Corporate Governance

Corporate Governance and Exec Compensation 2021

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Shearman & Sterling LLP 5 | The Management and Disclosure of Human Capital Resources Requires a Roadmap The Management and Disclosure of Human Capital Resources Requires a Roadmap Gillian Emmett Moldowan and Maxmilien Bradley Insights It is sometimes said that "People are everything." A company cannot do business without people. Without people, companies cannot open factories, stores or offices. Without people, companies have no employees, customers, suppliers or investors. Despite the rapid growth in automated systems and artificial intelligence, people remain at the core of creation and innovation. The global pandemic served as a reminder of the core role people play in all companies and forced companies to grapple with new challenges in managing this important asset, including employee health and safety, remote work, virtual management, and in certain industries, labor shortages and organized labor activity. But yet, until a year ago, public companies in the United States were obligated to tell their investors very little about the people that work for these companies and enable them to operate and grow. With the introduction of specific human capital resource management disclosure requirements, U.S. public companies have entered into a new dialogue with their investors, employees and regulators regarding the management, retention, support and sustainability of their employees and other human service providers. WHERE WE WERE Prior to the adoption by the SEC in August 2020 of specific disclosure requirements under Regulation S-K regarding human capital resource management, 1 the only employee- focused disclosure required in describing a company's business was to indicate the total number of persons employed by the company. 2 Although some companies would provide voluntary disclosures on information, such as employee location and the use of unionized workforces, this disclosure was neither consistent across companies nor generally robust. Investors and other stakeholders could thus tell how many people worked for a company, and perhaps where such individuals were located, but not how the management of employees (or even the number of employees) fit into the business objectives and strategies of the company. It was as if you knew how many people lived in your neighborhood, but not who they were, what they did, their backgrounds or whether they were safe, happy or wanted to be there. With such limited numerical information, would you have the material information to understand your neighborhood? The perspective that broader workforce policies, practices and strategies are material to shareholders has been an area of ongoing discussion. With the introduction of specific human capital resource management disclosure, public companies in the United States, including foreign private issuers, are now required to disclose, to the extent material to an understanding of the company's business taken as a whole, the company's human capital resources, including the number of employees and any human capital measures or objectives that the company focuses on in managing the business. This rule requires companies to determine for themselves the human capital resources, measures and objectives that are material to their business. This is a difficult task. First, companies have not been required previously to make this assessment for disclosure purposes. Further, each company may determine a different set of issues that are material to its human capital management, making it difficult to benchmark against peers. 1 Item 101(c)(2)(ii) of Regulation S-K requires that companies "[d]iscuss the information specified [below] with respect to, and to the extent material to an understanding of, the registrant's business taken as a whole, except that, if the information is material to a particular segment, you should additionally identify that segment... A description of the registrant's human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant 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 development, attraction and retention of personnel)." 2 Under Item 402 of Regulation S-K, companies have been required to describe in great detail the compensation of their named executive officers (a group consisting of specified executive officers as dictated by the disclosure rules). This is important information but, because of its limited scope, does not necessarily shed light on the management of the much larger employee population. It should also be noted that companies have been required to disclose certain information relating to employees to the extent it directly impacts financial statements (for instance, valuation and liability matters with respect to pension plans) and, further, some companies have been providing voluntary disclosure of human capital matters to varying degrees in corporate social responsibility reports and other publications, including their websites.

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