Annual Corporate Governance & Executive Compensation Survey

Shearman & Sterling LLP 36 | Human Capital Management Disclosure referred to human capital as, for some companies, a "mission-critical asset," explaining that "the historical approach of disclosing only the costs of compensation and benefits often is not enough to fully understand the value and impact of human capital on the performance and future prospects of an organization." 2 In light of this potential inadequacy of the current disclosure rules, Chairman Clayton expressed the view that investors might be better served by a principles-based (rather than a rules-based) disclosure framework that would allow them to understand "the lens through which each company looks at its human capital." The recommendation of the IAC and the remarks of Chairman Clayton were not made in a vacuum; instead, they followed a sustained series of calls for enhanced human capital management disclosure from special interest groups and investors. On July 6, 2017, the Human Capital Management Coalition (HCMC), a cooperative effort of 26 institutional investors representing over $3 trillion in assets, petitioned the SEC for rulemaking seeking more disclosure. 3 Citing a litany of empirical research and academic work that, in its view, shows that "thoughtful management of human capital is associated with better corporate performance, including risk mitigation," and highlighting the current lack of, and investor demand for, fulsome disclosure of public company human capital data, the HCMC urged the SEC to consider rules requiring human capital disclosures from public companies on workforce demographics, turnover, diversity, culture, and health and safety. The HCMC, in a March 22, 2019 letter to the IAC, reaffirmed its support for the adoption of human capital management disclosure rules; indeed, the IAC included the petition of the HCMC (and the fact that the HCMC represents a number of large institutional investors) as a finding in support of its recommendation to the SEC. 4 BlackRock, the world's largest asset manager, has made a similar call. In 2019, BlackRock, as it had in 2018, identified human capital management as one of its five engagement priorities (along with governance, corporate strategy and capital allocation, compensation that promotes long- termism and environmental risks and opportunities), 5 explaining that human capital management is a critical investment issue and "it is therefore important to investors that companies explain as part of their corporate strategy how they establish themselves as the employer of choice for the workers on whom they depend." 6 Finally, the Embankment Project for Inclusive Capitalism (EPIC), a project intended "to identify and create new metrics to measure and demonstrate long-term value to financial markets" by the Coalition for Inclusive Capitalism and Ernst & Young, participated in by more than 30 asset owners (such as Allstate, CalPERS and MetLife), asset managers (like Vanguard, State Street and Fidelity) and companies (three of which are in the Top 100 Companies) 7 and claiming to represent more than $30 trillion of assets under management, joined the same call. 8 In its 2018 report, EPIC identified "talent" as one of the four key "factors that define long-term value" for which company disclosure of consistent and comparable metrics are most needed (along with innovation and consumer trends, society and the environment, and corporate governance). According to the report, EPIC participants concurred that employees play a key role in "a company's ability to create long-term value" and therefore developed and proposed a series of metrics to allow investors to measure a company's management of its "talent" in the areas of human capital deployment, organizational culture and employee health. The SEC has begun to respond. On August 8, 2019, it announced proposed amendments to Regulation S-K that include requiring 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 (such as, depending on the nature of the registrant's business and workforce, measures or objectives that address the attraction, development, and retention of personnel)." 9 In proposing this principles-based disclosure requirement, the SEC noted that "human capital measures or objectives" that are material to one company may be immaterial to another and may vary over time and by industry. 2 See Chairman Jay Clayton, Remarks to the SEC Investor Advisory Committee (March 28, 2019). 3 See Letter to William Hinman, Director, SEC Division of Corporation Finance, from the Human Capital Management Coalition (July 6, 2017). 4 See Letter to Anne Sheehan, Chair, SEC Investor Advisory Committee, from the Human Capital Management Coalition (March 22, 2019); Investor Advisory Committee, supra note 1. 5 See BlackRock Investment Stewardship Engagement Priorities for 2019 (January 2019). 6 See BlackRock Investment Stewardship's Approach to Engagement on Human Capital Management (January 2019). 7 DowDuPont, Johnson & Johnson and PepsiCo. 8 See Embankment Project for Inclusive Capitalism. 9 Modernization of Regulation S-K, Items 101, 103 and 105, SEC Release No. 10668 (August 8, 2019).

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