SEC human capital disclosure rules: What businesses need to know
An SEC regulation that went into effect last September replaces the requirement to disclose number of employees with something a little more complicated.
Tangible assets are readily accessible for investors to evaluate. Intangible assets, however, may be better indicators of a company’s true value.
“What are intangible assets?” said Josh Painter, vice president of strategy and corporate development for Degreed. “They are things like software, intellectual property, business relationships and rights. These are all things that are produced by people, so it is human capital instead of physical capital like machines and industrial equipment.
Related: 7 principles for rethinking human capital
“For publicly traded companies globally, this represents a little over half of a company’s enterprise. If you focus just on the S&P 500, the number actually is 84%. For the top 10 companies in the world, it’s a staggering 97%, surpassing $10 trillion in value for the first time ever last year.”
Painter shared his insights during “Understanding the New SEC Human Capital Disclosures – and What it Means for HR, Learning and Talent Teams,” a webinar presented on January 21.
“The vast majority of these assets are undefined and are not disclosed on company balance sheets, which means they can’t be considered by investors,” he said. “For public companies in the United States, that just changed. What that means moving forward is that how a company allocates its human capital is going to be just as important as how it allocates its financial capital. The talent paradigm is shifting. People are now the primary driver of value of a company.”
An SEC regulation that went into effect last September focuses on non-financial reporting requirements. It replaces the requirement to disclose the number of persons employed by the registrant with the extended requirement “…to provide a description of the registrant’s human capital resources, including in such description any human capital measures or objectives that management focuses on in managing the business, to the extent such disclosures would be material to understanding the registrant’s business taken as a whole.”
The wording is vague for a reason, said Michael Hruska technologist of Allen Interactions. “The rules have changed, and there is not specific guidance,” he said. ”They’re not recommending anything specific other than that you have to use a principles-based approach that is unique to your business. The goal is to attract, retain and optimize. How do we use data to describe the uniqueness of our business and the way we think about and treat people?
“The things are easy to measure often are hard to impact. A good analogy is that it’s easy to get on a scale and read the number, but it’s hard to get off the scale and think about what you need to do to impact the next time you get on the scale.”
Several Fortune 500 companies that already were reporting human capital focus on these metrics:
- Workforce diversity, 50%
- Culture initiatives, 22%
- Workforce health and safety, 22%
- Workforce skills and capabilities, 22%
- Workforce stability, 6%
“This positions investors to use this data to evaluate investments,” Hruska said. “If they see things they like, the valuations of companies go up. If they see things they don’t like, it could be tens of millions, hundreds of millions or even more in terms of impact. It’s an opportunity to show that you are doing continuous improvement and have good directionality. Your organization decides how you are going to disclose things that are unique for your business.”
What does the new regulation mean for businesses? According to Hruska:
- The bright age of data about human capital, the most important “machine” in an organization, is moving closer.
- This rule forms a basis for companies to share their human capital data as another point of overall evaluation.
- Disclosures of human capital data will be a mark of organizational efficiency and the effective use of human resources.
- These data points can provide an improved human management landscape for organizations and can guide continual improvement and evolution.
- Equally important to outside parties, analysts and markets, the disclosure can provide an additional means for investor evaluation.
- While there is variability in the types of data that may be disclosed, organizations should make their best efforts to produced metrics that can be monitored and improved internally with more frequency while simultaneously sharing these metrics with the investment community.
He recommends that companies start by answering a few questions. Internally, what is relevant for our organization, what are we ready to do, what will we do first and what will we work toward? Externally, ask, what is applicable for investors?
“What does it really mean?” Hruska said. “We have a lot of data in organizations, but people are the most important part. The human-machine partnership is really important moving ahead. It’s a basis to compare companies. It could be a great way to tout the good things you are doing in HR in the effective use of people.”
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