Earlier in the week, a subcommittee of the House Financial Services Committee held a hearing on four draft bills that, if enacted, would impact corporate reporting, and more. Proponents of these bills contend that the disclosure will “provide more information to help investors make decisions based on long-term economic growth.”
What Were the Topics?
1. Mandatory HCM Reporting. Representative Cynthia Axne (D. Iowa) introduced a draft bill to amend the Securities Exchange Act of 1934 (Exchange Act) to require issuers to disclose information about human capital management (HCM) in annual reports on topics such as demographics, compensation, composition, skills, culture, health, safety, and productivity. Many of these topics were previously raised in the 2017 rulemaking petition to the SEC by the Human Capital Management Coalition and in the recommendations to the SEC in March 2019 by the SEC Investor Advisory Committee, which we previously wrote about.
2. Number of Outsourced Corporate Jobs. In a separately drafted bill, Rep. Axne further proposed that public companies annually disclose the total number of employees in each state and foreign country, as well as the percentage change from the previous year. The draft bill exempts smaller and newly public companies from this requirement.
3. Buyback Practices. The draft bill directs the SEC to study buyback practices and adopt rules based on its findings. Currently, Rule 10b-18 of the Exchange Act creates a safe harbor for companies to make purchases of their own shares, provided that they follow certain criteria regarding trading volume, timing, and price.
The draft bill mainly requests that the SEC determine whether “Rule 10b-18, or any other rule issued by the Commission” should be amended to stop companies from using buyback announcements to boost stock prices when they have no intention of actually conducting the buybacks and to limit executives and directors from selling their shares after a buyback announcement.
The bill questions whether disclosure should include not only the number of shares sought to be repurchased and the duration of the repurchase period, but also the total compensation of the company’s executives as well as “the percentage increase in the median of the annual total compensation of all the employees of the issuer, excluding executive officers, over the last completed fiscal year.”
The draft bill calls for the SEC to report the results of its study to Congress and, within one year of such report, to amend its rules to address the results of the report.
4. Rate of Pay Raises—Executives vs Employees. The legislative proposal submitted by Representative Dean Phillips (D-MN) requires public companies to disclose “the percentage increase in the median of the annual total compensation of all executive officers” and that of all its employees over the past year and compare each to the rate of inflation. The proposed bill requires disclosure of the ratio between the two pay raise percentages.
Possible Next Steps?
It’s not clear whether these bills will advance “as is” or undergo a markup by the full Committee. Moreover, it remains to be seen whether any of them will gain traction in the current political environment.