Reg. S-K Deep Dive: New Human Resource Capital Disclosures

EPISODE 52: DHG's Greg Faucette and Jennifer George make another visit to Growthcast for a follow-up, deeper dive discussion on the SEC’s new S-K regulations with a focus on new disclosures related to people and human resource capital.



[00:00:09] JL: Welcome to today’s edition of DHG’s GrowthCast. I’m your host, John Locke. At DHG, our strength relies on our technical knowledge, our industry intelligence and our future focus. We understand business needs and are laser-focused on company goals. In this ever-changing world, DHG’s GrowthCast provides insights and thought-provoking conversations on topics and trends that address growth opportunities and challenges in the current and future marketplace.

Thanks for joining us as we discuss tomorrow's needs today.

[00:00:42] ANNOUNCER: The views and concepts expressed by today's panelists are their own and not those of Dixon Hughes Goodman LLP. Always consult the advice of your legal and financial professional before taking any action.


[00:00:58] JL: Welcome to GrowthCast, and today's segment will focus on what you need to know for this year's 10-k reporting season, based on the SEC's recent changes to Regulation S-K. I'm joined today by two DHG professionals that were here just a little while ago discussing the similar topic. Welcome back, Jennifer George from our Professional Standards Group, and Greg Faucette, a Professional Practice Partner. Welcome.

[00:01:23] JG: Thanks, John. It's a pleasure to be back on the GrowthCast with you.

[00:01:28] GF: Absolutely. It's good to be back, John.

[00:01:30] JL: Well, we are glad to have you both. Now, as I alluded to in the opening, we recently released a GrowthCast with the two of you on the SEC's efforts to modernize and improve some of the reporting outside the financial statements. Our discussion today furthers that conversation a bit, I think, doesn't it?

[00:01:49] JG: Yes, that's right, John. When we were together last, we were discussing the impact that two recent SEC rules we're going to have on various disclosures outside the financial statements that are required by SEC’s Regulation S-K. These rules were titled, modernization of S-K items 101, 103, and 105. And management's discussion and analysis selected financial data and supplementary financial information. So, those were the two rules.

[00:02:22] GF: That's right, Jennifer. And the SEC wasn't very consistent. In that first rule, they gave us numbers, items 101, description of business, 103, three legal proceedings and item 105, risk factors. And the second rule, they gave us the titles. So, the selected financial data is item 301, the supplementary financial information is item 302, and MD&A is item 303. And all of those we find in various SEC filings or registration statements. Our focus here today is that those items appear in the form 10-k that our clients are getting ready to prepare now.

[00:02:57] JL: Well, that's a lot of numbers. And I remember we spent a good bit of time discussing all of those topics, and I think you guys might hold the record for one of our lager growth casts.

[00:03:06] GF: John, our defense, it was a lot of material to cover. The SEC had several years of deferred maintenance to go through. There were some disclosure items that had been replicated by gap disclosures now, so they were kind of redundant. The SEC’s rules had required a lot of stuff in a filing, thinking back to when things used to be in paper, and you had to have your paper copy of all the previous filings to find all the information. And now we can just simply click through on the internet and find an old filing of some type. So, putting together that, it drove a lot of changes. But I think most importantly, the SEC was looking to introduce more of a principles-based focus into how we prepare that MD&A.

[00:03:51] JL: And in doing so, they have provided guidance that may require companies to expand their disclosures in certain areas. Jennifer, one of those is the focus of this GrowthCast.

[00:04:03] JG: Correct. In the updates to the discussion under item 101 on the nature of a company's business, the SEC made a significant change to what should be shared with investors related to its people and human resource activities. If folks want to write it down, the guidance is in, reg S-K section 229.101 C22. And it is a symbol read, requiring the registrant to provide to provide to the extent its material to understanding the business.

So, let me tell you what it states, it says, “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 restaurant focuses on in managing the business.” So, think about, depending on the nature of the registrant’s business and workforce, majors, or objectives that addressed at development, attraction, retention, personnel, those types of things.

[00:05:08] JL: Well, that doesn't sound like an unreasonable request. But Greg, what makes this so significant?

