As we previously reported, new SEC rules requiring reporting on human capital resources will take effect November 9, 2020. The new disclosure is not required to be included in third quarter Forms 10-Q, but publicly-traded retailers should begin the analysis now to assess whether disclosure will be required in Form 10-K, and if so, what will be disclosed in 2020 annual reports to shareholders. Retailers determining that disclosure is immaterial under the federal securities laws may still elect to provide a human capital narrative in corporate sustainability reports, which are not filed with the SEC, in an effort to address increasing stakeholder demand for such information.

The SEC’s new human capital disclosure requirements are largely principles-based. Under new Item 101(c)(2)(ii) of Regulation S-K, public companies (including publicly-traded retailers) will be required to provide a description of their human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the company 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). Disclosure is only required to the extent material to an understanding of the company’s business taken as a whole, except that, if the information is material to a particular segment, a company should additionally identify that segment.

The SEC specifically declined to adopt a definition of “human capital” as part of the rulemaking because it believes this term may change over time and may be tailored to the circumstances and objectives of individual companies and industries. Thus, retailers may be situated differently than businesses of similar size in other unrelated industries. Even reporting within the retail space may differ by company.

According to the SEC’s adopting release, the new disclosure should include any human capital measures or objectives that management focuses on in managing the business, to the extent such disclosures would be material to an understanding of the registrant’s business. Some examples of relevant human capital measures or objectives the SEC cited include measures or objectives that address the attraction, development, and retention of personnel. The SEC emphasized that these are examples of potentially relevant subjects, and not mandates. The adopting release reminds each public company that disclosure must be tailored to its unique business, workforce, and facts and circumstances.

The new SEC disclosure requirement does not, of course, relieve companies from compliance with federal, state and local labor and employment laws. In crafting human capital polices and disclosures for their SEC reports, companies must continue to take into account employment discrimination laws and other labor regulations. Companies can lawfully take many actions to promote the laudable goal of advancing diversity in their workforce, for example, but they must continue to be mindful of potential claims that could seek to challenge these efforts as discriminatory in one way or another. These concerns are not merely hypothetical; in recent weeks the Department of Labor has reportedly questioned several prominent public companies about their diversity initiatives and whether those initiatives comply with employment law.

Furthermore, a number of well-known public companies have recently been the subject of shareholder litigation regarding human capital issues. These suits typically allege violations of board fiduciary duties for not maintaining a sufficiently diverse workforce in one way or another. They also claim that the companies violated the antifraud provisions of the federal securities laws by touting diversity efforts and achievements in proxy statements and other SEC filings even though such statements were allegedly untrue. The litigation is at too early a stage to draw any affirmative conclusions, but it is clear that some shareholders (and plaintiffs’ counsel) are now focused on these issues and have begun to look for potential misstatements and omissions on such matters in companies’ public statements.