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In the latest installment of the Salzburg Questions for Corporate Governance, associate at Three Crowns LLP Zachary Mollengarden reflects on corporate transparency, human capital, and the variability of disclosures with the US Securities and Exchange Commission
This article is part of the Salzburg Questions for Corporate Governance series, facilitated by the Salzburg Global Corporate Governance Forum
"We employed 2,071 people as of November 28, 2020. None of our employees are subject to collective bargaining arrangements, and we have not experienced any recent work stoppages. We consider our relationship with our employees to be good."
Bassett Furniture Company was founded in 1902 in the foothills of Virginia's Blue Ridge Mountains. Today, it boasts nearly 100 retail locations in the US and Puerto Rico, annual net revenue exceeding $450 million, and a listing on the Nasdaq stock exchange. The passage above appears in Bassett's 2020 Form 10-K, an annual report required by the US Securities and Exchange Commission (SEC) that provides what the SEC describes as a "comprehensive overview of the company's business and financial condition."
Specifically, the passage appears in a section of the 10-K that, as of this past November, must discuss, "to the extent material to an understanding of . . . the business taken as a whole," "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)." The new requirements do not designate required metrics. Instead, SEC Commissioner Jay Clayton has reiterated that the SEC "expect[s] to see meaningful qualitative and quantitative disclosure, including, as appropriate, disclosure of metrics that companies actually use in managing their affairs."
A few months and several hundred 10-Ks later, the new human capital disclosure requirements present a striking glimpse into how firms, regulators, and investors are wrestling with calls for a fundamental reconceiving of the relationship between companies, their employees, and civil society.
The results are mixed.
Start with a superficial but telling statistic: Among the first 50 10-Ks filed by registrants with a market capitalization greater than $1 billion, human capital disclosures ranged from nine to 1,582 words. The tersest companies simply advised the reader to look elsewhere—some to proxy statements, others to the annual report, still others to material advertising corporate social responsibility initiatives.
Try another metric: On the assumption that first impressions matter, with what information are firms introducing their human capital disclosures? Bassett, for instance, opens with headcounts and union affiliation. Compare that approach to Adobe's most recent 10-K: "Our values—genuine, innovative, involved and exceptional—are built on the foundation that our people and the way we treat one another promote creativity, innovation and productivity, which spur the company's success." The distance between Bassett's general observations and what appears to be Adobe's mission statement makes it all the more striking that the first paragraph in Adobe's filing concludes with the same boilerplate as Bassett: "We have not experienced work stoppages and believe our employee relations are good."
These distinctions are not simply a function of firm resources, with larger firms offering lengthier, more sophisticated disclosures. Adobe's discussion of diversity and inclusion alone outstrips the total amount of human capital information provided in John Deere's most recent 10-K. Deere informs investors, for example, that its 69,600 employees "take pride in their work and value learning from one another" and "appreciate different perspectives and embrace the opportunity to work with those of diverse backgrounds."
Nor do the disparities consistently track assumptions about a firm's political leanings, with those firms that tilt leftward presumably expending greater effort to burnish their social credentials. Starbucks' 10-K goes into considerable detail on pay equity but is virtually mum on employee safety measures relative to the 10-K of petroleum services firm, Helmerich & Payne. Covid-19 related initiatives garner one line in Starbucks' human capital reporting; Bassett triples that.
For some, this variability will be a cause for lament. The utility of such data—quantitative and qualitative—is linked to its comparability, and the briefest of glances over the 10-Ks filed since the requirement entered into force highlights disparities that appear unlikely to be ironed out over time. Indeed, in calling for the 10-Ks to detail what "the registrant focuses on," the SEC has invited idiosyncrasy.
The lamentation will be particularly pronounced among the growing number of voices advocating a step-change in how firms understand their place in civil society. The prompt for this article was a Salzburg debate concerning compensation committees' responsibility to address income inequality. Those supporting that broader remit may read the human capital reports and pine for blunter tools such as the CEO pay ratio.
Yet such variability should not be a cause for surprise. Until there is accord over the ends of such disclosure regimes, there is little reason to expect firms to adopt identical means. Indeed, from this perspective, the variability in corporate disclosures thus far may not be a cause for lament at all. If the call is for corporations to better reflect society's interests and ideals, what room for complaint when the mirror proves accurate?
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