Warren Buffett’s annual letter to Berkshire Hathaway shareholders came out this weekend. Although he says there wasn’t much “new or interesting” at the company in 2021, there are a few nuggets worth noting in the letter and the annual report that it accompanies. The letter:
– Prominently touts the company’s substantial federal income tax payments as a good thing. Berkshire Hathaway paid $3.3 billion in corporate income tax in 2021 – a figure you’ll find at the front of Saturday’s letter rather than on the back page. Warren Buffett has been a long-time proponent of reinvesting in the business and paying taxes “at the office” versus on take-home taxable income. At a time when the tax obligations of billionaires and their businesses are drawing more national attention (and starting to be discussed as an “ESG” issue), Buffett emphasizes “the invisible and often unrecognized financial partnership between government and American business” and says Berkshire wouldn’t be what it is today if its operations weren’t based in the USA.
– Applauds Apple and its CEO Tim Cook for strong performance and share repurchase decisions that caused Berkshire’s percentage ownership to increase to 5.55%. That might be useful praise heading into Apple’s shareholder meeting this Friday, where the tech company faces 6 shareholder proposals and an adverse ISS recommendation on say-on-pay. Later in the letter, Buffett expounds on Berkshire’s own repurchase decisions.
Additionally, it appears that the Oracle of Omaha is coming around to the business benefits of planning for the net-zero transition. The letter plays up these environmental achievements:
– BNSF’s role in the American supply chain comes with an emissions advantage – “If the many essential products BNSF carries were instead hauled by truck, America’s carbon emissions would soar.”
– BHE has made the “societal accomplishment” of becoming a leading force in wind, solar & transmission – and the letter highlights previously-identified successor Greg Abel’s leadership role in that company’s transformation. Buffett takes a dig at “greenwashing” and brags that BHE has a lengthy history of making climate-conscious moves that soak up all of its earnings.
In a rare move, Abel also gets dedicated space in the company’s annual report. His Vice-Chair letter details annual GHG emissions from BHE and BNSF – and the 2030 targets for those two businesses – which represent more than 90% of Berkshire’s overall emissions. The 2030 targets are about 54% of the 2005 baseline (close to the “halving emissions by 2030″ goal that gained support after the IPCC report last summer). Abel’s letter highlights that BHE has invested in renewables while retiring coal plants and that it routinely communicates its approach to decarbonization. For more info on Abel’s background and the significance of his “sustainability” letter getting space in the annual report, check out this Bloomberg article.
Buffett’s letter ends with a plug for the company’s “annual gathering of capitalists.” This year’s incentives to attend include a discount on a “cousin” Jimmy Buffett-designed pontoon party boat that is manufactured by a Berkshire subsidiary. At a time when other companies are elbowing for positive attention & turnout from retail shareholders, Warren Buffett’s ability to connect the dots in a straightforward way seems to be a continued formula for success.
– Liz Dunshee
Supply chain disruptions continue to grow. Last week, the largest international logistics company in the US shut down most of its operations after announcing a cyberattack (see reports by ZDNet and the WSJ). This follows several supply chain attacks over the past few months – including a ransomware attack on Switzerland’s Swissport airport management services and a data breach that affected Germany’s billion-dollar logistics firm Hellman Worldwide – along with chatter from cyber-criminals last fall that they have access to networks for companies in the supply chain and are targeting that sector.
This is one of those areas where if you have been informed of a specific issue, your risk factors need to be tailored accordingly. So, do your procurement folks know to keep you in the loop? Do you have a sense for what type of disruption would warrant discussion with your board? As Dave blogged last week, the Russian conflict also means that cyber threats have grown to unprecedented levels for companies and the infrastructure that we all rely on. Preparedness for different types of scenarios is key.
– Liz Dunshee
Tune in tomorrow from 2-3pm EST for our PracticalESG.com webcast – “Shareholder Engagement: Fallout From the ‘ESG’ Tsunami” – featuring RLB Governance’s Rhonda Brauer, Close Consulting Group’s Tamara Close, Freshfields’ Pamela Marcogliese and Georgeson’s Hannah Orowitz. Shareholders have become more vocal than ever about ESG issues. The question now is, what should companies be thinking about before & after they commit to action? These experienced practitioners will discuss the “next steps.” Directors elections may be at risk if companies fail to show responsiveness, so it’s important to get this right!
Members of PracticalESG.com are able to attend this critical webcast – and access the transcript afterwards – at no charge. If you’re not yet a member, subscribe now by emailing firstname.lastname@example.org or calling us at 800.737.1271. If you sign up for a membership today, you can also receive 25% off the regular pricing. Don’t delay – this introductory promotion ends next week.
