knowledge-based assets. In 2020, 90% of the market cap of the S&P 500 is in intangible assets, such as human capital. In light of this shift, do we need to rethink whether investors getting the information they need? What types of financial information, she asked, are now relevant for investors?

At the IAC meeting

At the meeting, SEC Chair Gary Gensler said that the staff had been "evaluating how disclosures under [the 2020 rule amendments] have been informing investors and possible recommendations for any enhancements, including considering the Committee's prior recommendations regarding the total dollars spent on the workforce as well as turnover." Commissioner Jaime Lizárraga said that "[w]e can build on the 2020 foundation with quantitative metrics that will give investors the standardized, comparable information needed to properly evaluate companies' market value." Commissioner Hester Peirce, typically not a fan of prescriptive regulation, asked a number of questions:

  1. "Are investors the only audience of the disclosures being recommended? If not, which specific disclosures are tied to financial materiality, the touchstone for investor-oriented disclosures? Will other constituencies benefit from these disclosures at the cost of investors?
  2. Principles-based standards are designed to accommodate a varied issuer population. Would it even be possible for the Commission to draft uniform, prescriptive human capital disclosure requirements that would elicit material information regardless of a company's size, industry, location, and any other distinct human capital challenges?
  3. Would the recommended disclosures risk giving investors false confidence in the accuracy, consistency, and comparability of human capital information?
  4. Why do we need a new rule just three years after the Commission's adoption of human capital disclosures and before FASB issues its final disaggregation rule? [See SideBar below.] If anything additional is needed, would guidance regarding the existing rule be better than a new rule?
  5. Do we risk requiring disclosures that only larger companies could afford, perhaps because they already make similar disclosures? How should the Commission scale these disclosures for smaller companies? What kind of human capital information is most costly for companies to track?
  6. The draft recommendation expresses an interest in disclosures related to 'gender, race/ethnicity, age, disability, and/or other [important] categories.' Are there constitutional or other legal concerns with requiring such information to be disclosed publicly? How would this information be financially material?
  7. How can the Commission avoid drafting rules that would have the effect of micromanaging public companies' human capital decisions, rather than simply eliciting disclosure?"


In July this year, FASB published a proposed Accounting Standards Update intended to provide investors with more decision-useful information about expenses on the income statement, including employee compensation. According to the press release announcing the proposed ASU, investors have said that more detailed information about a company's expenses "is critically important to understanding a company's performance, assessing its prospects for future cash flows, and comparing its performance over time and with that of other companies." Currently, companies typically include in their income statements expense captions for selling, general and administrative (SG&A) expenses, cost of services and other cost of revenues, and cost of tangible goods sold. The new proposed ASU would require disaggregation of many of those expenses, requiring "public companies to provide detailed disclosure of specified categories underlying certain expense captions in interim and annual periods. It would provide investors with more detailed information about the types of expenses, including employee compensation, depreciation, amortization, and costs incurred related to inventory and manufacturing activities in income statement expense captions such as cost of sales; selling, general and administrative; and research and development." (See this PubCo post and this PubCo post.) The IAC recommendation points out that the FASB proposal uses a "restrictive definition of employee that does not include independent contractors," and that "the proposed line item disclosure groups together all forms of employee compensation rather than disaggregating the type of compensation to show whether, for example, stock compensation expense is concentrated primarily in a particular line item expense or allocated evenly."

The IAC Recommendation

According to the recommendation, a "growing body of work provides evidence that companies with effective human capital management perform better than those that manage their human capital poorly," including, for example, better returns and better productivity. In addition, the modernization of the economy, with the "overwhelming percentage of company valuation now held in intangibles," underscores the need for better workforce information. Accordingly, investors have been looking for data on the workforce. But the available data is often unreliable, forcing analysts "to rely on crude workarounds to fill the human capital reporting gap," with the result that human capital may not be "fully priced into the market."

