On Friday, President Trump announced via Twitter (naturally) that he had asked the SEC to study the possibility of moving from quarterly to semi-annual reporting for public companies. As we’ve previously blogged, this isn’t a new idea. Less frequent reporting also dovetails with recent calls from a “Who’s Who” of business groups & CEOs to eliminate the practice of providing quarterly earnings forecasts – but even many of these business leaders continue to endorse quarterly SEC reporting.
But if the SEC did move to a semi-annual reporting system, would that really help promote a longer-term focus? Would it even change the practice of releasing quarterly results? This MarketWatch editorial from last year by a group of B-school profs who studied the issue suggests that the answer to both questions may be “no.” Here’s an excerpt:
In 2014, the U.K. followed the E.U.’s directive and eliminated the requirement for quarterly reporting. Yet, less than 10% of all U.K. public companies have so far moved to semi-annual reporting. These were mainly companies involved in the energy and utility sectors, where investments of 20-30 years are typical. However, the investment level of companies moving back to semiannual reporting did not increase more than those companies continuing to report quarterly.
Accordingly, our research strongly suggests that moving from quarterly to semi-annual reporting is not an effective response to concerns about the undue corporate emphasis on short-termism. If quarterly reporting focuses company executives on profit maximization in the upcoming three months, then semi-annual reporting might logically focus these executives on attractive investments in the upcoming six months — not over the next three to five years.
In contrast, another recent study suggests that less frequent reporting may help reduce short-termism – but that study was based on a review of the effect of changes in reporting mandates that occurred long before the advent of the 24-hour news cycle, the Internet & social media.
In our current information-saturated environment, it might be a stretch to conclude that the behavior of public companies & investors would change much based solely on the SEC’s decision to reduce the frequency of mandatory reporting. I doubt companies would alter their internal accounting cycle or stop generating quarterly financials for internal use (and many probably would also voluntarily file 10-Qs). My guess is that our experience would mimic the UK’s – although you never know…
Investor groups are likely to strenuously oppose any effort to move to semi-annual reporting – this press release from the CII in response to the President’s announcement is a case in point. Also see this Vox article – and Cooley blog.
”The Accountable Capitalism Act”: Attacking Short-Termism From the Left
Meanwhile, in a parallel universe, Sen. Elizabeth Warren introduced her own prescription for short-termism – ”The Accountable Capitalism Act”. Under her proposal, all companies with $1 billion in annual revenues would be required to be chartered by the federal government. As this New Republic article explains, those federally-charted companies would also have some pretty unusual governance provisions:
Under the federal charter, companies would be required to consider the interests of workers, customers, communities, and society before making major decisions. Employees would elect at least 40% of all company directors, giving them representation on corporate boards.
That would involve worker representatives in decisions like whether to engage in political spending, which would require sign-off from 75% of all directors and shareholders. Finally, executives who receive shares of stock as compensation would have to hold them for at least five years.
Sen. Warren explained the rationale for her legislation in this WSJ editorial. Here’s an excerpt:
As recently as 1981, the Business Roundtable—which represents large U.S. companies—stated that corporations “have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy.” This approach worked. American companies and workers thrived.
Late in the 20th century, the dynamic changed. Building on work by conservative economist Milton Friedman, a new theory emerged that corporate directors had only one obligation: to maximize shareholder returns. By 1997 the Business Roundtable declared that the “principal objective of a business enterprise is to generate economic returns to its owners.”
That shift has had a tremendous effect on the economy. In the early 1980s, large American companies sent less than half their earnings to shareholders, spending the rest on their employees and other priorities. But between 2007 and 2016, large American companies dedicated 93% of their earnings to shareholders. Because the wealthiest 10% of U.S. households own 84% of American-held shares, the obsession with maximizing shareholder returns effectively means America’s biggest companies have dedicated themselves to making the rich even richer.
I’m no pundit, but I’ll still go out on a limb and say that in the current political climate, my beloved Cleveland Browns have a better chance of winning the Super Bowl than this legislation does of getting enacted.
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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.
Yesterday, a federal grand jury indicted Congressman Chris Collins (R-NY) on a variety of fraud-related charges arising out of alleged insider trading in an Australian biotech company for which he served as a director. He was also charged with making false statements to the FBI. Parallel civil securities fraud charges were filed by the SEC (for the newbies out there, the SEC only has the authority to bring civil charges; not criminal).
According to the indictment, Rep. Collins disclosed to his son the negative results of a clinical trial for a drug being developed by his company. In turn, Collins’s son, along with his future father-in-law, allegedly sold shares in the company on the basis of the non-public information about the trial results & tipped other persons who also traded. Both of those men were also indicted.
Rep. Collins’s involvement with this company has been the subject of an investigation by the House Ethics Committee. He has denied the charges made against him.
