Get Up to Speed: What the SEC’s New Human Capital Filing Requirements Mean for HR Leaders
With the U.S. Securities and Exchange Commission’s (SEC) new requirements for reporting human capital metrics comes a whole host of questions.
Perhaps the most pressing questions for chief people officers and other HR leaders are:
- How do I help my company comply with the new requirements?
- How do I measure our various people programs, from recruitment to retention; employee engagement; diversity, inclusion, equity, and belonging; growth and development; and more?
- How will our people programs impact our company’s value and attractiveness to investors?
As you get up to speed on these new requirements, here’s a quick guide, which includes a Q&A with corporate governance consultant Lisa Beth Lentini Walker.
Fast facts: The SEC’s new human capital filing requirements
What are the new requirements? “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).”
You can find the official SEC guidance here.
When did they go into effect? November 2020.
Who has to comply? Public companies.
More resources: The Harvard Law School Forum on Corporate Governance did an analysis of the first 50 filings sent into the SEC after the new requirements went into effect.
Q&A with Corporate Governance Consultant Lisa Beth Lentini Walker
Lisa Beth is a former SEC attorney, and she’s also held in-house legal counsel and compliance leadership positions at various public and private companies. She’s now CEO and founder of Lumen Worldwide Endeavors, where she advises businesses and business leaders on compliance, ethics, governance, and risk. She graciously spent time with us to provide context on what these new SEC human capital filing requirements mean. (We’ve edited the conversation for clarity.)
Why did the SEC issue these new requirements?
The SEC is all about making sure that there’s adequate information in the market. For a very long time, the SEC has been in the role of making sure that there’s a framework so that investors can have information that’s comparable and understand what the risks to their investment are.
So when we think about what the SEC is doing, they’ve identified that human capital is a risk, and, frankly, most companies are already aware of this. Most companies can’t operate without humans.
How might investors see a company’s human capital as a risk?
When you think about talent, and the risks of turnover, and where companies are spending their money, many companies spend a significant portion of their money on human capital. The people are the most important asset for almost every company, so of course this is important for investors to understand. Now it’s just a question of what type of information is important.
For companies, there’s what they do. There’s their purpose, which is the why they do it. But now it’s really important to also understand the how. And that’s where I think human capital comes in. How does a company navigate the world? How are they attracting, developing and retaining people?
There are more requests for disclosure around human capital because more people are asking questions like: How are you making sure there’s diversity, equity, and inclusion within your workforce? How are you making sure you’re developing people in a way that engages and retains them? We all know that an engaged workforce is a more productive workforce. There are absolutely benefits to keeping employees—and keeping them happy. There’s a financial impact when you have a lot of people leave. So all of these things are coming together, and more people are saying this is important information. It’s information we want to know—and not just through PR or anything else. We want the company and their executives to sign off on saying, “This is how we approach people.”
These new requirements are vague. Why is that?
One of the principles when you’re talking about disclosures is: Is the information material to an investor and making an investment decision? So, all things considered equal, would this information make a difference about whether or not you would invest?
The reason why a lot of the SEC guidance and regulations focus on the broader concepts is because companies are like fingerprints. There is not one company that is identical to another, and what’s important for one company may not be as important for another company.
So completely prescribed metrics don’t work well. What you generally see these regulators do is give the broad concept, and they say, “These are the types of things we might want to see.” But they leave it up to the companies to say, “Here’s how we think this plays out for us.”
How will the SEC handle the wide range of different human capital metrics that companies will submit?
There will inevitably be reviews of what’s submitted. And there will very likely be comments from SEC regulators saying something along the lines of, “Explain more; this doesn’t seem to make sense.”
And there will be a growing set of developments indicating what good looks like. There are already articles that are coming out that say some companies didn’t bother to change their language much at all, or some companies included all new sections. And as you see that play out, you start having companies basically look to the left and look to the right. They’ll see what the competition is doing, see what other companies that are similarly situated in terms of a market capitalization or type of business are disclosing. And we will start building a more mature process.
Personally, I like the way the SEC approaches this because I think it allows a more informed and refined approach that grows and develops best practices over time.
What are the consequences for companies the SEC deems not to be in compliance with these new filing requirements?
The first consequence is generally that the disclosures generate questions and further inquiry. This may come from investors as well as an SEC staff review and comment.
Fines and fees aren’t usually something that just come out of the blue. You need to look at what a company’s required to do, and then you need to look at whether they did something like misleading investors. That’s where you’d see potential enforcement. I don’t think the SEC asking a company for new disclosures necessarily translates immediately into fines and fees.
How do you see the process to include these new metrics playing out internally?
Hopefully companies are already talking about this internally. Now they’re just being asked to open up a little bit and talk about it a little more externally.
But I think there are definitely going to be, from a management perspective, heightened expectations around how you collect and disseminate this information. And I think some companies are not going to be happy about collecting and disseminating this information, because sometimes the information doesn’t look great, and then there’ll be questions about why.
What do you think the impact will be for businesses?
What I believe will likely happen is companies that are good actors and that have good practices tend to attract, develop and retain talent.
For companies that don’t have particularly good practices, it previously may have been less evident why they had turnover. Maybe that turnover wasn’t previously disclosed. But it will start becoming more evident that there’s probably a problem there. And then it becomes more difficult to attract and retain people. They may become a potential target for shareholders who are disgruntled because their investments aren’t performing. So they may receive shareholder proposals saying, “We want you to make these changes, and we would like to have all the shareholders vote on it.” They’ll also probably receive some board attention.
A famous SEC Chairman, William O. Douglas, said, “Sunlight is the greatest disinfectant.” Once any issue sees the light of day, you have the opportunity to have a discussion about it.
People who are thinking about being employed by a company or joining an executive management team will have more information from which to base their decision. And shareholders will have more information about companies they invest in or may be thinking about investing in.
In the human capital space, a lot of that information is very protected historically. These new requirements may force companies to share some previously undisclosed information. All of a sudden, we will be able to ask: Is this company ahead of the game? Are they behind the game? Or they may not even be playing the game because they think they don’t have to. So I think it will be a great revealer in the war on talent.
Where should HR leaders and company executives start when trying to figure out how to comply with these new requirements?
I think it depends on how far they are on their journey, and every company is in a different place.
So if they already have practices that they’re proud of, terrific. They should say them loud and proud.
If they’re in a position where they have practices and they’re working on them, then they need to be transparent and make sure they tell the story of why their practices are somewhere along a journey of getting to where they would like them to be.
If they’ve never thought about this, they need to start thinking really fast and looking at what leading companies are doing. If it means they need to start new practices, because they haven’t been doing something, then it’s moving in a direction that’s going to benefit everyone. It’ll benefit the employees, it’ll benefit communities, it’ll benefit the shareholders, it’ll benefit the companies.
Learn how Glint can help you measure employee engagement and belonging, and spot retention issues before they become a business problem.