Do companies disclose enough information about investments in their workforces? Not according to the Working Group on Human Capital Accounting Disclosure, a group of ten academics that includes former SEC Commissioners Joe Grundfest and Robert Jackson, Jr. and former SEC general counsel, John Coates. The Working Group has submitted a new rulemaking petition requesting that the SEC require more disclosure of financial information about human capital. According to the petition, there has been “an explosion” of companies “that generate value due to the knowledge, skills, competencies, and attributes of their workforce. Yet, despite the value generated by employees, U.S. accounting principles provide virtually no information on firm labor.” The petition requests that the SEC “develop rules to require public companies to disclose sufficient information to allow investors to assess the extent to which firms invest in their workforce”—in the same way that “SEC rules have long facilitated analysis of public companies’ investments in their physical operations.” Asked about the petition, Grundfest told Bloomberg that it “aims to move the accounting treatment of a company’s workforce to the same level as its physical capital….’Current accounting rules give us more information into the economic consequences of buying or leasing a drill press than of hiring and training a software engineer….How much sense does that make in today’s world?’”

Why is this disclosure necessary? The petition offers two reasons. First, companies’ value is increasingly derived from intangible assets, such as intellectual property and human capital, rather than tangible assets, such as property, plant and equipment. According to the petition, in 1975, intangibles represented just 17% of the value of companies in the S&P 500; in 2020, intangibles represented 90% of the S&P 500 market value. That trend is illustrated by the growth of the healthcare and information technology industries, both of which depend heavily on human capital and now together represent about a third of the market cap of the S&P 500. Yet the accounting rules are still fashioned around corporate value as structured in the 1930s, when the first accounting standard-setter was created. For example, current accounting standards treat investments in capital expenditures as assets on the balance sheet to be depreciated over time, while investments in R&D are typically treated as expenses, not assets, and reduce net income in the current period. Similarly, labor appears as an expense that reduces net income, but, the petition observes, labor costs are typically included as part of administrative expenses, and only 15% of companies even separately disclose their labor costs. “These legacy rules,” the petition concludes, “do not reflect the current reality that the largest firms add value through internally developed intangible assets such as human capital[,]… leaving investors without information necessary to accurately value the firms that they own.”

The second reason identified in the petition is that the increase in the number of public companies reporting losses—more than half in 2020—necessitates more disclosure about operational costs, especially human capital, to analyze their value. Why is that? As explained in the petition, analysts and investors cannot use common valuation techniques, such as price-to-earnings ratios, when companies report losses and instead must “project future earnings—an analysis that requires reliable information on costs, margins, and scalability that is commonly obfuscated under current accounting principles….To best value lossmaking firms, investors need a sufficiently detailed breakdown of the firm’s cost structure to identify contribution margins. That requires distinguishing whether cash outflows should be considered investments or maintenance expenses.” For example, while salary is typically considered a maintenance expense, expenses such as training and even equity could be expected to increase productivity, improve retention and create future value and could be considered investment expenses. Although many investors can estimate the proportion of capex devoted to investment, “when it comes to workforce,” the petition contends, “investors typically cannot even determine total workforce costs—much less identify the distinction between investments and maintenance workforce expenses.” (Although the focus of the petition is labor costs, the authors advocate that the SEC consider the opacity of cost disclosures more generally.)


This isn’t the first petition to the SEC asking for a mandate to disclose information about human capital. In 2017, the Human Capital Management Coalition, a group of 25 institutional investors with more than $2.8 trillion in assets under management, submitted a rulemaking petition to the SEC asking the SEC to adopt rules requiring “issuers to disclose information about their human capital management policies, practices and performance.” Although the petition was short on prescriptive recommendations, it did identify the broad categories of information that the proponents viewed as “fundamental to human capital analysis”:

  1. “Workforce demographics (number of full-time and part-time workers, number of contingent workers, policies on and use of subcontracting and outsourcing)
  2. Workforce stability (turnover (voluntary and involuntary), internal hire rate)
  3. Workforce composition (diversity, pay equity policies/audits/ratios)
  4. Workforce skills and capabilities (training, alignment with business strategy, skills gaps)
  5. Workforce culture and empowerment (employee engagement, union representation, work-life initiatives)
  6. Workforce health and safety (work-related injuries and fatalities, lost day rate)
  7. Workforce productivity (return on cost of workforce, profit/revenue per full-time employee)
  8. Human rights commitments and their implementation (principles used to evaluate risk, constituency consultation processes, supplier due diligence)
  9. Workforce compensation and incentives (bonus metrics used for employees below the named executive officer level, measures to counterbalance risks created by incentives)”

The petitioners left it to the SEC to achieve an appropriate balance between “specific, rules-based disclosures, such as the amount spent on employee training in the past year, and more open-ended principles-based disclosures like how training expenditures are aligned with a changing business strategy.” (See this PubCo post.)

When, in August 2020, the SEC adopted a new requirement to discuss human capital as part of an overhaul of Reg S-K, the debate centered largely on whether the rule should be principles-based or prescriptive. In that instance, notwithstanding the earlier rulemaking petition and clamor from numerous institutional and other investors for transparency regarding workforce composition, health and safety, living wages and other specifics, the “principles-based” team carried the day; the SEC limited the requirement to 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 registrant focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel).” At the time, SEC Commissioner Allison Herren Lee argued for a more balanced approach that would have included some prescriptive line-item disclosure requirements and provided more certainty in eliciting the type of disclosure that investors were seeking. (See this PubCo post.)

