In remarks for a telephone call on February 6 with SEC Investor Advisory Committee members, SEC Chair Jay Clayton briefly discussed three topics: disclosure requirements in general, human capital disclosure and proxy plumbing, the latter two topics being subjects of the committee's call. Framework for analyzing disclosure rules. As a preliminary matter, Clayton observed that the SEC's disclosure requirements are based on a framework that is

"rooted in the principles of: (1) materiality—as so well defined by Justice Marshall; (2) comparability—as demonstrated by our commitment to U.S. GAAP; (3) flexibility—as requirements that are too rigid can lead to superfluous and, in some cases, misleading disclosure; (4) efficiency—as the question generally is not rule or no rule, but rather what rule is most effective with the least cost; and (5) responsibility (or liability)—as rules have little long-term value if they cannot be effectively monitored and enforced. I also believe that our disclosure requirements and guidance must evolve over time to reflect changes in markets and industry while being true to the principles I articulated."


Clayton has previously discussed his view that the SEC's materiality disclosure framework is the right one, but that what goes into it needs to reassessed from time to time. That is, we need to recognize when things have changed, and, Clayton maintained, what is important now is forward-looking information. For example, Clayton observed that, because the market reflects anticipated future performance, stocks tend to move at the time of the earnings release and analyst call—when guidance tends to be issued—not at the time of filing of the 10-Q. Although key performance indicators are valued because they can presage future performance, they're not part of the regulatory framework because there is little comparability across companies or industries. As a result, adding KPIs and NGFMs to GAAP is really difficult. What Clayton would like to see with regard to KPIs and NGFMs is a clear tie-back to GAAP and period-to-period consistency for each company. In addition, he indicated, these types of measures should track how management looks at its business, not just how management wants to present its business. (See this PubCo post)

Human capital disclosure. Items 101 and 102 of Reg S-K, which address, to a limited extent, people and properties, were adopted back when companies' most valuable assets were plant, property and equipment, and human capital was primarily a cost. But now, human capital and intellectual property often represent "an essential resource and driver of performance for many companies. This is a shift from human capital being viewed, at least from an income statement perspective, as a cost." However, developing standardized disclosure requirements for "human capital" is not so easy. Given that disclosure requirements should elicit information that is material to making investment decisions, Clayton observed, those requirements may need to differ significantly, depending on the industry and even the company. It may not be possible, Clayton observes, to identify metrics that offer market-wide comparability and perhaps not even industry-wide comparability:

"Each industry, and even each company within a specific industry, has its own human capital circumstances. For example, I would expect that the material human capital information for a manufacturing company will be different from that of a biotech startup, and different from that of a large healthcare provider. Further, the human capital considerations for a car manufacturer will be different from that of a home manufacturer. Because of those differences and the principles of materiality, comparability, and efficiency, I am wary of jumping in with rules or guidance that would mandate rigid standards or metrics for all public companies."

As a result, Clayton believes that, for human capital, "it is important that the metrics allow for period-to-period comparability for the company." Importantly, Clayton believes that human capital should be viewed through the eyes of management, whether the focus is on turnover rates, education or experience of the workforce, availability of workers to fill open positions or other factors. And what, he wanted to know, are investors looking for?


As discussed in this PubCo post, human capital management has become a significant concern of institutional investors. What is human capital management? According to SASB, HCM "addresses the management of a company's human resources (employees and individual contractors) as key assets to delivering long-term value. It includes issues—such as labor practices, employee health and safety and employee engagement, diversity and inclusion—that affect the productivity of employees, management of labor relations, and management of the health and safety of employees and the ability to create a safety culture." (See this PubCo post.)

Because of the intense competition for talent, institutional investor BlackRock, for example, views each company's approach to HCM as an investment issue and a "factor in business continuity and success. In light of evolving market trends like shortages of skilled labor, uneven wage growth, and technology that is transforming the labor market, many companies and investors consider robust HCM a competitive advantage." That view is shared by other institutional investors. In its compilation of investors' top priorities for companies for 2018 (involving interviews with over 60 institutional investors with an aggregate of $32 trillion under management), EY identified HCM as one of investors' top five priorities. For many investors, EY reported, hiring and retention of the best talent can be key to remaining competitive over the long term, and company culture can play a role.

Some institutional investors have also encouraged companies to provide more transparency on HCM practices. But what exactly should they disclose? In a 2017 petition for rulemaking, the Human Capital Management Coalition, a group of 25 institutional investors with more than $2.8 trillion in assets under management, asked the SEC to adopt rules requiring "issuers to disclose information about their human capital management policies, practices and performance." The proponents contended that disclosures regarding human capital management would benefit investors and the public, as well as promote capital formation. The petition, however, was not explicit with regard to the details of any proposed regulation, identifying only the broad categories of information that the proponents viewed as "fundamental to human capital analysis." (See this PubCo post.)

In December 2018, the International Organization for Standardization (ISO) published a new ISO standard, ISO 30414 Human resource management — Guidelines for internal and external human capital reporting, designed to allow investors and others to benchmark companies' performance on HCM. The new ISO standard calls for companies to publicly report on certain metrics and to report internally on other metrics related to core human capital areas such as compliance and ethics, costs, diversity, culture, recruitment, mobility and turnover, skill and capabilities, organizational health and safety and productivity. (See this PubCo post.)

Proxy Plumbing. With regard to proxy plumbing, Clayton acknowledged that there is a near-consensus that the current system for proxy solicitation and voting "needs a major overhaul." The question is what that should entail, both in the short-term and long-term. New Commissioner Elad Roisman will be taking the lead on proxy plumbing and other "efforts to consider improvements to the proxy process generally."


Clayton's view was certainly confirmed at the SEC's proxy process roundtable held in November 2018. At the roundtable, a member of the SEC's Investor Advisory Committee, which had addressed the topic of "proxy plumbing" at length at its September meeting (see this PubCo post), observed that the current system of share ownership and intermediaries is a byzantine one that accreted over time and certainly would not be the system anyone would create if starting from scratch. There was broad agreement that the current system of proxy plumbing is inefficient, opaque and, all too often, inaccurate. Anecdotally, panelists described instances of overvoting, delays in counting of registered shares, breaks in the chain of custody leading to separation of necessary documentation and resulting disqualification of votes, and shares not counted because of conflicts on the face of the omnibus proxy. So the question was: should the SEC start over from scratch with a complete overhaul or are there approaches that could repair the existing system? On that issue, there was no agreement. As framed by the first panelist, "do we have the willpower" to reinvent the system? (See this PubCo post.)

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