Corporate Governance

Shearman & Sterling LLP Preparing the Board for Human Capital Management Oversight and Disclosure | 31 specified quantitative human capital metrics. The new rule has already been criticized by two SEC Commissioners who did not approve its adoption. Commissioner Allison Lee criticized the rule for failing to require the disclosure of even "simple, commonly kept metrics such as part time vs. full time workers, workforce expenses, turnover and diversity," and Commissioner Caroline Crenshaw characterized the rule as "a generic and vague principles-based requirement" that will not give investors the human capital information they need because of its "failure to adopt detailed, specific disclosure requirements concerning human capital." 5 The new disclosure rule does not prescribe specific metrics that must be disclosed, but companies do need to consider human capital measurements that could be material to their disclosure. Measures that address the attraction, development and retention of personnel are given as non-exclusive examples of the types of measures that may be material under the rule. These are just examples, and each company must perform its own analysis of the human capital measures that are material to an understanding of its business. SEC Chairman Jay Clayton underscored the fact that the new disclosure rule is principles-based, but also noted that he does "expect to see meaningful qualitative and quantitative disclosure, including, as appropriate, disclosure of metrics that companies actually use in managing their affairs" and that "as is the case with non-GAAP financial measures, [he] would also expect companies to maintain metric 5 SEC Commissioner Allison Herren Lee, Regulation S-K and ESG Disclosures: An Unsustainable Silence (August 26, 2020); SEC Commissioner Caroline Crenshaw, Statement on the "Modernization" of Regulation S-K Items 101, 103, and 105 (August 26, 2020). 6 SEC Chairman Jay Clayton, Modernizing the Framework for Business, Legal Proceedings and Risk Factor Disclosures (August 26, 2020). 7 Many of the Top 100 Companies provide more than one of the additional measurements. definitions constant from period to period or to disclose prominently any changes to the metrics used or the definition of those metrics." 6 How should companies prepare to meet this new disclosure requirement? The steps outlined in the section above can serve as an excellent start. Discussions between the board, executive management and the human resources management team regarding the categories of human capital measurements that are already collected and tracked, and crucially, how those categories relate to the company's business planning goals and risk management, are necessary to prepare to meet the requirement to disclose the "human capital measures or objectives that the company focuses on in managing the business." Companies can then use the robust body of year-over-year human capital data developed for the board's expanded human capital management oversight rule to provide human capital disclosure, including progress over time, on an ongoing basis. In this way, developing this data now will allow the board to more effectively oversee and measure human capital management and simultaneously allow the company to provide meaningful human capital management disclosure in accordance with the new disclosure rule. Even before the new disclosure rule, were companies already providing these enhanced human capital management disclosures? Companies have long disclosed certain information relating to employees to the extent it directly impacts financial statements (for instance, valuation and liability matters with respect to pension plans). But outside of this area and the area of executive compensation, available data suggests that notwithstanding the calls for enhanced human capital disclosures, the only workforce-related measurement many companies have been disclosing are the minimum required by Item 101 of Regulation S-K prior to its amendment with the new disclosure rule: total number of employees, or subtle variations on this required disclosure. Although the new disclosure rule is not prescriptive and does not identify measures that all companies must report, the pressure to include human capital disclosures (including measures) is growing and unlikely to slow down. Institutional investors, proxy advisory firms and investor advocates are all expecting more in this area. It is important to prepare the board for this now.

• Cover