[00:05:14] GF: Well, it's kind of in comparison to what they used to require. The previous guidance was very minimal and quantitative. Essentially, they just asked the number of employees. Many companies would provide that number, sometimes maybe breaking it down into independent contractors, or how many are part time. Many companies would give a very brief description as to whether they had, unionized workforce or collective bargaining agreements. And finally, some would often describe the overall relationship with their employees. Most of them saying they had a good relationship with their employees. So, pretty simplistic in the past.

[00:05:54] JL: So, a company now needs to use a lot more judgment around what to say, the SEC has moved from a simple compliance disclosure.

[00:06:04] GF: Your right, John. This is now going to be more of a real kind of clean white sheet moment for a company to put a lot of its perspective into its own words.

[00:06:14] JL: So, Jennifer, is this a trend in the SEC’s other new rules, judgment, and the need for a company to really think about what needs to be communicated to investors?

[00:06:23] JG: Definitely, John. It's really part of the overall move to a more principles-based approach. But this may be the very beginning of a newer trend as well. This is the first time the SEC has really seemed to clearly embrace or codify disclosures from the ESG world. And what I mean, those disclosures around environmental, social, and governance matters. So, one might summarize that is how and what are we doing as a corporate citizen locally, nationally, and globally? We can hold an entire separate GrowthCast on this topic or even a series. But here we see an element of them coming into required SEC disclosures now.

[00:07:11] GF: Jennifer, I think element is a good word there. They're only touching on part of that ESG interest. As this rule was coming through the SEC, many commenters said that they wanted actually to see more in this area. In fact, of the five commissioners, two of them voted against the entire rule simply because they wanted to see more discussions, specifically in the areas around diversity and climate change. And in fact, one of the ones that did vote for, also said they wish it had gone farther as well.

[00:07:46] JL: Okay, well, that was some great background information from the two of you. Now, let's get down to the application of the new disclosure. Focusing on your comment, Greg, on the clean sheet of paper concept. But first, what I hope is an easy question. Who does this apply to and when does it apply?

[00:08:08] JG: John, I take the first part of that question. As a first cut, it applies to domestic registrants only. So, foreign private issuers are exempted, as the rule only amended the guidance for domestic SEC forms. So, drilling down a little bit further, those domestic companies that are emerging growth companies that frequently get a break from the SEC rules did not get a break this time. However, our smaller reporting companies do have the option of providing these disclosures, and are only required to provide the old quantitative headcount information.

[00:08:49] GF: Yeah, John. So, that's the who, I'll take the second when. These rules are effective now for this reporting season. They were actually effective for any of the forms filed after November 9 of last year. The staff had to give some special instructions if you were doing a registration statement that involved these types of S-K disclosures. But important for our discussion today is those preparing their 10-Ks for this upcoming filing season are in the middle of these rules right now.

[00:09:18] JL: Very good. We definitely now understand who needs to be following these and when but what about the how? How should companies approach this? And who is sitting around that clean sheet of paper?

[00:09:33] GF: That's a good question. As you kind of heard, Jennifer, articulate the rule. It's looking at the way companies manage and measure their human capital resources. So, who should be involved? Well, the accounting department probably is around the table. But this really isn't focused on accounting metrics other than if they're helping kind of prepare some of the numbers. It's really the folks that have the story that needs to be told. HR, Investor Relations probably wants to be at the table. The legal department is certainly going to want to be at the table since we're talking about SEC filing. But importantly, this starts in the C suite. All of this focuses around what the company focuses on to manage the business. And it needs to be those material things. So, think about the things that catch the attention of the C suite. What do they focus on? What metrics do they use?

[00:10:28] JG: Yeah, I think it's going to be really interesting to see the interaction, or arm-wrestling between legal and HR. One department may be looking for compliance without incremental exposure, and the other potentially another chance to share the company's recruiting poster story. Investor Relations may also have a perspective given how they understand the views of institutional investors or their institutional investor advisors and what those groups want to understand about a company. But the company needs to know that they have many other avenues for sharing these types of messages and other ESG communications or analyst calls or even presentations.

The main focus in the area for ESG reporting, larger companies often have a dedicated ESG report each year. These other communications outside the 10-k may be a helpful place to start. But all those activities, the material activities managing the company's business. These are the ones required for the SEC’s disclosure. So, companies may want to also think about what they disclose in the required compensation discussion and analysis area and their proxy, which may be helpful, but again, it has a different focus in its objectives.