– Liz Dunshee
In yesterday’s blog we highlighted some of disclosure considerations that could arise from the Russian invasion of Ukraine, but one issue that we did not address is what should companies do if they have already issued their earnings release and filed their Form 10-K? The invasion comes just as earnings season has wrapped up and larger companies with a December 31 fiscal year end have already filed their Form 10-K. In this way, there are parallels to what we saw with the onset of the COVID-19 pandemic, which became a concern in the United States in early March 2020, right after many companies had already wrapped up their earnings releases and periodic report filings.
In many ways, companies may have already covered the risks and uncertainties arising from the conflict in their Form 10-K disclosures, given that many companies include general risk factor warnings about the risks arising from wars and global economic instability. Further, many companies included risk factor disclosure this year about the risks arising from inflation, given that those trends existed before the crisis in Ukraine began. Many companies have also discussed in depth the supply chain challenges that they have already been facing, which could be exacerbated by the conflict in Ukraine.
In terms of determining whether a company must disclose now any risks or uncertainties arising from the Ukraine conflict, it is important to evaluate whether the company has an affirmative disclosure obligation that would require the company to address such material risks and uncertainties, including any upcoming SEC periodic and current reports, potential securities offerings, ongoing share repurchases, or other public statements (such as earnings announcements or investor day presentations). If a company chooses to make a statement regarding risks and uncertainties arising from the conflict, such statement may not be materially misleading, or omit information that would make the statement materially misleading. Companies have a duty to correct prior disclosure that the company determines was untrue (or omitted a material fact necessary to make the disclosure not misleading) at the time the disclosure was made.
In addition to the information expressly required by SEC rules and forms, a public company is required to disclose “such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.” The SEC considers omitted information to be material if there is a substantial likelihood that a reasonable investor would consider the information important in making an investment decision or that disclosure of the omitted information would have been viewed by the reasonable investor as having significantly altered the total mix of information available.
The materiality of risks and uncertainties associated with the conflict in Ukraine depends upon the nature, extent, and potential magnitude of the impact on the company’s business and the scope of the company’s operations. In accordance with Basic v. Levinson, a company should consider both the probability of and anticipated magnitude of any impacts in light of the totality of the company’s business activity.
What we observed with the onset of the COVID-19 pandemic in 2020 was a push toward more current disclosure of information about risks and uncertainties, even though companies might have been able to wait to make those disclosures in their periodic reports. The SEC’s Chairman and the Director of Corp Fin called on companies to provide more “real time” disclosure, particularly given the profound effects that the pandemic and the measures taken to prevent the spread of the virus had on public companies and the extreme volatility in the stock markets. I think the conflict in Ukraine is somewhat distinguishable from those circumstances, given that the economic impact may be less widespread and more targeted toward particular industries.
For a more detailed discussion of the framework for analyzing these disclosure considerations, check out the article “Can It Wait Until the Next 10-Q” in the July-August 2021 issue of The Corporate Counsel. If you aren’t already subscribing to receive the current issues of this critical newsletter, email email@example.com or call us at 800-737-1271.
– Dave Lynn
If you have not figured this out about me yet, I like to torture myself by committing to write many time-consuming publications. It is a habit that I can’t seem to break.
One of these publications is the annual Proxy Season Field Guide, which is published by DFIN. The Ninth Edition is out, and is packed full of 340 pages of insights relevant to the annual reporting and proxy season.
– Dave Lynn
So far this year I have been looking back on 15 years of contributing to CCRcorp publications and reflecting on some of my favorite blogs, podcasts, webcasts, conferences and publications over the years. I have participated in quite a few panels at the annual Executive Compensation Conference and Proxy Disclosure Conference during the last 15 years, so it is difficult to pick just one as my favorite. There were of course the puppet shows in 2015 and 2018, which I talked about in one of the Fond Farewell episodes of the Dave & Marty Radio Show. But I would have to say that my favorite appearance was the last one I did with the late, great Marty Dunn at the 2019 Proxy Disclosure Conference, in a panel called “I Like it Like That.”
This was the last in a series of panels over the years where we basically did a 10 minute comedy routine to give the audience a little break from the proxy disclosure and executive compensation topics. One of our perennial topics for the panel was “What Really Ticks Us Off,” but for the 2019 program we flipped the script and instead covered “What Makes Us Happy.” While we look relaxed up there, I recall that the panel required quite a bit of preparation, from acquiring the Hawaiian shirt and other props to searching around New Orleans for margarita mix. I can remember being backstage blowing up those palm trees and trying to get the parrot to sit on my shoulder, which turned into a wardrobe malfunction when I got on stage. The best part for me now is listening to Marty tell his classic stories and reflecting on what made us happy with what we do, and I am very grateful that we had the opportunity to do this panel before he died.
– Dave Lynn
Overnight, Russia attacked Ukraine, despite intense efforts to find a diplomatic solution. The continuing tensions have prompted a spike in the price of oil and significant volatility in the stock market. While our concern for the safety of the people of Ukraine is paramount, public companies must consider whether and how to address the conflict and its attendant consequences in their public disclosures.
