September 30, 2020

SEC Enforcement: Fiat-Chrysler Tagged for Misleading Emissions Disclosure

Earlier this week, the SEC announced settled enforcement proceedings against Fiat-Chrysler arising out of allegedly misleading disclosures about its compliance with emissions standards.  Here’s an excerpt from the SEC’s press release:

The SEC’s order found that in February 2016, FCA represented in both a press release and an annual report that it conducted an internal audit which confirmed that FCA’s vehicles complied with environmental regulations concerning emissions. As found in the order, FCA’s statements did not sufficiently disclose the limited scope of its internal audit, which focused only on finding a specific type of defeat device, or that the audit was not a comprehensive review of FCA’s compliance with U.S. emissions regulations. In addition, at the time FCA made these statements, engineers at the U.S. Environmental Protection Agency (EPA) and California Air Resource Board (CARB) had raised concerns to FCA about the emissions systems in certain of its diesel vehicles.

Under the terms of the SEC’s order, Fiat-Chrysler consented to a cease & desist order enjoining it from committing or causing future violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-16 thereunder. The company also agreed to a $9.5 million civil monetary penalty.

The announcement of this proceeding follows on the heels of a significant setback in the SEC’s enforcement action against Volkswagen arising out of that company’s use of a “defeat device” to thwart emissions tests. As discussed in this Mintz memo, a California federal court recently dismissed a significant portion of the SEC’s securities claims against Volkswagen on the grounds that they were previously released by the DOJ.

I’m inclined to be a little more forgiving toward Fiat-Chrysler than I am toward Volkswagen. Sure, this conduct seems to be less egregious, but the real reason is that I have a sentimental attachment to the company. My first car was a 1972 Dodge Polara, and my current dream car is an Alpha-Romeo Stelvio Quadrifoglio – both of which are currently under the Fiat-Chrysler corporate umbrella. Of course, in the real world I still drive a 2012 Equinox that eats oil and has a broken tail light that I busted when I accidentally hit it with a garbage can I was dragging in from the curb a few months ago.

By the way, if it seems like there are more high-profile enforcement actions this week than usual, don’t forget that the SEC’s fiscal year ends today, so Enforcement needs to put cases to bed now if they’re going to count in this year’s stats.

Board  Diversity: The Impact of Geography

Improved oversight and risk management are some of the advantages often associated with board gender diversity. However, a recent study suggests that the advantage that boards with female directors have when it comes to improved oversight doesn’t derive from the gender of those directors, but from their location.

The study says that what makes the difference is that fact that female directors are generally more geographically distant from the companies that they serve than their male counterparts. According to the study, this makes them more reliant on hard data and less reliant on things like CEO schmoozing when it comes to making tough decisions. Here’s the abstract:

Using data on residential addresses for over 4,000 directors of S&P 1500 firms, we document that female directors cluster in large metropolitan areas and tend to live much farther away from headquarters compared to their male counterparts. We also reexamine prior findings in the literature on how boardroom gender diversity affects key board decisions.

We use data on direct airline flights between U.S. locations to carry out an instrumental variables approach that exploits plausibly exogenous variation in both gender diversity and geographic distance. The results show that the effects of boardroom gender diversity on CEO compensation and CEO dismissal decisions found in the prior literature largely disappear when we account for geographic distance.

Overall, our results support the view that gender-diverse boards are “tougher monitors” not because of gender differences per se, but rather because they are more geographically remote from headquarters and hence more reliant on hard information such as stock prices.

Check out this episode of the @DenselySpeaking podcast, in which Greg Shill leads a discussion with one of the study’s authors about its implications and some of the other ways geography influences governance. I’ve never really considered the impact of geography on corporate governance, but the discussion makes an interesting case for the idea that geographic considerations can play a big role in a wide range of governance concerns.  

ICFR: Newly Public Companies & Material Weaknesses

This Audit Analytics blog takes a look at how newly public companies have fared when it comes to internal control over financial reporting. This excerpt summarizes the results of its analysis:

To get a sense of how prepared new IPOs are in terms of ICFR, this analysis looks at the effectiveness of controls as disclosed by SEC registrants in the first management report on ICFR after the IPO year. The amount of reports disclosing ineffective ICFR after an IPO has increased from 12% in 2010 to 21% in 2018, with a high point of 24% in 2016.

As an important note, 2019 is excluded from the above longitudinal analysis on ineffective ICFR after an IPO due to incomplete data; less than 20% of IPOs conducted in 2019 have subsequently filed a management’s report on ICFR. However, based on the reports currently available, 39% have disclosed a weakness in internal controls.

For comparative purposes, a 2019 study referenced in this FEI blog found that 23% of all SEC filers reported a material weakness in 2018. However you slice it though, the trend line for new public companies is not good – and remember, most IPO companies aren’t required to have their auditors vouch for management’s assessment of ICFR.

John Jenkins