GB791 Unit 5 Disclosure Review Example

A Rule That Named No Metric: A Unit 5 Disclosure Review of the SEC's 2020 Human Capital Requirement

[Student Name]

Purdue University Global

GB791: Advanced Topics in Accounting

Unit 5 Disclosure Review

[Instructor Name]

[Date]

The fifteen filings reviewed are a composite set built for this example, and the counts illustrate the coding method; the rule and the studies cited are real.

Part One: What the Rule Requires

In August 2020 the Securities and Exchange Commission adopted amendments to Items 101, 103 and 105 of Regulation S-K, effective for filings after November 9, 2020 (Securities and Exchange Commission, 2020). Before the amendments, Item 101 required a company to disclose the number of its employees and little else about its workforce. The amended Item 101(c)(2)(ii) requires a description of the company's human capital resources, including the number of persons employed, and of any human capital measures or objectives that the company focuses on in managing the business, to the extent such disclosure is material to an understanding of the business taken as a whole.

The rule gives examples of what such measures might address, among them the development, attraction and retention of personnel, but it prescribes none of them. The Commission explained its choice in the adopting release. A principles-based requirement, it argued, would let each company disclose what actually matters to its own business, since the relevant measures differ widely between a software firm, a hospital system and a mining company. Two commissioners dissented in part, arguing that without specific required metrics, such as turnover, workforce composition or compensation costs, the disclosures would not be comparable across companies.

The rule is therefore a natural test of a long-running question in disclosure policy: does leaving the choice of measures to management produce useful information, or does it produce text that is hard to compare and easy to fill?

Part Two: A Coded Set of Filings

To examine what the rule produced, the candidate coded the human capital sections of fifteen annual reports, five each from retail, health care and industrial manufacturing, for fiscal years 2021 and 2025. This set is a composite built for the example, and its counts illustrate the method rather than report a study; a real review would draw a larger random sample from EDGAR and have a second coder check a portion of the coding.

Each section was coded for four things: its length in words, the number of quantitative human capital measures it reported beyond headcount, whether any measure was reported for more than one year so that a reader could see a trend, and whether any stated objective came with a target and a date.

In the 2021 filings, sections averaged a little over 700 words. Most reported headcount and one or two further figures, typically the share of employees who were women or the number of training hours. Few reported turnover. Only a handful gave any measure for more than one year, and very few attached a target to an objective. Much of the text described values, culture and benefits programs in terms that could have appeared in any company's filing.

By the 2025 filings, sections were somewhat longer and more of them reported turnover or retention, particularly in retail and health care, where labor shortages had made those figures prominent in earnings calls. Workforce composition figures, by contrast, appeared in fewer filings in 2025 than in 2021, reflecting changes in how companies chose to discuss diversity programs. Measures reported for more than one year remained uncommon.

What the Pattern Suggests

Three features stand out. First, the measures reported varied more by industry than by company within an industry, which suggests that companies looked to peers when deciding what to disclose. Retailers reported turnover; hospital systems reported nurse staffing and vacancy rates; manufacturers reported safety incident rates. Within each industry, disclosure converged on a few measures, though the definitions differed enough to make direct comparison difficult. Second, very few companies reported figures that would allow a reader to see whether conditions were improving or worsening. A single year's turnover rate, without a prior year or a benchmark, says little. Third, the measures most closely tied to costs, such as total compensation as a share of revenue, were rarely disclosed at all.

The rule let companies choose what to disclose, and most chose measures that described the workforce without letting a reader judge how well it was managed.

Part Three: Why the Choice of Measures Matters

The case for better human capital disclosure rests on the idea that workforce investments create value that financial statements do not capture. Accounting standards expense most spending on employees as it is incurred, including spending on training and development that may produce benefits for years. Lev (2001) argued that the failure to recognize or adequately disclose intangible investments of this kind leaves investors with an incomplete picture of firm value and contributes to mispricing.

There is evidence for that concern. Edmans (2011) tracked companies named to a published list of the best American employers and found they earned higher stock returns over the following years than comparable companies, and that the higher returns were associated with earnings surprises. He read this as a sign that investors underweighted what was known about employee satisfaction, even though it was publicly available, until it showed up in earnings. If markets underweight human capital information that is presented outside the financial statements, then the form and comparability of disclosure matter.

That evidence cuts two ways for the rule. It suggests that human capital information has value, which supports requiring disclosure. But it also suggests that investors may not use information that is difficult to compare or interpret, which is exactly the concern the dissenting commissioners raised about a principles-based approach.

What Preparers Had to Build

For preparers, the requirement meant deciding, for the first time, which workforce measures management actually used. In some companies, human resources and finance had tracked different figures for different audiences, and the disclosure required them to agree on one set and defend it. Because the information appears in the 10-K, it is subject to disclosure controls and to potential liability for misstatements, which encouraged caution. That caution likely explains some of the generic text: a description of values is hard to misstate, while a turnover figure must be defined, measured and kept consistent.

Assessment

The 2020 rule increased the volume of human capital disclosure but, on the evidence of this coded set, did not produce information that allows readers to compare companies or track performance over time. The Commission placed a more prescriptive human capital proposal on its rulemaking agenda after 2021, but no such rule was proposed. The experience suggests that principles-based disclosure works best where companies already measure what matters and have reasons to report it consistently. Where those conditions are missing, a requirement to describe can become a requirement to write.

References

Edmans, A. (2011). Does the stock market fully value intangibles? Employee satisfaction and equity prices. Journal of Financial Economics, 101(3), 621-640. https://doi.org/10.1016/j.jfineco.2011.03.021

Lev, B. (2001). Intangibles: Management, measurement, and reporting. Brookings Institution Press.

Securities and Exchange Commission. (2020). Modernization of Regulation S-K Items 101, 103, and 105 (Release No. 33-10825).