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Article | Executive Pay Memo North America

Proposed House bill would require annual disclosure of human capital metrics

Governance Advisory Services |Executive Compensation
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By Ann Marie Breheny and Steve Seelig | March 4, 2020

The bill will not become law but indicates a continued focus on requiring companies to describe the elements and value of human capital in their 10-Ks.

We don’t often blog about proposed legislation, given the dearth of laws that have moved through Congress over the past few years. But when the proposal involves expanding the disclosure of human capital metrics on company Form 10-K filings, particularly when this question is top of mind for boards and compensation committees, we thought it worthwhile to focus on the potential implication.

In February 2020, the House Financial Services Committee approved the Workforce Investment Disclosure Act, which would require company annual 10-K filings to include a disclosure of workforce demographics, workforce stability, training and capabilities, health and safety, culture and empowerment, and compensation and incentives. Recall that in March 2019, the Securities and Exchange Commission (SEC) Investor Advisory Committee issued a recommendation that companies should disclose human capital metrics that would provide similar insights to shareholders as would be required by the committee markup. (Read our article)

Then in fall 2019, the SEC included a human capital component in its proposal to modernize Regulation S-K by encouraging companies to take a flexible, principle-based approach to disclose certain measures that management focuses on and that it deems material to understanding a registrant’s business. We expect this latter provision to be finalized this spring and submitted a comment letter offering our views on how the disclosure might be crafted.

The Workforce Investment Disclosure Act would expand the disclosure regime beyond objectively measurable items to those that would require more nuanced, qualitative disclosures that align measurements with business goals (see items 4 and 5 below). Most of the listed items contemplate that SEC rules would require inclusion of this information but would permit the SEC to expand those disclosures. The required information is as follows:

  1. Workforce demographics — including information on the number of full-time, part-time and contingent workers as well as policies and practices relating to subcontracting, insourcing and outsourcing
  2. Workforce stability — including information about voluntary and involuntary turnover rates, internal hiring and internal promotion rates
  3. Workforce composition — including data on the gender, racial and ethnic composition of the workforce, information about diversity policies and audits (workforce stability information from item 2 above would also be broken out by gender, racial and ethnic components)
  4. Workforce skills and capabilities — including information about training (including the average number of hours of training and spending on training per employee per year), skills gap, and the alignment of employee skills and capabilities with business strategy
  5. Workforce culture and empowerment — including:
    • Policies and practices regarding freedom of association and work/life balance
    • Incidents of verified workplace harassment (during the five prior fiscal years)
    • Policies and practices relating to employee engagement and wellbeing, including:
      • Management discussions about creating an autonomous work environment
      • Fostering a sense of purpose in the workforce
      • Trust in management
      • A supportive, fair and constructive workplace
  6. Workforce health and safety — including information about frequency, severity and lost time due to injuries, illnesses or fatalities, plus disclosure of fines and actions under the Occupational Safety and Health Act
  7. Workforce compensation and incentives — including information about:
    • Total workforce compensation, broken out by full-time, part-time and contingent workers
    • Policies and practices about how performance, productivity and sustainability are considered when setting pay and making promotion decisions
    • Policies and practices regarding incentives and bonuses provided to those who are not named executives (including policies and practices to counter any risk created by such incentives)
  8. Workforce recruiting and needs — including the number of new jobs created, the worker classification of new jobs, information about the quality of hire and new hire retention rate.

If the proposal is enacted, the SEC would have 270 days to study whether additional disclosures would be material to shareholders and one year to report the results to Congress, including information about:

  • Human rights commitments of issuers, principles used to evaluate risk, constituent consultations and supplier due diligence
  • Violations of the Fair Labor Standards Act
  • More detailed employee demographic information
  • The results of employee satisfaction surveys

The SEC would have two years to promulgate final regulations for implementation of the law’s disclosure requirements; however, issuers would still need to comply with the law as of the date of enactment. Until the SEC issues its regulations, issuers would be deemed in compliance with the law if disclosures set forth in the annual report satisfy the public disclosure standards of the International Organization for Standardization’s ISO 2 30414, or any successor standards for external human capital reporting, and as supplemented or adjusted by such rules, guidance or other comments from the commission.

The bill is cleared for action on the House floor. The House could vote on the proposal, but Senate action is not expected.

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