Further, the IAC contends, the "growth of net loss firms highlights the need for updated human capital reporting." Valuation of these companies is especially difficult, requiring that investors "understand the firms' margins and the degree to which these firms report negative net income because they are engaging in the type of investment, such as research and development or investment in human capital, that GAAP commonly treats as an expense that reduces net income." Even FASB's disaggregation proposal would not "provide sufficient visibility into labor costs."


One panelist at the June 2022 IAC meeting (now a committee member) addressed accounting for human capital and other intangibles, and many of her insights are reflected in the IAC recommendation. Total compensation costs, she said, are actually rarely disclosed—only about 15% of companies disclose that data. Instead these costs are typically aggregated with other costs. In addition, in contrast to the accounting for investments in physical assets, which are shown on the balance sheet and depreciated over time, R&D is not capitalized and reduces net income right away. Similarly, investments in labor reduce net income right away and are not even separately disclosed, requiring interested investors to search it out. She noted that some have suggested that it's better, from an accounting perspective, to buy robots than to invest in human capital. She advocated disaggregating and disclosing a number of these HC-related expenses.

To illustrate why more detailed information would be useful, she observed that many companies reported net losses in 2020. These were typically smaller, less mature companies that investors expect are going to scale up. But, she said, it's hard to determine from an accounting perspective if that's true: Why is the company losing money? Is it because of investment expenses or recurring maintenance expenses? She advocated that MD&A should include a discussion differentiating between maintenance expenses and investment expenses intended to increase future production. In the context of human capital, that would entail disaggregating different compensation costs; for example, salary would be a maintenance expense while training would be an investment. She also recommended that companies disclose employee turnover. That information would be financially material on its own, but if companies were able to capitalize labor-related investment costs, it would be important to understand the duration of employees' employment. Finally, she advocated additional disaggregation of line items on the income statement. For example, with respect to cost of goods sold, how much is attributable to labor?

The IAC recommendation recognized that both the 2020 amendments and the FASB disaggregation proposal were useful first steps, "but both fall short of giving investors the full information needed for accurate valuation of human capital. For example, the 2020 rule offers virtually no guidance or prescription about what information should be disclosed, and it explicitly declines to define 'human capital.'" As a result of the lack of specificity, the IAC contends, issuers have provided disclosures that are not consistent or comparable. In terms of costs to issuers, the IAC recognized that the recommendation would involve increased costs, but indicated that "technological advancement has significantly decreased the cost of collecting—and, ostensibly, reporting— basic human capital data." Balancing the costs to issuers against the benefits, including the benefit of elimination of the costs to investors in hunting for data, the IAC concludes that it "would be more efficient for issuers to provide human capital information directly."

The IAC recommendation has two basic components: enhancements to the human resources disclosure in the business description under Reg S-K Item 101(c) and enhancements to the narrative disclosure in MD&A.

Business Description. With regard to Item 101(c), the IAC recommends that the SEC add requirements for disclosure of

"1. The number of people employed by the issuer, broken down by whether those people are full-time, part-time, or contingent workers;

2. Turnover or comparable workforce stability metrics;

3. The total cost of the issuer's workforce, broken down into major components of compensation; and

4. 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."

Headcount breakdown. With regard to headcount disclosure, the IAC contends that current disclosures are inconsistent, with some excluding international workers and many excluding contingent labor "despite 2008 SEC staff guidance stating that industries typically reliant on independent contractors should disclose these numbers as well." The IAC notes that the measure of contingent workers "would include reporting on all similarly situated persons whose work contributes to a material level of revenue or income." Investors find these breakdowns of headcount to be telling: for example, the IAC suggests, a move of many employees to part-time "could indicate a downward shift in operations, and the volume of independent contractors provides insight into management's assessment of the stability of current operations."


