WASHINGTON – Today, U.S. Sens. Mark R. Warner (D-VA) and Chairman of the Senate Banking, Housing, and Urban Affairs Committee Sherrod Brown (D-OH) encouraged the U.S. Securities and Exchange Commission (SEC) to continue focusing on improving human capital disclosures and on reforms that would ensure shareholders can properly evaluate public companies’ human capital practices and investments in their workers. The letter urges the SEC to implement the recommendations included in a petition from the Working Group on Human Capital Accounting Disclosure, which seeks to level the playing field between investments in workers and investments in physical equipment.

“As the Commission considers improvements to Regulation S-K and human capital disclosure, the working group’s recommendations would go a long way in ensuring shareholders can properly evaluate public companies’ human capital practices and investments in their workers. Strengthening human capital disclosure is needed to reflect the modern economy, where public firms are increasingly deriving their value from intangible assets,” the senators wrote. 

They continued, “Human capital does not receive the same treatment as even R&D in this respect, placing spending on workers at a further disadvantage. Unlike R&D, human capital spending is included as part of a company’s administrative expenses and not as a stand-alone item. As a result, investors are not given the information to differentiate between a firm with poor human capital management and one that is making a concerted effort to invest in its workforce to increase worker capability and performance.”

On June 7, 2022 the Working Group on Human Capital Accounting Disclosures petitioned the Commission to improve human capital disclosures including the following recommendations: 

1. Requiring managers to disclose, in the Management’s Discussion & Analysis section of Form 10-K, what portion of investments in workers should be considered as an investment in the firm’s future growth to allow investors to distinguish between labor expenses and value-adding investments, like training or upskilling;
2. Treating workforce costs similar to investments in R&D by ensuring workforce costs are disclosed; and
3. Disaggregating labor costs to allow investors to clearly understand employees’ job function, expected value creation, and contributions to their company.

Since 2018, Sen. Warner has stressed the importance of updating human capital disclosure requirements to reflect the priorities of modern companies. Sen. Warner has long focused on prioritizing better reporting on human capital management and on making sure that companies are not discouraged – based on accounting or reporting rules – from investing in their workers. In a May 2020 letter to the U.S. Securities and Exchange Commission (SEC), Sen. Warner and Rep. Cindy Axne (D-IA) urged the SEC to require that human capital management information be made publicly available in a timely and accurate manner to help determine whether a company will be successfully able to weather risks following the COVID-19 crisis.

In May 2021, Sen. Warner and Rep. Axne reintroduced the Workforce Investment Disclosure Act to require public companies to disclose crucial workforce management metrics, including investments made in skills training, workforce safety, and employee retention. Sen. Warner also leads legislation, the Investing in American Workers Act, modeled on the R&D tax credit to further incentivize investments in companies’ most important asset, their workers.

A copy of the letter is available here and below.

Dear Chairman Gensler,

We are writing to urge the Securities and Exchange Commission (SEC) to adopt the recommendations included in the Working Group on Human Capital Accounting Disclosure’s petition to the Commission on June 7, 2022. As the Commission considers improvements to Regulation S-K and human capital disclosure, the working group’s recommendations would go a long way in ensuring shareholders can properly evaluate public companies’ human capital practices and investments in their workers. Strengthening human capital disclosure is needed to reflect the modern economy, where public firms are increasingly deriving their value from intangible assets.

We applaud the SEC for working on improvements to human capital disclosures as part of its regulatory agenda. In 2018, Senator Warner urged the Commission to focus on the treatment of human capital and noted the significant discrepancy between the treatment of physical investments and spending on human capital and research and development (R&D). A physical investment can be listed on a balance sheet and is often capitalized, whereas human capital and R&D investments are expensed. R&D is disclosed on its own expenditure line – reflective of its importance for firms’ valuation, competitiveness, and long-term performance – so that investors can assess company expenditures on R&D separately from other firm costs.

Human capital does not receive the same treatment as even R&D in this respect, placing spending on workers at a further disadvantage. Unlike R&D, human capital spending is included as part of a company’s administrative expenses and not as a stand-alone item. As a result, investors are not given the information to differentiate between a firm with poor human capital management and one that is making a concerted effort to invest in its workforce to increase worker capability and performance. The strengthened human capital disclosure must be focused on the discrepancy laid out above.

To do so, we respectfully urge the SEC to adopt the Working Group’s recommendations to improve human capital disclosures. Those recommendations include:

1. Requiring managers to disclose, in the Management’s Discussion & Analysis section of Form 10-K, what portion of investments in workers should be considered as an investment in the firm’s future growth to allow investors to distinguish between labor expenses and value-adding investments, like training or upskilling;
2. Treating workforce costs similar to investments in R&D by ensuring workforce costs are disclosed; and
3. Disaggregating labor costs to allow investors to clearly understand employees’ job function, expected value creation, and contributions to their company.

These quantifiable and comparable disclosures would significantly improve investors’ ability to understand firms’ human capital practices. While there are tradeoffs and costs associated with mandating additional disclosures, firms already collect most of this information for tax reporting. In addition, few could argue that these disclosures would be unimportant for investors, particularly at a time when public companies’ value is increasingly determined by intangible assets like its workforce.

We look forward to continued engagement with the SEC on this critical issue, and appreciate your consideration of these recommendations as the Commission moves forward with updating Regulation S-K to strengthen human capital disclosures. Thank you for your attention to this important matter.

Sincerely,

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