Workforce Data Insight Pitch

The Need to Modernize Human Capital Disclosures Given the circumstances, it is no surprise that investors continue to demand high-quality, decision-useful human capital disclosures. After all, financial reporting should reflect the ways modern companies create value. Due to two key trends, the importance of human capital-and thus the need for greater disclosures in this area-seems only likely to increase going forward. First, the ongoing modernization of our economy-and overwhelming percentage of company valuation now held in intangibles-underscores the urgent need for higher-quality workforce information from U.S. public companies. In 1973, when issuers were first mandated to disclose headcount, over 80% of the S&P 500's market capitalization was held in tangible assets such as property, plant, and equipment. 19 By contrast, in 2020, 90% of the S&P 500 was based on intangible assets such as human capital. 20 Yet, the only metric that companies must disclose remains headcount. 21 The growing importance of human capital can also be seen in firms' labor costs. From 1992 to 2018, capital expenditures have remained flat at roughly 10% of sales. By contrast, personnel expense as a percentage of sale increased from roughly 26% to 38%. 22 These statistics underscore the need for updated reporting. Human capital represents a substantial asset (and a key operating cost) that cannot be found on firms' disclosed financials. be the on Second, the growth of net loss firms highlights the need for updated human capital reporting. In 2020, for the first time, more than half of listed firms reported negative net income under Generally Accepted Accounting Principles (GAAP). 23 One explanation for the growth of net loss firms is that these are younger firms that will scale as they age, eventually becoming profitable. Valuing these firms is particularly difficult, as common valuation techniques such as price-to-earnings multiples cannot be used. Instead, to evaluate these firms' future financial prospects, investors must understand the firms' margins and the degree to which these firms report negative net income because they are engaging in the type of investment, such as research and development or investment in human capital, that GAAP commonly treats as an expense that reduces net income. Although FASB's disaggregation proposal will help provide needed transparency if enacted, current accounting rules do not provide sufficient visibility into labor costs. Firm investments in tangible assets, such as investments in Property, Plant and Equipment, are typically capitalized and remain as assets on the balance sheet. By contrast, internal firm investments in intangible assets such as Research & Development and human capital are typically expensed and do not appear on the balance sheet-as though they provide no future value. 19 Report, Intangible Asset Market Value Study, Ocean Tomo, https://oceantomo.com/intangible-asset-market- value-study/ 20 Id. 21 SEC Final Rule to Modernization of Regulation S-K Items 101, 103, and 105, https://www.sec.gov/files/rules/final/2020/33-10825.pdf 22 Regier and Rouen, supra note 16, see figure 1, using firms that report under IFRS). 23 Colleen Honigsberg & Shivaram Rajgopal, Wage Wars: The Battle Over Human Capital Accounting, 12 Harv. Bus. L. Rev. 275-314 (2022). INVESTOR ADVISORY COMMITTEE 6

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