Annual Corporate Governance & Executive Compensation Survey

Shearman & Sterling LLP Human Capital Management Disclosure | 35 HUMAN CAPITAL MANAGEMENT DISCLOSURE Doreen E. Lilienfeld and Maxmilien R. Bradley INSIGHTS Current law does not require much from a public company in the way of disclosing information concerning its workforce (its "human capital") outside the C-suite or with respect to the philosophies, policies and practices it implements to select, oversee, nurture and develop that workforce (its system of "human capital management"). Under SEC disclosure requirements (Item 101 of Regulation S-K) a public company need disclose no more than its total number of employees, and common practice is to do no more than that. Recently, though, a growing number of stakeholders — special interest groups, investors, the SEC and public companies themselves — have questioned and publicly discussed whether human A CALL FOR ENHANCED DISCLOSURE On March 28, 2019, the Investor Advisory Committee (IAC) to the SEC recommended that the SEC recognize the significance of human capital management and "incorporate it as a part of the Commission's Disclosure Effectiveness Review and the Commission's approach to modernizing corporate reporting and disclosure." 1 As explained in the written recommendation, the U.S. economy has transitioned from one based on industrial production and tangible assets to one based on intangible assets and human services, and the current disclosure rules — based on the antiquated view that human capital is a cost rather than a driver of financial performance — have failed to respond. Since, in the view of the IAC, human capital is the "primary source of value" of many of the most dynamic U.S. companies, it encouraged the SEC to engage with investors, issuers and the academic community in an effort to improve and augment existing human capital management disclosure. SEC Chairman Jay Clayton seems interested. In remarks published in connection with the IAC recommendation, Chairman Clayton 1 See Recommendation of the SEC Investor Advisory Committee, Human Capital Management Disclosure (March 28, 2019). The Disclosure Effectiveness Review is a project undertaken by the SEC's Division of Corporation Finance to review and modernize the form and content of public company reporting. capital management disclosure requirements should be expanded or, if not, whether a public company should voluntarily disclose its approach to ensuring that its human capital is diverse, developing, motivated and positioned to contribute to the long-term value of the company. To that end, the SEC, on August 8, 2019, issued proposed amendments to Item 101 of Regulation S-K that would require principles-based disclosure of matters related to human capital. This article surveys the current landscape and provides recommendations to public companies considering how to approach disclosure in this increasingly important area.

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