How the new SEC rule is a game changer for HR and training functions in public companies
The new U.S. Securities and Exchange Commission (SEC) amendments to Regulation S-K bring opportunities and challenges to Human Resources and Training departments in public companies. Effective November 9th, all companies listed on U.S. stock exchanges will be required to make human capital disclosures on their quarterly reports, annual reports, and registration statements. That means next week – reports filed on or after Monday. Are you ready? This article provides a summary of this new rule and some suggestions for how to prepare for and capitalize on this opportunity.
Table of Contents
What is the new rule?
What does this mean for Human Resources and Learning & Development?
What about privately-held companies?
Which metrics should the company report?
What should I do next?
What is the new rule?
For the past 30+ years, public companies were not required to disclose any human capital metrics except for their number of employees.
The new amendments to SEC Regulation S-K, Modernization of Regulation S-K Items 101, 103, and 105 are designed to update the description of business (101), legal proceedings (103), and risk factor disclosures (105) to be more in line with current investor needs.
Item 101(c) refers to the new human capital disclosure requirements "Item 101(c) will require, to the extent such disclosure is material to an understanding of the registrant’s business taken as a whole, a description of a registrant’s human capital resources, including any human capital measures or objectives that the registrant focuses on in managing the business." SEC Regulation S-K, page 49
What does this mean?
This rule means that public companies are now required to report human capital resources they consider important for investors to understand their business – information investors would want to know before buying or selling securities.
The SEC does not define “human capital” or what is “material” to the business. It does, however, provide three examples of human capital measures that may be considered material to the business: (1) attraction, (2) development, and (3) retention of personnel. (SEC Regulation S-K, pages 48-49)
These example metrics are suggestions by the SEC, not mandates. This amendment is principles based as opposed to prescriptive or rules based, meaning that each company can determine how to define human capital, which information is material to the business, and how to disclose this information to investors.
What does this mean for Human Resources and Learning & Development?
Human Resources (HR) and Learning & Development (L&D) functions in public companies will play a key role in defining the company’s human capital strategy and how they are presented to investors. Any personnel and training initiatives material to the business will be included in the report and tied to the company’s overall business goals. This leads to increased visibility of HR and L&D in the organization with more importance given to employee programs and training.
What about privately-held companies?
Not in a public company? Don’t think this won’t affect you. Sooner or later, privately-held companies will likely be required to disclose human capital information as well.
"These changes will go far beyond U.S. publicly traded companies. In 5-10 years, privately held companies, nonprofits, and other types of organizations will be compelled (or shamed) into adopting the same level of transparency," David Vance, Executive Director for the Center for Talent Reporting
Once these reporting measures become widely adopted, applicants will review a company's human capital metrics when considering a job offer. Employers will need to report this information to remain competitive in the marketplace.
Which metrics should the company report?
When choosing human capital metrics, each company should first consider the human capital story it wants to tell investors and employees. Then gather metrics that support the story. (Stacey Boyle, PhD, VP, Solution Consulting, EdCast, SmarterPeoplePlanning, Webinar - URGENT: STRATEGIC OPPORTUNITIES for L&D with the passing of the SEC's Rule Mandating Human Capital Disclosure in the 4th Quarter)
The following are potential starting points for human capital metrics:
SEC amendment stated examples
A good place to start may be gathering metrics related to the three examples identified in the SEC amendment:
Attraction (e.g., recruitment)
Development (e.g., training)
Retention of personnel (e.g., employee exit information)
International Organization for Standardization guidelines - ISO 30414:2018
In 2018, the International Organization for Standardization released ISO 30414:2018, which sets international guidelines for human capital reporting. These guidelines apply to all types of organizations – large, small, public, private, and non-profit. Many consider the ISO guidelines to be a safe harbor approach for reporting the new SEC human capital metrics (HCMI) and that they will be broadly adopted by all organizations.
