Ernst & Young publish guidance on approaching SEC disclosures
Below is a summary of the instructions of the document:
Planning and Approach
- Understand the SEC Rule:
- Review the requirement to disclose human capital resources, including the number of employees and measures/objectives relevant to managing the business.
- Note the principle-based approach and industry-specific flexibility.
- Define Human Capital:
- Determine how your organization defines human capital in alignment with its business model and industry.
- Identify Key Metrics and Objectives:
- Evaluate existing human capital measures and objectives used by management to assess performance and allocate resources.
- Consider metrics provided to the board of directors and other stakeholders.
- Incorporate Established Models:
- Use frameworks like the Financial Accounting Standards Board (FASB) management approach for segment reporting to guide disclosures.
Key Questions to Address
- What human capital objectives are established to evaluate performance and allocate resources?
- What measures are provided to management, and how do they influence decisions?
- What goals, strategies, or targets are set for HR executives to support management?
- What human capital measures and objectives are shared with the board of directors or stakeholders?
- How are human capital objectives linked to performance goals and compensation?
- Are broader human capital objectives aligned with corporate strategy, mission, and vision?
Governance
- Data Management:
- Identify where human capital data resides (internally or externally).
- Ensure data is centrally located or compiled efficiently.
- Disclosure Controls and Procedures (DCPs):
- Assess existing DCPs for human capital measures.
- Develop additional DCPs to ensure accurate and timely reporting.
- Implement controls for consistent calculation and disclosure of methodology changes.
- Cross-Functional Team:
- Assemble a team including project management, external reporting, investor relations, legal, HR, and IT to review disclosures and close gaps.
Reporting and Communications
- Maximize Impact:
- Align human capital disclosures with business objectives and strategies.
- Highlight strategic strengths and long-term value creation.
- Consistency Across Channels:
- Ensure messaging is consistent across IR decks, social media, website, sustainability reports, Form 10-K, and proxy statements.
- Examples of Metrics to Disclose:
- Workforce cost (e.g., salaries, bonuses, pension benefits).
- Recruitment and turnover (e.g., annual turnover rates, voluntary turnover of high performers).
- Workforce composition and diversity (e.g., leadership diversity, full-time vs. part-time ratio).
- Training and development (e.g., annual training hours, ROI on talent investment).
- Employee health and well-being (e.g., engagement index, absenteeism rate, mental health metrics).
- Organizational culture (e.g., survey responses on ethics, alignment with values, leadership behavior).
Compliance and Liability
- Ensure Accuracy:
- Verify that all required information is reported accurately in SEC filings.
- Avoid misstatements or omissions to mitigate liability under federal securities laws.
- Quarterly Certification:
- Ensure the CEO and CFO certify the effectiveness of DCPs as required by the Sarbanes-Oxley Act.
Sector-Specific Metrics
- Consider metrics issued by the Sustainability Accounting Standards Board (SASB) for sector-specific relevance.
By following this checklist, registrants can effectively prepare and comply with the SEC’s human capital disclosure requirements.
