The evolving landscape of human capital disclosures

For years, public companies disclosed only limited information as it relates to their human capital management. They would generally list the number of employees, whether they had labor unions, and a statement that they believed their relations with employees were good. This was the status quo until 2020, when the U.S. Securities and Exchange Commission (SEC) adopted new rules requiring companies to include not only the number of employees but also a description of human capital resources and any human capital measures or objectives that are material to their business strategy and performance.

The 2020 rules are based on a “principles-based” approach, which means companies have discretion to determine what information is material and relevant to their specific circumstance.  As a result, we have seen a wide variation in the amount, type and format of human capital management disclosures. For example, companies may provide workforce demographic data, describe DEI efforts and progress, highlight health and safety records, and/or discuss employee feedback.

The lack of standardization in human capital disclosures has fueled calls from investors, workers, regulators, and other stakeholders for a more prescriptive approach. On 21 September 2023, an advisory committee formed by the SEC to study the issue recommended to the agency that companies be required to disclose specific details about the workforce, including the number of full-time, part-time and contract employees; turnover metrics; the total costs of labor, including salary and equity-based compensation; and workforce demographic data. The advisory committee report was timely, as the SEC is expected to propose a new rule on human capital disclosure as early as this year.

Preparing for the renewed focus on human capital management

Public companies should take action now to prepare for the new era of human capital disclosure. In most cases, human resources personnel, in collaboration with the investor relations and/or legal teams, will be at the forefront of gathering the necessary documentation and data to support future disclosures. Companies should be thoughtful about having appropriate training, processes, and procedures in place to ensure that the right information is flowing up to the disclosure-makers, as unsupported or inconsistent statements can create liability concerns.

Recent SEC activity and litigation risks

The SEC has placed a renewed emphasis on ESG-related disclosures, soliciting whistleblowers to come forward, and investigating and bringing enforcement actions against companies for disclosure control failures.

For example, in one recent enforcement action, the SEC alleged that a gaming company failed to maintain adequate disclosure controls tracking workplace misconduct complaints and utilized separation agreements that violated whistleblower protection rules. According to the SEC, these failures prevented the company from having adequate information to assess whether disclosures concerning its workforce were accurate and did not omit material information. Without any allegation that there were materially false or misleading disclosures, the company agreed to settle the matter for US$35 million for disclosure controls failures and for violating whistleblower protection rules.

Shareholder litigation against companies, as well as individual officers and directors, is also a concern. We expect more shareholders to pursue litigation if they believe corporate officers or directors ignored allegations concerning the workplace culture or complaints of misconduct, and particularly those that reach higher levels of the organization.

Best practices to minimize risk when making human capital disclosures

As momentum builds for more robust and transparent disclosure of human capital initiatives, public companies should consider the following:

• Review existing disclosure controls and procedures and verify that qualitative and quantitative statements are accurate and supported by high-quality, reliable data.

• Proactively review existing workplace policies, practices, and procedures to ensure that they reflect the company’s values, comply with applicable laws, and are being implemented appropriately throughout the organization.

• Consider undertaking a pay equity study and/or culture audit to gain insight into whether the company is living up to the human capital goals it has set out publicly.

• Ensure workplace complaints are properly investigated (by qualified individuals), carefully documented, and reported up. Counsel and compliance officers should coordinate with human resources to implement procedures to avoid actual or perceived retaliation. 

• Review confidentiality agreements to confirm they have appropriate carveouts for whistleblowers.

If you have questions or would like to formulate a go forward strategy in light of these developments, feel free to contact an author of this post or the Hogan Lovells lawyer with whom you work.

Authored by Saydee Schnider.