“Many of us in the standard-setting space believe that the ISO recommendations will eventually be broadly adopted by all organizations…” David Vance, Executive Director for the Center for Talent Reporting
ISO 30414:2018 sets 10 metrics for human capital reporting for all public organizations:
Percentage of employees who have completed training on compliance and ethics
Total workforce cost
Human capital ROI
Revenue or profit per employee
Turnover rate
Total development and training cost
Number of accidents
Number killed during work
Number of employees
Number of full-time equivalents (FTEs)
ISO 30414:2018 also recommends eight metrics related to Learning and Development:
Total development and training cost
% of employees who have completed training on compliance and ethics
% of employees who participate in training
% of employees who participate in formal training by category
% of leaders who participate in training
% of leaders who participate in leadership training
Average formal training hours per employee
Workforce competency rate
(Stacey Boyle, PhD, VP, Solution Consulting, EdCast, SmarterPeoplePlanning, Webinar - URGENT: STRATEGIC OPPORTUNITIES for L&D with the passing of the SEC's Rule Mandating Human Capital Disclosure in the 4th Quarter)
The ISO 30414:2018 guidelines are available for purchase on the ISO website.
Human Capital Management Coalition (HCM) recommendations
Another approach for choosing human capital metrics would be to consider the recommendations from the HCM Coalition rulemaking petition to the SEC on July 6, 2017. (Hunton Andrews Kurth LLP, Cooley LLP)
The HCM Coalition recommended the following human capital disclosures on the rulemaking petition:
Workforce demographics (number of full-time, part-time, and contingent workers; policies on and use of subcontracting and outsourcing)
Workforce stability [turnover (voluntary and involuntary), internal hire rate]
Workforce composition (diversity, pay equity policies/audits/ratios)
Workforce skills and capabilities (training, alignment with business strategy, skills gaps)
Workforce culture and empowerment (employee engagement, union representation, work-life initiatives)
Workforce health and safety (work-related injuries and fatalities, lost day rate)
Workforce productivity (return on cost of workforce, profit/revenue per full-time employee)
Human rights commitments and their implementation (principles to evaluate risk, constituency consultation processes, supplier due diligence)
Workforce compensation and incentives (bonus metrics for employees below the named executive officer level, measures to counterbalance risks created by incentives)
The HCM Coalition also sent a statement on August 27, 2020 in response to the final S-K rule urging the SEC to adopt four metrics for human capital reporting.
1. Number of employees, including full time, part-time, and contingent labor
2. Total cost of the workforce
3. Turnover
4. Employee diversity and inclusion
What should I do next?
Now is the time for HR and L&D professionals to capitalize on this opportunity and prepare for the next SEC filing.
Stacey Boyle, PhD, VP, Solution Consulting for EdCast, recommends the following steps to get started:
1. Create a stakeholder group
Begin the conversation about human capital disclosures with your HR and/or L&D team. Identify all individuals needed to tell your human capital story and create a stakeholder group:
Human Resources
Learning and Development
Company leadership
Legal
Finance
Marketing
Investor relations
Individuals involved in data collection, HR systems, and analysis
Other
2. Establish your human capital story and metrics
Work with your stakeholder group to establish your human capital story, considering the perspective of investors and current/future employees.
Choose which human capital metrics are material for telling your story. Consider starting with SEC stated examples, ISO 30414:2018 guidelines, or HCM Coalition recommendations.
When developing your human capital story and metrics, consider short- and long-term strategies. Identify which metrics you can report in your next SEC filing and any additional metrics you may collect over the long term. Your human capital story may evolve over time.
3. Collect and analyze the data
Identify the human capital data you are collecting now and compare it to your chosen metrics. How large is the gap? Do you have systems in place to collect the data you need?
Set up a reporting strategy. This may involve implementing new HR systems and processes within the organization.
Collect and analyze the data
4. Craft your human capital story using your new metrics and data
Work with your stakeholder group to craft your human capital disclosure narrative incorporating your metrics and data collected.
This is an exciting time for HR and L&D professionals, as human capital measures will now be given more weight in public companies. This will benefit employees, the company, and investors.
Disclaimer The information provided in this article does not constitute legal advice; instead, all information and links available in this article are for general informational purposes only. You should not act upon any such information without first seeking qualified professional counsel on your specific matter. No reader, user, or browser of this article should act or refrain from acting on the basis of information in this article without first seeking legal advice from counsel in the relevant jurisdiction.
Natalie Sikes is an accomplished learning consultant with 20 years of experience developing training programs for corporate, legal, and non-profit organizations. To learn more, visit www.sikesdesigns.com or email nataliesikes@sikesdesigns.com.
Today's trivia question
Which animal lives the longest?
a. Bowhead whale
b. Giant tortoise
c. African elephant
d. Pink cockatoo
Answer to last weeks trivia question:
Which president was the wrestling champion of his county at the age of 21?
Abraham Lincoln