January 7, 2021

Board Evals & Refreshment: Key to Unlocking Diversity Gains?

Despite 81% of boards saying that they want to add diverse directors, it could be a long process due to low turnover among existing directors. Lynn has blogged that many boards seem to be focusing on overboarding to move the needle, but that isn’t a solution for all companies. The latest Spencer Stuart Board Index highlights these stats from S&P 500 boards during the 2020 proxy season:

– 55% appointed a new independent director – translating to an overall turnover of 0.84 new directors per board – which is similar to rates during the past 5 years

– Of the 272 boards that appointed new independent directors, 28% increased the size of the board to add women – yet increasing board size for more diversity isn’t a sustainable option

– 25% had no change to board composition

– 16% of sitting independent directors on boards with retirement age caps are within 3 years of mandatory retirement

– 6% report having explicit term limits for non-executive directors – the most common limits are 12 or 15 years

– Female representation rose to 28% of all S&P 500 directors – but only 22% of new S&P directors are from underrepresented racial or ethnic groups

– 24% included a commitment in the proxy statement to consider diverse slates when adding a new director

The report goes on to note that the preferred method for board refreshment is a robust board assessment process that includes director self-assessments and peer evaluations. Although director surveys consistently indicate that there’s room for improvement with this process – here’s Lynn’s blog about this year’s PwC director survey, saying that 49% of directors think at least one of their fellow board members should be replaced – anecdotally, things might be improving. Some members are saying that they’ve seen an increase in board evaluations and peer reviews over the last few months.

Small-Cap Capital Formation: COVID’s “Roadshow” Impact

The SEC’s “Office of the Advocate for Small Business Capital Formation” – which covers emerging, privately-held companies up to small-cap public companies – recently released its second Annual Report, which as you might guess by the name of the office, provides data on the state of small business capital formation. There were several SEC rulemakings last year that impacted this set of companies – and page 7 of the report links to video summaries of these changes:

– Accredited investor amendments

– COVID-19 crowdfunding relief

– Accelerated filer amendments (SOX 404(b))

– Capital formation proposal

– Modernizing Rule 15c2-11 governing quotations for OTC securities

– Accredited investor proposal

Of course, the biggest stories in 2020 were the impact of the pandemic and the challenges faced by founders and investors from underrepresented groups. The report says that the number of small businesses decreased by 27% from January through September last year – and gives a state-by-state breakdown of those losses on page 18. The IPO process has also changed in ways that some think will become the “new normal” – at least for companies that are well-known enough to get noticed without needing an in-person meeting. Here are some highlights:

– While traditionally issuers and their underwriters traveled across the country and sometimes across continents to pitch the IPO, in the face of the pandemic, companies and investors have quickly adopted virtual roadshows – benefits to companies included saving time & money from travel and expanded geographical reach

– The average roadshow shortened from 8 days to 4 days

– The reduction in launch time from roadshow to IPO decreased companies’ exposure to market risk & volatility

– Test-the-waters meetings have lengthened

– Prospective investors are indicating interest earlier, giving greater visibility in pricing

– Companies are providing more sophisticated and detailed disclosures about new developments and the impact of the pandemic

Check out the full report for data on Reg D and Reg A offerings, IPOs, the “small size trap” and the state of the market for small public companies (spoiler: there’s been a 52% decline in the number of public companies since 1997, but only a 5% decline in the amount of corporate assets in the public market). On February 4th, the Office is hosting a “Capital Call” to cover the content of the report and allow the public to ask live questions.

Transcript: “Modernizing Your Form 10-K: Incorporating Reg S-K Amendments”

We’ve posted the transcript for our recent webcast, “Modernizing Your Form 10-K: Incorporating Reg S-K Amendments.” This program focused on the SEC’s amendments to Reg S-K Items 101, 103 and 105 – with tips on human capital disclosures, risk factors, and what you should be thinking about for your disclosure controls & procedures. On this upcoming Tuesday, January 12th, we’ll be having another program on the topic of “Streamlined MD&A and Financial Disclosures: Early Considerations.” Don’t miss it!

Liz Dunshee