In February 2022, Senators Sherrod Brown and Mark Warner, the Chair and a member, respectively, of the Senate Committee on Banking, Housing, and Urban Affairs, submitted a letter to Gensler, calling on the SEC to include in its HCM proposal a requirement that companies report about—not just employees—but also the number of workers who are not classified as full-time employees, including "gig" workers and other independent contractors. Acknowledging that the SEC is working on advancing HCM disclosure, the Senators suggest that the "picture would be wholly incomplete...if companies are not required to disclose information about the number of independent contractors they use on a regular basis and the entire workforce that is material to their business strategy." In recent years, they say, companies have contracted out—through subcontracting, on-demand work, or other forms of independent contractor labor—substantial work that previously was performed in-house. This trend, they suggest, may result in lower short-term costs for the company, but "come[s] at the expense of workers, who receive fewer benefits, lower wages, and have less upward mobility within the organization." According to Brown and Warner, the tension between cost savings and investment in workers "is one of the defining tensions that has emerged as companies have prioritized short-term profits at the expense of investments in their workforce and long-term productivity. As you know, these decisions have material effects on a business' financial performance." (See this PubCo post.)

Turnover metrics. Disclosure of turnover metrics was considered important because studies have shown that "turnover is meaningfully related to financial performance." For example, better employee retention is "associated with higher stock returns." Replacement costs can be high, and "high rates of undesired turnover can be costly for companies due to loss of knowledge and social capital, lower productivity, and reduced product and/or service quality." In addition, turnover is a quantitative metric that can be compared across companies.

Compensation cost components. According to the recommendation, the cost of labor is "likely the most significant operating cost that companies incur," yet it is rarely disclosed (about 15% of S&P 500 firms), making it more difficult to understand why certain line items, such as COGS, increased or decreased. "Disclosure of workforce costs," the recommendation contends, "would allow investors to understand these costs—and to evaluate the efficiency of each dollar invested in human capital through various productivity measures." As with executive comp, breaking compensation down into its components would allow investors to understand employees' incentives, "how a company invests in its workforce, and whether any of that investment should be capitalized in the investors' own financial models."

Workforce demographic data. The IAC recommends that the SEC require better data on the demographic composition of the workforce, including diversity at senior levels. Diversity data, the IAC suggests, provides insight into "companies' efforts to identify and develop new sources of talent," allowing "investors to evaluate a firm's talent pipeline and effectiveness of DE&I efforts." The IAC observes that empirical research has demonstrated the value of diversity, and research has shown that "diversity-related disclosures have emerged as one of the most common human capital disclosures." Former Chair Clayton "acknowledged that D&I are 'value-enhancing' and that he 'expects' public companies that deem D&I to be material to the business and a driver of performance to include this in disclosures." However, the IAC contends, company disclosures on diversity are often "generic, qualitative, varied with respect to the level of detail, and lack specific metrics"—missing the "decision-useful information that investors seek."

MD&A. With regard to MD&A, the IAC recommends that the SEC require additional narrative about how the company's "labor practices, compensation incentives, and staffing fit within the broader firm strategy. Such a discussion would address what portion of labor costs management views as an investment and why, including how labor is allocated across areas designed to promote firm growth (e.g., R&D) and those necessary to maintain current operations rather than increase sales revenue (e.g., compliance)." The IAC notes that its "recommendation here is consistent with the recommendation put forward in a June 2022 rulemaking petition submitted by former SEC commissioners and senior officials as well as professors of accounting and securities law."


There have been at least two petitions requesting that the SEC expand human capital disclosure requirements. In June 2022, a new rulemaking petition was submitted by the Working Group on Human Capital Accounting Disclosure, a group of ten academics that included former SEC Commissioners Joe Grundfest and Robert Jackson, Jr. and former SEC general counsel, John Coates. The petition requested that the SEC require more disclosure of financial information about human capital. According to the petition, there has been "an explosion" of companies "that generate value due to the knowledge, skills, competencies, and attributes of their workforce. Yet, despite the value generated by employees, U.S. accounting principles provide virtually no information on firm labor." The petition requested that the SEC "develop rules to require public companies to disclose sufficient information to allow investors to assess the extent to which firms invest in their workforce"—in the same way that "SEC rules have long facilitated analysis of public companies' investments in their physical operations." Asked about the petition, Grundfest told Bloomberg that it "aims to move the accounting treatment of a company's workforce to the same level as its physical capital....'Current accounting rules give us more information into the economic consequences of buying or leasing a drill press than of hiring and training a software engineer....How much sense does that make in today's world?'"

