October 26, 2020

Searching for Supply-Chain Financing Disclosure: FASB to Study it Too

Earlier this fall, Liz blogged about Corp Fin’s increased scrutiny of supply-chain finance arrangements. Last June, in Topic 9A Disclosure Guidance, Corp Fin called out supply-chain finance arrangements and now last week, this WSJ article reports that the FASB voted to add a project to its agenda to explore greater disclosure on the use of supply-chain finance arrangements. Cydney Posner posted a blog entry detailing some of the recent focus on supply-chain finance disclosure and suggests that companies engaged in this type of financing might want to take the opportunity now to revisit the adequacy of their disclosure.

The WSJ article says a joint letter from the Big Four accounting firms is what led to the FASB’s decision to work on the matter as more transparency could lead to a better understanding of a company’s financial position. It’s unclear exactly what additional disclosure would entail but today there are questions about whether the arrangements should be classified as debt or accounts payable and it’s generally understood that disclosure is lacking:

Board members during Wednesday’s meeting highlighted the growing use of supply-chain finance among companies as well as the lack of disclosure. Fewer than 5% of the nonfinancial companies that Moody’s Investors Service rates globally disclose supply-chain financing in their financial statements, the ratings firm said last year. Companies generally aren’t required currently to disclose that information.

One result could be requiring companies to add footnotes to their financial statements explaining the nature of the programs they use.

ISS’ Proposed Board Diversity Policy Change: Aggregated Data Won’t Cut It

The comment period for ISS’ policy changes closes at 5 pm Eastern Time today and when Liz blogged about the potential changes a couple of weeks ago, one U.S. change that has received a fair amount of attention is the proposed change relating to board diversity. Under that proposed policy, beginning in 2022, at companies where there are no identified racial or ethnically-diverse board members, the proposed U.S. policy will be to recommend voting against the chair of the nominating committee (or other relevant directors on a case-by-case basis). If the proposed policy is adopted, all companies in the Russell 3000 and S&P 1500 indexes would be subject to it.

As stated in ISS’ proposed policy changes document, as of Sept. 21, 2020, 1,260 of the Russell 3000 companies, 492 of the S&P 1500 and 71 of the S&P 500 do not have minority ethnic and/or racial board representation. The document also states that in 2021, ISS research reports will highlight boards that lack racially or ethnically diverse board members (or lack disclosure of such) to help investors identify companies they may want to engage with to foster dialogue on the topic. A recent AgendaWeek piece (subscription required) includes commentary from Marc Goldstein, head of U.S. research at ISS, that sheds more light on information ISS wants to see:

‘The real problem for us is when companies disclose diversity and then aggregate race, ethnicity and gender all together and say, for example, that ‘30% of our board is diverse,’ but then they don’t say what that means,’ says Goldstein. ‘We don’t consider that good enough.’

Instead, says Goldstein, ISS wants to see companies that haven’t provided specific disclosure to disclose what percentage of the board is composed of women, what percentage is racially diverse, and what percentage is ethnically diverse. ‘We want to see gender diversity separated out from racial and ethnic diversity. And obviously, there are other ways to define diversity too, including background, thought, nationality — lots of things. But we’re specifically interested in racial and ethnic diversity for the purposes of this policy.’

ISS expects to announce its final 2021 benchmark policy changes in the first half of November, so we’ll find out soon if the proxy advisory firm adopts this board diversity policy. In the event ISS adopts this policy change, given that ISS research reports will begin flagging companies for lack of disclosure in 2021, even companies that have historically included aggregated director diversity information in their proxy statements might want to consider updating their disclosure or prepare for potential questions from investors.

ISS to Expand QualityScore with FICO Cyber Risk Score

For more on ISS, the proxy advisory firm issued a press release late last week announcing it entered into an agreement to acquire FICO cyber risk score business. With FICO cyber risk score, ISS’ announcement says that institutional investors will be able to use cyber risk scores as part of ISS’ Governance QualityScore ratings in 2021 to evaluate portfolio company risk. ISS also says that it will integrate the cyber risk score into other product offerings such as ISS ESG ratings.

– Lynn Jokela