Disclosure Modernization and Integrated Reporting

As many of you may know, SEC Institute’s Associate Director Bob Laux, who is instrumental in making SECI’s Midyear and Annual Forums such great programs, actually wore two professional hats for many years.  In addition to his position at SECI, Bob was also the North American Lead of the International Integrated Reporting Counsel.  With this wealth of experience Bob helps us all understand more about integrated reporting and how it is more than just “ESG” disclosures, this proposed addition to S-K Item 101(c), in the SEC’s August 9, 2019 proposed rule to modernize certain parts of Regulation S-K, caught our attention:

A description of the registrant’s human capital resources, including in such description any human capital measures or objectives that management 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 attraction, development, and retention of personnel).

Here are some of Bob’s thoughts on this issue:

This proposed change is a perfect example of moving beyond the traditional reporting model to a more complete reporting model.  As described in The Conference Board Report, “The Emergence of Integrated Reporting”:

Over the last 30 years, intangible assets have moved from 20 percent to over 80 percent of the value of public companies, yet decision making within companies has failed to keep pace. Financial reporting has made even less progress in addressing these changes. As they take ESG impacts ever more seriously, US investors are urging management and the board to adopt a reporting method that accounts for both tangible and intangible assets. “Integrated reporting” is such a method: it provides a framework that highlights all the ways a company creates and will continue to create value.

 For instance, human capital – people’s competencies, capabilities, experience, and motivation to innovate – is often the most significant asset an organization has as business models become centered on people and technology.  The SEC rule proposal is consistent with the concept of integrated reporting and previous comments from SEC Chairman Jay Clayton, where he indicated:

Today, human capital and intellectual property often represent an essential resource and driver of performance for many companies.  This is a shift from human capital being viewed, at least from an income statement perspective, as a cost . . . I think investors would be better served by understanding the lens through which each company looks at their human capital.   Does management focus on the rate of turnover, the percentage of their workforce with advanced degrees or relevant experience, the ease or difficulty of filling open positions, or some other factors?

As always, your thoughts and comments are welcome!

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