Members of Congress have long demonstrated uncanny abilities as stock pickers – particularly when it comes to industries for which they have oversight responsibilities. In 2012, Congress enacted the STOCK Act, which was intended to combat legislative insider trading. But according to this “Washington Post” editorial, its results have been mixed. The number of trades by legislators has declined sharply since the statute was enacted, but as this excerpt notes, problematic trading practices remain:
Of the senators who remain active in the stock market, they have a high propensity for trading stocks in businesses they directly oversee from their committees. From these perches, members of Congress often are privy to information that could directly affect the value of stocks, posing a serious conflict of interest when trading in those markets.
Politico found a similarly disturbing trend in both chambers of Congress. Politico identified about 30 percent of members of the House and Senate who are currently active in the stock market. Several of these members play in the markets over which they have some direct legislative responsibility — in some cases, even sponsoring legislation that could have a direct bearing on their stock investments.
Regardless of its outcome, the Collins case is a reminder that insider trading on Capitol Hill remains a live issue – and that there’s still a lot of work necessary to drain this part of the swamp.
More On “To Reg FD & Beyond!” – Mr. Musk, We’d Like a Word With You. . .
In what may be the least surprising development in the history of securities regulation, the WSJ is reporting that the SEC has come knocking on Tesla’s door to discuss Tuesday’s series of extraordinary events:
Securities regulators have inquired with Tesla about Chief Executive Elon Musk’s announcement that he may take the company private and whether his claim was factual, people familiar with the matter said.
The SEC has asked the company whether Mr. Musk’s unusual surprise announcement on Tuesday was factual, the people said. The regulator also asked about why the disclosure was made on Twitter rather than in a regulatory filing, and whether the firm believes the announcement complies with investor-protection rules, the people said.
Meanwhile, there continues to be media speculation about whether Musk’s announcement of a possible Tesla buyout via Twitter violated the securities laws.
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So, Elon Musk arrived at work yesterday and decided to tweet this:
Utter chaos then ensued. More tweets followed, Tesla’s stock soared, shorts got squeezed, Nasdaq halted trading, Tesla blogged more details, and the stock began trading again & closed up 11% on the day. Meanwhile, people began to chatter about whether Musk violated Reg FD – or whether he might face bigger legal woes.
The Reg FD issue is an interesting one. Over on “Broc Tales,” Broc had a great blog a while back about the perils of CEO social media accounts & the potential need for a “Twitter baby-sitter.” Mindful of the Netflix 21(a) report, I took a quick look at Tesla’s investor page & didn’t notice anything indicating that Elon’s twitter feed would be a channel of investor information – but that’s because it happened so long ago, in a 2013 Form 8-K (hat tip to this MarketWatch article). Tesla did this in November 2013, the tail end of when a slew of companies filed this type of 8-K in the wake of the SEC’s latest social media guidance (companies seem to have stopped filing those 8-Ks, but that’s for another blog). So, maybe there’s an issue – or maybe there’s not?
Elon Musk has 22 million followers & has been using his Twitter account to share info with investors for years, so it seems like a stretch to say that his tweets aren’t a “recognized channel” for Tesla information by now – particularly given that Tesla 8-K’ed about it five years ago. He’s practically. . . umm – is “presidential” the right word? – in his use of social media to get information out, so while I doubt Elon cares much about Reg FD, my initial impression is that he’s got a decent argument that he hasn’t run afoul of it.
In any case, Reg FD just might turn out to be the least of Elon’s problems when it comes to his unconventional approach to disclosure. As Prof. John Coffee noted in this “Yahoo! Finance” article, Musk may face some exposure if he fudged about the financing:
If Musk’s aim was to temporarily boost Tesla’s stock in order to force losses on short sellers, it could be considered stock manipulation, which is illegal. “That’s too inviting to a plaintiff’s lawyer not to sue,” says Coffee. “This would be an attractive lawsuit. The people who think he’s manipulating the market would say they’ve suffered an injury, and you could pull all those losses together in a class action.”
If, on the other hand, Musk can demonstrate that he has actually arranged financing for a private buyout, or made serious efforts to do so, he might be off the hook.
It should be very entertaining to watch this whole thing unfold, but there’s one question that I’m just dying to get an answer to – what did Elon’s lawyers do to make him hate them this much? Tesla lawyers, the Excedrin’s on me!
Sustainability: Beware The Golden State, Delaware Virtue Signalers!
A few weeks ago, I blogged about Delaware’s new voluntary sustainability certification regime. The state’s new statute goes to considerable lengths to disclaim any liability for actions that boards & corporations take with respect to it – but this recent blog from Keith Bishop says “not so fast.”
It turns out that those companies that want to hang out Delaware’s gold star for sustainability may find themselves in the cross-hairs in California. Here’s an excerpt:
California has enacted an extremely broad unfair competition law, Bus. & Prof. Code § 17200, that seeks to protect both consumers and competitors from any unlawful, unfair or fraudulent business act or practice. By proscribing unlawful competition, California’s UCL does not enforce the borrowed statute, but treats them as unlawful practices that the UCL makes independently actionable. Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., 20 Cal. 4th 163, 180 (1999).
When the inevitable UCL suit is filed in California against a Delaware corporation for allegedly false or misleading “virtue signaling” under the Delaware statute, the California courts will face interesting questions of conflict of laws and comity.
Looks like there’s still no such thing as a free lunch.