[00:11:46] JL: Well, Jennifer, Greg mentioned measurements and metrics a few moments ago are quantified metrics required. The SEC’s new rules don't seem really clear on that.

[00:11:58] JG: The SEC’s staff has taken several opportunities to emphasize that quantitative metrics are not required. At the AICPA’s SEC conference this past December, the staff provided limited but helpful comments. They really just emphasized that a company only needs to disclose those HR and related issues that are material to the company. And if the company's disclosures really need to be specific to their company, but no explicit or implicit requirements for quantitative measures, unless of course management uses such measures.

[00:12:36] JL: So, is the SEC going to be looking for consistency here from all registrants?

[00:12:41] JG: No, we don't think so. In fact, in his comments at the meeting, adopting the new rules, Chairman Clayton, or actually, then current Chairman Clayton, who has since concluded his tenure’s chair right before Christmas, he said he expected that material human capital information for a manufacturing company would be very different than a biotech startup or a large healthcare provider. And human capital considerations for a multinational car manufacturer will be very different from that original home manufacturer.

I think these disclosures likely develop over time and it seems reasonable. The staff would allow for a good faith initial effort followed up by some changes over time. But given the nature of the principles-based requirements, it's unlikely that boilerplate disclosures across an industry would ever be acceptable to the SEC.

[00:13:37] GF: John, I want to take you back to your question about the quantification. Again, it's clearly something that might be useful, but not necessarily required. And people have asked, “Well, what might those quantified metrics be?” And, you know, the SEC itself provided a little insight into that back when they proposed the rule back in August of 2019, that publication, proposing the rule listed what they called some nonexclusive examples of measures that could be provided, starting with what we've always had the numbers, the head counts of employees. But then looking at something along the lines of maybe stability of the workforce, what's your voluntary or involuntary turnover rates? How about training? Maybe your average hours of training per employee, per year. How about your human capital trends such as general competitive conditions in the marketplace for your human resources? Internal hiring rates and promotion rates may be a measure of worker productivity. Maybe an overall statement is how HR has made its progress towards any objectives that has been set as a strategic goal for the company.

So, some examples given there, but kind of consistent with what we've seen the staff do and some other rules, where they removed examples from existing rules thinking it might be providing a little bit of – almost a constraining factor on folks thinking about what to write with that clean sheet of paper, the staff declined to actually put examples into the final rule. But that old rule might give people some perspective on what could be the types of metrics that could be presented.

[00:15:23] JL: Now, some companies have already applied this guidance in 10-ks filed since the effective date back in November, is that correct? And is there anything we can take from that?

[00:15:34] GF: Yep, you're right, John, they have. And we pulled a small, call it, judgmentally selected sample, just 16 companies. So, it's better than anecdotal, but certainly not scientific. And we looked at a wide variety of industries. There was a diversified rodent based entertainment company, we'll get to. There was a very popular hot beverage service company that I'll touch on here, and then a homebuilder, medical supply, several others. And given the DHG client base, we did pick three smaller regional or community sized financial institutions. And here's what we kind of found out. For those that had a sentence or two, 2 of our 16 added sentences to a sentence, 6 of the 16 went from a sentence or two to a page, then we had a C3, going from a small paragraph to three or four paragraphs. We had one went from a paragraph to a full page and a half. And then four had no change at all. So, a variety of approaches there.

[00:16:45] JL: Okay, now, you've really got my interest piqued. Any companies that you care to call out?

[00:16:51] GF: So, back to our rodent based diversified entertainment company. Disney went from a sentence to a page and they had some pretty good metrics over there. In my way of thinking, it was a pretty good example. They had some discussion around some key programs for diversity and inclusiveness, as well as employee education and improvement. They had some discussions around COVID, and especially some of the furloughs we've all been hearing about in terms of the Disney and its theme parks and the what's happened there with tourism being kind of curtailed. Some good discussion around that. And as a person who has enjoyed, whose family has enjoyed their Disney trips in the past, I did find it interesting that they did not refer to their employees as cast members, as they do when you're on a property.

[00:17:37] JL: Very interesting.