This timely Morgan Lewis memo points out that companies may need to address the conflict in their upcoming risk factor disclosures, and points out examples of disclosures that may be required depending on a company’s particular circumstances:
Against the backdrop of rising tensions between the United States and Russia, particularly as it relates to Russia’s actions in Ukraine, and the new sanctions announced on February 22 by President Joseph Biden and several European leaders against Russia, public companies should review their risk factor disclosure to ensure that it appropriately addresses the risks associated with these events as they relate to their business, results of operations, and financial condition.
For example, if a company’s business depends on exports or imports to or from Russia, its disclosure should appropriately convey the potential effect of bans, sanction programs, additional licensing requirements, and/or boycotts on its business, including supply chain disruptions and other restrictions, to reflect the uncertainty surrounding the escalating conflict as it is unfolding in real time.
Additionally, a company that materially depends on third parties for its operations should consider whether those third parties may be impacted by the events in Russia and Ukraine. For example, third party contractors may have staff, material operations, financial transactions, research and development facilities, equipment, or other properties located in Russia or Ukraine that could be directly impacted by the conflict, which, in turn, could result in material implications for the company’s operations.
Similarly, a public company may have a material customer base located in Russia or Ukraine whereby both the economic and security conditions could limit the company’s ability to provide its services or products to such customers, as well as limit its ability to receive payments, resulting in a potential loss of revenues.
– Dave Lynn
One of the consequences of the Russia-Ukraine conflict is that the countries imposing sanctions on Russia – most notably the United States – are now facing an unprecedented cybersecurity threat, as state-sponsored cyberattacks are certain to follow. Public companies, financial institutions, stock exchanges, telecommunications and energy infrastructure and states and municipalities are all likely high on Russia’s target list. A recent Harvard Business Review article notes:
Conflict in Ukraine presents perhaps the most acute cyber risk U.S. and western corporations have ever faced. Invasion by Russia would lead to the most comprehensive and dramatic sanctions ever imposed on Russia, which views such measures as economic warfare. Russia will not stand by, but will instead respond asymmetrically using its considerable cyber capability.
The U.S. Cybersecurity and Infrastructure Security Agency (CISA) recently issued a warning of the risk of Russian cyberattacks spilling over onto U.S. networks, which follows previous CISA warnings on the risks posed by Russian cyberattacks for U.S. critical infrastructure. The European Central Bank (ECB) has warned European financial institutions of the risk of retaliatory Russian cyber-attacks in the event of sanctions and related market disruptions.
As this Mandiant blog notes, we should be prepared but not panic. Our cyber defenses have evolved to handle sophisticated state-sponsored attacks, and they should hopefully be able to withstand the inevitable attacks from Russia and its allies. But it certainly is a good time to dust off those reminder emails to employees about being vigilant against attacks to corporate systems, the contingency plans for dealing with individual cyberattacks as well as disruptions to financial markets and the economy, and your disclosure plans in the event that your organization experiences a significant cybersecurity event. Check out our Cybersecurity Practice Area for some helpful resources.
– Dave Lynn
We’ve posted the transcript for our recent webcast for members, “Rule 10b51- & Buybacks: Practical Impacts of SEC’s Proposals.” I was joined on this webcast by an all-star panel: Brian Breheny from Skadden, Ning Chiu from Davis Polk, Meredith Cross from WilmerHale LLP and Keir Gumbs from Broadridge Financial Solutions. We discussed the SEC’s December 2021 rule proposals in detail and addressed the practical implications of the proposed rules if they were adopted, including this nugget from Ning:
What’s key here is that many of us work with companies that already have processes and procedures in place to make sure that there is no abuse. Even for those companies, what is being proposed would require some big changes. So, if we stick with talking about the individual plans, as opposed to the corporate plans, to the extent that anybody that has a 14-day, 30-day, or even a separate quarter cooling-off period – we’re now talking about 120 days – under the proposal, any modification would be the end of the plan. Anything, probably even fixing a typo, as of right now, would end the plan. It doesn’t actually accommodate even de minimis changes. A modification would end the plan and you start a new plan. You start your new 120-day cooling off period. I have a couple key questions. One is on the prohibition on overlapping plans. What exactly is an overlapping plan when you’re covering the same securities? What does it really mean? The affirmative defense can’t just be adopted in good faith, but it must be operated in good faith. Those are some of the key things that we’re all trying to give advice on.
– Dave Lynn
Like it or not, the proxy season is now upon us, and this White & Case memo highlights the Top 13 considerations for 2022 annual meeting proxy statements. Not surprisingly, taking the number one spot on this Top 13 list is a focus on board diversity disclosure. Other suggested areas to consider when preparing your proxy statement are disclosing a board skills matrix, focusing on board risk oversight disclosure, reviewing board considerations for independence, considering overboarding policies, revisiting human capital, CEO pay ratio, ESG, perquisites and related party transaction disclosures, addressing negative Say-on-Pay votes and considering basic proxy housekeeping items.
– Dave Lynn