SEC Issues Guidance On Disclosure Of Key Performance Indicators

On Thursday, in addition to voting to issue a new rule proposal regarding changes to MD&A and other financial disclosure requirements (see this PubCo post), the SEC also issued new companion guidance on the disclosure of key performance indicators and other metrics in MD&A. There has been an increase in investor interest in disclosure of KPIs and similar metrics, as part of MD&A and especially outside of MD&A, for example, in connection with sustainability reporting. (See this PubCo post.) Although the SEC's guidance applies specifically in the context of MD&A, companies may want to take the guidance into account in other contexts as well.

What is a KPI? In general, a KPI is a quantitative measure used to demonstrate performance of a business or operational objective. To the extent that these factors are material to an understanding of MD&A, the SEC believes that they should be disclosed:

"Item 303(a) of Regulation S-K requires disclosure of information not specifically referenced in the item that the company believes is necessary to an understanding of its financial condition, changes in financial condition and results of operations. The item also requires discussion and analysis of other statistical data that in the company's judgment enhances a reader's understanding of MD&A.... The [SEC has] previously stated that companies should identify and address those key variables and other qualitative and quantitative factors that are peculiar to and necessary for an understanding and evaluation of the individual company. Such information could constitute key performance indicators and other metrics."

These metrics may be financial or non-financial, "relate to external or macro-economic matters," be company specific or industry specific, or combine external and internal information. Some examples of KPIs identified in the guidance include:

operating margin; same store sales; sales per square foot; total customers/subscribers; average revenue per user; daily/monthly active users/usage; active customers; net customer additions; total impressions; number of memberships; traffic growth; comparable customer transactions increase; voluntary and/or involuntary employee turnover rate; percentage breakdown of workforce (e.g., active workforce covered under collective bargaining agreements); total energy consumed; and data security measures (e.g., number of data breaches or number of account holders affected by data breaches). In the guidance, the SEC...