Principle-based Reporting on Human Capital: SEC Reg S-K Item 101

I am particularly supportive of the increased focus on human capital disclosures, which for various industries and companies can be an important driver of long-term value. Jay Clayton, SEC Chairman

In October 2020, new human capital reporting requirements made headlines in industry publications. On November 9th, 2020, the new Reg S-K Item 101(c) amendment became effective immediately. Does that sound like a big deal? It is. As PWC reports in this excellent write up on the modernization effort, up to 85% of a company’s costs are tied up in its people. However, financial accounting standards like US GAAP consider human capital to be an “intangible asset” in the same category as other non-physical assets like Goodwill and Intellectual Property. The new framework recognizes that investors are looking for more robust ways to evaluate companies’ intangibles, especially around key areas like worker engagement, training, retention, and diversity. To fill this need, the SEC has incorporated new “principle-based” reporting standards, allowing companies to determine where human capital information has material relevance to investors.

So how have companies determined norms around the new “principle-based” standards? Ultimately, the new infrastructure allows for more alignment between industry and regulation. The SEC can gather data about naturally occurring norms, informing more enlightened reporting standards. A virtuous cycle can develop. The AFL-CIO has been calling for reforms like these since at least 2001. A good first-hand account can be found in this article written by SASB Board Member Marc Siegel in 2017. There is an important borderline in his experience that denotes what should fall under financially material reporting. Just because something MAY be financially relevant does not imply that it is “financial data” as such. A move towards more integrated reporting can add value for investors, but there is a limit to what is useful.

Expanding the Scope

One risk is that principle-based reporting on material business matters explodes the universe of possible reporting methodologies. In our initial analysis of 187 filers addressing the new requirements, we found 45 Audit Firms were used in total by the filers, and the top 4 Auditors were involved in 65% of all filings. The consolidation that this represents is a positive factor in that feedback loop of principle-based reporting. Service providers who help filers do their research also play a role in producing more business-organic reporting standards. At idaciti, we see our disclosure research application users compare and contrast filings easily and make informed decisions about reporting language and methodology.

Technology Makes New Data More Useful

This report from Gallup written by Senior Editor Jennifer Robison indicates some of the positive impacts that service providers can have on shaping Reg S-K's modernization. The article outlines some points of emphasis for the SEC. It also informs filers of crucial points to report and advises investors to be more aware of red flags in areas like retention. Reporting norms can have a lasting impact on capitalization efforts as investors receive new data that significantly impact perceptions surrounding company health. In particular, Robison makes an excellent and succinct summary of the overarching process when she writes, "Do these things, and your S-1, 10-Q and 10-K reports will not only satisfy the SEC but also prove your human capital is an asset worth investing in." The virtuous cycle at work. See below for some research we've conducted on the new filings.

Modern Disclosure Research Platform Improves Efficiency

In our examination of the 187 filings filed since the deadline for the change, we have learned there are 107 unique SIC codes represented, and the top 10 codes account for 30% of the filings in total. That represents a cross-section of different public companies. 95% of the filings examined are 10-K filings, and the remaining 5% are 20-F filings.

The top six most reported categories were:

  1. Employee Count (99% reporting)
  2. Attraction, Development, and Retention of Talent (62% reporting)
  3. Health, Wellness, Safety, (50% reporting)
  4. Handling Covid-19 - Work Facility Safety (47% reporting)
  5. Employee Benefits Offered (44% reporting)
  6. Diversity and Inclusion (45% reporting)

Roughly one-third of filers reported other items: Employee Surveys Engagement, Corporate Culture, Remote work due to Covid-19.

Further research into the filers' choices around reporting is easy with idaciti's Disclosure Research application. Our search engine delivers precise results just minutes after a filing is received by the SEC. The best way to stay up to date with an evolving topic like Human Capital disclosure is with real-time email notifications that can monitor disclosures and deliver results 24/7. The natural language processing techniques, in conjunction with our XBRL capabilities, are on display in the above research results. This adaptable technology is the basis of research cards that our clients use to collect and share information – with stakeholders both with and without the idaciti user logins. Taking a comprehensive look at the data we collected, we can identify particular areas for improvement.

Key Areas for Improvement - Diversity

The least mentioned topics are also interesting and point to areas where significant improvement is required to achieve the new data's sufficient depth. Less than 10% of filings we examined reported diversity issues regarding either gender or race. Does this represent a failure in data collection on the entity filing part? If it does, this type of regulatory shift can help expose a yawning gap in this urgently needed area. "Diversity and Inclusion" efforts are being discussed by 45% of filers, but the actual key information on employee demographics is sparse.

In this new year, commitments to ESG focused investing are common. The above analysis clarifies that if a majority of firms are willing to report on topics like talent attraction and retention, shouldn't they also reveal how turnover rates change when considering workforce diversity? Just as an example, right now, that type of analysis would be difficult, with only 11% of filers reporting turnover rates and even fewer with a commitment to reporting on gender and race.

The Winner is You

Analysis like this can reveal both winners and losers, but ultimately the goal is normative reporting around human capital. When it comes, it will be a huge benefit to investors. As discussed in our last blog, significant initiatives have been launched to establish international taxonomies for sustainability reporting. Still, the development and implementation of normative standards will take time on the global stage. In contrast, human capital reporting requirements from this Reg S-K modernization seek clarity around data points that are fundamental to company performance and growth. In this era of constant change, principle-based reporting themes will continue to grow in a push-pull cycle with both the market and the filing companies. What will be revealed as the standards continue to develop?

We're encouraged by what we have seen so far in this filing season, and you can stay up to date with us by following our LinkedIn page and our blog posts. Reach out to info@idaciti.com for more information on idaciti's broad range of data products and services.