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US Securities and Exchange Commission

Chairman Clayton: Companies Should Provide More Disclosure on Human Capital Management

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

SEC Chairman Jay Clayton wants public companies to step up and provide more extensive information about how they manage their workforce. He said investors care about the information because human capital is increasingly important for companies today. However, he said he does not want to mandate a prescriptive rule because one metric that makes sense to one industry may not to another industry.

SEC Chairman Jay Clayton wants public companies to provide more information about how they manage their workforce.

At the same time, however, he emphasized that he is against writing a prescriptive disclosure rule related to what investors call human capital management.

“The SEC does need to lead on disclosure, things companies should be thinking about and engaging with their shareholders. If you look across our economy, the importance of human capital to the performance of firms has gone way up compared to 40 years ago,” Clayton said in response to a question about whether the securities market regulator should have a role in writing a disclosure rule related to environmental, social, and governance (ESG) matters at the annual general membership meeting of the Investment Company Institute (ICI) on May 2, 2019, in Washington.

“Forty years ago, our rules said: ‘Tell us about your plant, property, and equipment. Tell us about your sort of hard capital asset and what they mean to your business,'” Clayton explained. “If I am an investor looking at businesses today, I want to know what you are doing with your human talent, how you are growing your human talent, how you are accessing new talent, how you are retaining existing talent, how you are enhancing. I think that is an area where we can lead.”

Even as human capital management is “really important” to him personally, he said he is “very cautious” about writing a standardized rule that all companies should follow because one metric that makes sense to a pharmaceutical company is going to be “nonsensical” for the shipping industry, for example.

“So, I think we should be pushing in this direction, but to pick a metric around human capital that would be applicable across all aspects of our economy, you are going to be over inclusive, under inclusive, you are going to miss the mark,” Clayton said.

His remarks about human capital management come as investors say a company that manages its employees well provides better return on investment, and therefore the disclosure is material to investors. But they complained that the only information that is required for companies to provide under Regulation S-K is the number of employees under Item 101. And in July 2017, a coalition of 25 institutional investors managing combined assets of over $2.8 trillion filed a petition to undertake rulemaking to mandate more extensive disclosure about human capital management. In March 2019, the SEC’s Investor Advisory Committee also asked the commission to consider whether disclosure can be improved. Reg S-K sets out the disclosure rules for registration statements and annual and quarterly reports.

But Clayton again told reporters afterward that it is difficult to write a rule that can universally apply to different industries.

“In some sectors, it’s how many engineers were you able to attract and retain, do they have the skills you need, and in other sector it can be something else. In the healthcare sector, you are looking at people with specific types of expertise and are you able to have those types. In biotech, it may be people with particular PhDs or what not. So, it changes,” he said. “But when investors look at companies, it’s front of mind. What kind of human capital profile do they have and how is that going to deliver a return for investors?”

Further, he also seemed to rule out issuing interpretive guidance when asked by Thomson Reuters. “I think I just gave one,” he responded.

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