August 10, 2018

Form 8-K Filings: Goin’ Down, Down, Down. . .

This FEI blog reports that the number of Form 8-K filings peaked in 2005 & is now approaching pre-Sarbanes-Oxley levels. The SEC’s rules expanding the items triggering an 8-K reporting obligation went into effect in August 2004. Over 112,000 8-Ks were filed in 2005 – the first full year of the new regime – and the number’s been on the decline ever since. Last year, approximately 69,000 8-Ks were filed, compared with 65,000 during 2003.

Why the decline? The blog speculates that increased use of social media for communicating information to investors may have something to do with it. But I kind of think that ignores the elephant in the room – the number of public companies has fallen off a cliff.

Here are some thoughts from WilmerHale’s David Westenberg on what’s behind the decline in 8-K filings:

I think the most important reason for the decline in 8-K filings is the change in executive compensation disclosure requirements. This trend is evident when you look at the data on a per-issuer basis. Below is an extract from my IPO book, describing an analysis we did on this subject. I have not yet updated the data for 2017 but do not expect any significant change in this trend.

“Since 2003, many new categories of reportable events were added to the Form 8-K rules, moving Exchange Act reporting closer to a real-time basis. As a result, a typical public company now files many more Form 8-Ks per year than it did prior to the rule changes.

Based on an unscientific sampling of Form 8-K filings by 57 public companies of various sizes across sectors, the median number of Form 8-Ks filed by these companies annually between 2000 and 2002, the three-year period before the rule changes, was 2.67, and the median number of Form 8-Ks filed by the same companies annually between 2005 and 2007, the three-year period following the rule changes, was 13.33.

In the 2000 to 2002 period, the most Form 8-K filings by any of the surveyed companies in any one year was 28; two of the surveyed companies did not make a single Form 8-K filing during this period, and five companies filed only one Form 8-K each.

In the 2005 to 2007 period, the most Form 8-K filings by any of the surveyed companies in any one year was 53, and the fewest was five. Form 8-K filings have since declined in number due to further rule amendments in late 2006 and subsequent SEC staff interpretations regarding the reporting of executive compensation arrangements.

Between 2008 and 2016, among the 38 companies from the original sample that remained independent throughout this period, the median number of Form 8-Ks filed annually was 11.95; the highest number of Form 8-K filings in any one year was 41, and the lowest was four. All of the foregoing data includes Form 8-Ks that are “furnished” under Item 2.02 and Item 7.01 rather than “filed.””

Board Diversity:  An Activism Repellant?

If you need another reason to increase the number of women on your board, try this one on for size – there’s a study suggesting a correlation between the number of women directors a company has & the likelihood that it won’t be an activist target.  This excerpt from a recent “Corporate Secretary” article lays it out:

According to a study of 1,854 public groups by the Alvarez & Marsal (A&M) consultancy, European businesses that have more female directors are less likely to be targeted by activist investors. The analysis found that companies not targeted by hedge fund activists had, on average, 13.4 percent more women on their boards.

Paul Kinrade, managing director at A&M, said there are many factors that can result in a business coming under scrutiny from activists, including diversity. ‘We would not go so far as to say that gender mix is a primary driver of shareholder activism, but our research shows it is certainly a factor and it demonstrates the value of a greater diversity of thinking at board level,’ he said. ‘A board that contains a broader and more rounded view on the disruptive forces in their given markets will increase a company’s resilience and flexibility.’

The study only addressed European companies, but it would be interesting to see data on the US experience.

Lease Accounting: Things Are Looking Sort of Grim

When we last updated you about the status of implementation efforts for FASB’s new lease accounting standard, nobody was ready, Wall Street analysts didn’t care, but the SEC very much did. According to this recent Deloitte report, the clock is still ticking – but the mood among financial execs is darkening. Here’s an excerpt from the press release announcing the report:

Deloitte’s April 2018 poll of more than 2,170 C-suite and other executives shows confidence is declining as those feeling unprepared to comply (29.5%) nearly double those feeling prepared (15.6%). This represents a drop from January 2018 statistics: unprepared (22.4%) and prepared (19%). Moreover, nearly one-half of executives (49.3%) report they are either “very” or “somewhat” concerned about implementing on time—up from 47.1% in May 2017.

The new standard goes into effect on January 1, 2019, and while FASB continues to try to lift accountants’ spirits by providing additional relief from certain aspects of the new standard, it still looks like things might get ugly.

John Jenkins