After adoption of the SEC’s final amendments, the Human Capital Management Coalition issued a statement observing that “under the new rules shareholders would still face difficulty in obtaining information that is clear, consistent, and comparable in order to make optimal investment and voting decisions. While the rulemaking represents important progress in acknowledging the importance of the workforce, the new rules give public companies too much latitude to determine the content and specificity of the human capital-related information they report.” The Coalition looked forward “to working with the SEC to assist in developing a balanced approach to human capital-related reporting.” In the statement, the Coalition also urged the SEC to require companies, at a minimum, to report on “four quantitative yet modest disclosures to anchor the principles-based, industry- and company-specific reporting framework relied upon in [the SEC’s final] amendments”: “(1) the number of employees, including full time, part-time and contingent labor; (2) total cost of the workforce; (3) turnover; and (4) employee diversity and inclusion.”

Subsequent reporting has suggested that companies “capitalized on the fact that the new rule does not call for specific metrics,” as “[r]elatively few issuers provided meaningful numbers about their human capital, even when they had those numbers at hand.” (See this PubCo post.) As a result, with the new administration, a reexamination of human capital management disclosure appeared prominently on the SEC’s short-term reg-flex agenda for Fall 2021 (see this PubCo post). Given the SEC’s current bent for highly prescriptive rulemaking, presumably a new proposal on the topic from Corp Fin would involve a much more prescriptive effort to enhance company disclosures regarding human capital management. The agenda identified December of last year as the target date for issuance of a proposal, but, with the SEC focused on climate, SPACs and other matters, that obviously didn’t happen. Whether this petition will move this topic to the front of the line remains to be seen.

To address this issue, the petition advocates three reforms, combining quantitative and qualitative disclosure, that are designed to help investors distinguish between maintenance and investment expenses.

  • Require disclosure in MD&A of the portion of workforce costs that should be considered an investment in the firm’s future growth and an explanation why. The authors believe that this disclosure would “allow investors better insight as to what portion of labor costs should be capitalized in their own models—and incentivize management to consider employees as a source of value creation.”
  • Treat workforce costs on the same basis as R&D, requiring that they still be expensed for accounting purposes but disclosed. The authors recommend the use of standardized tabular disclosure that would disclose employee mean tenure and turnover as well as various components of compensation and benefits, including healthcare and training expenses, distinguishing among full-time, part-time and contingent workers. This approach would, in the authors’ view, allow investors to create valuation models that capitalize workforce costs if desired.
  • Require disaggregation of labor costs in the income statement, allowing investors to determine the proportion of COGS, R&D and SG&A attributable to labor costs and thus to better understand the contribution of workers to the company and the dependence of the company on its employees. As noted above, the petition maintains that, for companies that report losses, investors “need information on product margins to estimate future profitability. To do that, investors need detailed information on operating costs, the most important of which is labor, to predict future margins and to determine what portion of cash outflows reflect investment. Without this information, it is difficult, if not impossible, to reliably value these firms, or to stress-test the market’s valuations of a firm using fundamental analysis.”


Notably, the proposed tabular disclosure would also cover contingent workers. The Gig Economy Data Hub, from the Aspen Institute and Cornell, estimates that over 25% of workers participate in the gig economy in some capacity. Online surveys cited by the Hub “indicate between 25 and 35 percent of workers had engaged in non-standard or gig work on a supplementary or primary basis in the preceding month.” According to this data from Fortunly, 36% of U.S. workers participate in the gig economy, either through their primary or secondary jobs, and a study projected that, by 2023, 52% of the U.S. workforce will either be gig economy workers or have worked independently at some point in their careers. The article also reports that gig workers earn, on average, about 58% less than full-time employees, and 54% of gig workers don’t have access to employer-provided benefits.

In February, Senators Sherrod Brown and Mark Warner, the Chair and a member, respectively, of the Senate Committee on Banking, Housing, and Urban Affairs, wrote a letter to SEC Chair Gary Gensler, calling on the SEC to include in its expected proposal on human capital disclosure a requirement that companies report about—not just employees—but also the number of workers who are not classified as full-time employees, including independent contractors. According to the letter, the “picture would be wholly incomplete…if companies are not required to disclose information about the number of independent contractors they use on a regular basis and the entire workforce that is material to their business strategy.” In recent years, they say, companies have contracted out—through subcontracting, on-demand work, or other forms of independent contractor labor—substantial work that previously was performed in-house. This trend, they suggest, may result in lower short-term costs for the company, but “come at the expense of workers, who receive fewer benefits, lower wages, and have less upward mobility within the organization.” Examples they cite of subcontracted or independent contractor workers that they believe “should be considered part of the material workforce include security personnel, janitors, food service workers, housekeepers for hotels and lodging real estate investment trusts (REIT), and custodial workers.” According to Brown and Warner, the tension between cost savings and investment in workers “is one of the defining tensions that has emerged as companies have prioritized short-term profits at the expense of investments in their workforce and long-term productivity. As you know, these decisions have material effects on a business’ financial performance.” (See this PubCo post.)

The petition contends that the improved price efficiency resulting from the proposed disclosures would outweigh the initial costs of compliance. The proposal fits within current accounting frameworks, should improve market pricing and should involve minimal costs to implement, especially given that much of the information is already required to be produced for tax purposes.

One of the Working Group’s co-chairs told Bloomberg that SEC plans to expand disclosures about human capital “must be paired with accounting changes to give investors more details about a company’s labor costs and to better hold management accountable for what they report….’Companies are really reliant on highly skilled labor to actually create value and the financial statements just don’t reflect that.’” (The co-chairs of the Working Group both participated as panelists discussing accounting for nontraditional financial information at the recent SEC’s Investor Advisory Committee meeting. See this PubCo post