[00:17:39] GF: Starbucks, our very popular hot beverage service, they had a lot of socially focused words, as you might think around a company with a reputation that a Starbucks has. But interestingly enough, not a lot of quantification. But again, a lot of socially focused words and some language around their compensation philosophy and their views on pay equity. And kind of going back to that DHG client base that we made reference to, the smaller banks, I'll tell you the three smaller banks in our sample, their disclosures did not look much different than what they were in the prior year.

[00:18:14] JL: What about quantification of these metrics?

[00:18:18] GF: Yeah, that's a good question. So, as a baseline of our 16, if you look back to 2019 filings, only one of them provide a little quantification beyond the straight up headcount and that was quantified for gender. And their more recent 10-ks, out of the sample of 16 again, four quantified something around gender, six quantified something around racial, or diversity and inclusiveness. And by quantified, I mean, it's some type of metric. It could be they broke it out into like, a percentage of all underrepresented peoples in a single percentage. It could be they broke it out in more detail, but they provided something with a number around the DNI or the gender breakdown. So, that's 10 of the 16 provided some type of quantified metric.

[00:19:12] JL: Jennifer, I'd love for you to weigh in on this. What did you find interesting in the things that you saw here?

[00:19:18] JG: Well, considering everything going on right now, I thought it was interesting that the seven, only seven discuss the COVID pandemic in some shape or form. And, you know, one might have thought that could have been higher, but perhaps it was because it was discussed somewhere else in the document, or it was thought of as more of an immediate management issue more so than a longer-term focus for human capital. I also thought it was interesting to see some of the other metrics that were reported, such as percent of employees with long term development plans, dollar amounts of contributions to particular external charities. Talked a little bit, I saw length of employment tenure for management and their rank and file employees. Again, dollar amounts of investments that they've spent in employee education. Percent of employees responding to employee engagement surveys and what percent recommended the company as a great place to work.

There also was some talk about percent on goals for increase in gender and racial diversity and inclusion, but not a lot around, kind of baseline or existing breakdown. So, you can see how some of those would tie to managing the business, but others perhaps are just telling a good story about the company. And it kind of all depends on how the words around the metrics were really crafted.

[00:20:48] JL: Well, Jennifer, and Greg, fascinating information and extremely informative. Any last words of advice for our listeners today?

[00:20:58] JG: I think I would just re-emphasize the need to make sure the disclosures are addressing the key focus of the new requirement, providing human capital measures or objectives that the registrant focuses on in managing the business. I said it earlier, but thinking about material items, and specific to the business.

[00:21:23] GF: I'll bring in one thing we didn't really touch on John, but it's these things that are being disclosed do fall under management's disclosure controls. So, as management is working with the folks around the table with that white clean sheet of paper, they need to think about the controls they're putting around the words and the metrics they're providing.

[00:21:42] JL: Well, my thanks to both of you for your insights today, and I can certainly see why companies are putting a lot of thought into these new disclosures this year. And hopefully, our GrowthCast today will give them some help in thinking through their specific disclosures. So, again, thanks to both of you for being here today.

[00:22:01] JG: Thank you.

[00:22:02] GF: Glad to do it.

End of Interview

[00:22:04] JL: And thank you, to our listeners, for joining us on today's episode of DHG GrowthCast with Jennifer George from our Professional Standards Group, and Greg Faucette, a Professional Practice Partner. We hope that you now have what you need to know for this year's 10-k reporting season based on the SEC's recent changes to Regulation S-K.

I'm your host, John Locke and I look forward to reconnecting with you soon on another episode of DHG Growthcast

End of Episode
About DHG's GrowthCast

At DHG, our strength lies in our technical knowledge, our industry intelligence and our future focus. We understand business needs and are laser focused on company goals. In this ever-changing world, DHG’s Growthcast, provides insights and thought -provoking conversations on topics and trends that address growth opportunities and challenges in the current and future marketplace. Join us in discussing tomorrow’s needs today.

Disclaimer: The views and concepts expressed by today’s guests are their own and not those of Dixon Hughes Goodman LLP. Always consult with your legal and financial professional before taking any action.


Gary Greer
Co-Managing Partner, DHG Assurance
Scott Berte
Co-Managing Partner, DHG Assurance
Greg Faucette
Professional Practice Partner


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