The petition advocated three reforms, combining quantitative and qualitative disclosure, designed to help investors distinguish between maintenance and investment expenses.

  • Require disclosure in MD&A of the portion of workforce costs that should be considered an investment in the firm's future growth and an explanation why. The authors believe that this disclosure would "allow investors better insight as to what portion of labor costs should be capitalized in their own models—and incentivize management to consider employees as a source of value creation."
  • Treat workforce costs on the same basis as R&D, requiring that they still be expensed for accounting purposes but disclosed. The authors recommended the use of standardized tabular disclosure that would disclose employee mean tenure and turnover as well as various components of compensation and benefits, including healthcare and training expenses, distinguishing among full-time, part-time and contingent workers. This approach would, in the authors' view, allow investors to create valuation models that capitalize workforce costs if desired.
  • Require disaggregation of labor costs in the income statement, allowing investors to determine the proportion of COGS, R&D and SG&A attributable to labor costs and thus to better understand the contribution of workers to the company and the dependence of the company on its employees. As noted above, the petition maintained that, for companies that report losses, investors "need information on product margins to estimate future profitability. To do that, investors need detailed information on operating costs, the most important of which is labor, to predict future margins and to determine what portion of cash outflows reflect investment. Without this information, it is difficult, if not impossible, to reliably value these firms, or to stress-test the market's valuations of a firm using fundamental analysis."

(See this PubCo post.)

Back in 2017, the Human Capital Management Coalition, a group of 25 institutional investors with more than $2.8 trillion in assets under management, filed a rulemaking petition with the SEC requesting adoption of rules requiring "issuers to disclose information about their human capital management policies, practices and performance." (See this PubCo post.) The petition identified the broad categories of information that the proponents viewed as "fundamental to human capital analysis":

  1. "Workforce demographics (number of full-time and part-time workers, number of contingent workers, policies on and use of subcontracting and outsourcing)
  2. Workforce stability (turnover (voluntary and involuntary), internal hire rate)
  3. Workforce composition (diversity, pay equity policies/audits/ratios)
  4. Workforce skills and capabilities (training, alignment with business strategy, skills gaps)
  5. Workforce culture and empowerment (employee engagement, union representation, work-life initiatives)Workforce health and safety (work-related injuries and fatalities, lost day rate)
  6. Workforce productivity (return on cost of workforce, profit/revenue per full-time employee)
  7. Human rights commitments and their implementation (principles used to evaluate risk, constituency consultation processes, supplier due diligence)
  8. Workforce compensation and incentives (bonus metrics used for employees below the named executive officer level, measures to counterbalance risks created by incentives)"

The petitioners left it to the SEC to achieve an appropriate balance between "specific, rules-based disclosures, such as the amount spent on employee training in the past year, and more open-ended principles-based disclosures like how training expenditures are aligned with a changing business strategy." (See this PubCo post.)

After adoption of the SEC's 2020 amendments, the Human Capital Management Coalition issued a statement observing that "under the new rules shareholders would still face difficulty in obtaining information that is clear, consistent, and comparable in order to make optimal investment and voting decisions. While the rulemaking represents important progress in acknowledging the importance of the workforce, the new rules give public companies too much latitude to determine the content and specificity of the human capital-related information they report." The Coalition looked forward "to working with the SEC to assist in developing a balanced approach to human capital-related reporting." In the statement, the Coalition also urged the SEC to require companies, at a minimum, to report on "four quantitative yet modest disclosures to anchor the principles-based, industry- and company-specific reporting framework relied upon in [the SEC's final] amendments": "(1) the number of employees, including full time, part-time and contingent labor; (2) total cost of the workforce; (3) turnover; and (4) employee diversity and inclusion." If not the SEC, the Coalition appears at least to have influenced the IAC.

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