Succession Planning: Most CEOs Say They Weren’t Ready
CEO succession planning has become an increasingly important issue – and as Broc recently noted, one that’s even made an appearance in pop culture. However, if you measure a company’s succession planning efforts by the readiness of a new CEO to grab the reins, this Harvard Business Review article says that there’s a lot more work to be done.
According to the article, 68% of CEOs say that they weren’t fully ready for their job – and as this excerpt suggests, that’s not the only shortcoming when it comes to succession planning:
This signals that something is missing in internal hiring and development processes, and in board management of CEOs. Indeed, among CEOs who’d risen in the ranks through their firms, only 28% told us they’d been adequately prepared for the top job, and among all respondents, only 38% said they turned to their board chairman for honest feedback, while only 28% sought counsel from non-chairmen directors.
Egads! That’s practically the definition of a dysfunctional process.
There’s less than a year to go until the new audit report’s required disclosure of “Critical Audit Matters” (or “CAMs”) goes into effect for large accelerated filers – so the Center for Audit Quality’s “Key Concepts & FAQs” on CAMs are pretty timely. Here’s an excerpt on the process of deciding whether a particular matter is a CAM:
The determination of whether a matter is a CAM is principles based, and the new standard does not specify that any matter(s) would always be a CAM. When determining whether a matter involved especially challenging, subjective, or complex auditor judgment, the auditor takes into account certain nonexclusive factors (as specified in the new standard), such as the auditor’s assessment of the risks of material misstatement, including significant risks.
For example, the new standard does not provide that a matter determined to be a significant risk would always constitute a CAM. Some significant risks may be CAMs, but not every significant risk will involve especially challenging, subjective, or complex auditor judgment.
Similarly, the new standard does not require that matters such as material related party transactions or those involving the application of significant judgment or estimation by management always be a CAM.
Audit Committees: Trend Toward More Proxy Disclosure Continues
We’ve previously blogged about the trend toward more disclosure about various aspects of the audit committee’s work. This Deloitte report on the latest proxy season says that trend is continuing – although at a slower pace. Here’s an excerpt:
Our analysis of the S&P 100 companies demonstrates that companies are indeed voluntarily increasing disclosures included in the proxy, albeit at a slower pace in some areas. 2018 results show that disclosures did not increase by more than 10% in any areas covered, except for one, though 80% of the areas analyzed saw an increase in disclosure over last year. The greatest year-over-year percentage increase occurred in disclosures on the audit committee’s role in the oversight of cybersecurity, which increased by 13% since last year.
Other key observations include increases in disclosures around audit committee practices, specifically discussion of management judgments and/or accounting estimates, which increased 6%, and the audit committee’s review of significant accounting policies, which rose 4 percent. However, the analysis demonstrated only a 2% increase in the discussion of issues encountered during the audit.
The report suggests that the requirement for auditors of large accelerated filers to begin disclosing CAM in their audit reports next year may well trigger an increase in company disclosures in related areas.
Annual Meetings: Big Tech Directors Can’t Be Bothered?
This Reuters article confirms every Big Tech company stereotype you’ve ever heard:
A large portion of Alphabet, Facebook, Netflix and Twitter directors have not attended annual shareholder meetings in recent years, company records and securities filings show, in some cases in growing numbers.
Recent high-profile no-shows at the meetings – which are often the only chance “mom-and-pop” retail investors get to ask directors questions – include Alphabet Chief Executive Larry Page and Facebook board member Peter Thiel. The companies declined to discuss the absences in detail.
While big asset managers can get access to directors, shareholder activists and corporate governance experts say the empty seats at annual meetings mean small investors and campaigners challenging directors to make corporate changes may not get to engage with boards.
The article says that only 4 of 8 Facebook directors showed up at this year’s annual meeting. And only 4 of 11 directors at Alphabet – aka “The Company Formerly Known as Google.” Incredibly, Alphabet’s CEO Larry Page didn’t even show up to his own meeting!
Attendance was even worse for some high-profile tech companies that went the virtual annual meeting route. For example, at Netflix’s meeting, only 2 of 11 directors attended – while the CEO was the only director to attend Twitter’s meeting.
Having your directors blow off your annual meeting is a very bad look for any company – much less companies in a sector that’s getting as much negative publicity as Big Tech is.
It seems that SEC Commissioner Hester Peirce could teach Dale Carnegie a thing or two about how to win friends & influence people – at least on the Internet, where she’s become “Twitter famous” & earned the moniker “Crypto Mom.” According to this “Quartz” article, Commissioner Peirce owes her new-found popularity to her dissent from the SEC’s recent decision to refuse to allow the Winklevoss brothers to list their bitcoin ETF:
Crypto Twitter is rallying behind a sympathetic watchdog at the US Securities and Exchange Commission. Not long after commissioner Hester Peirce dissented from the agency’s rejection of a bitcoin exchange-traded fund, her count of Twitter followers soared.
Peirce’s social media exposure got a boost from a Reddit user who goes by lamb0x, who called for readers on the site to “show her some love from the Crypto Community.” She’s not the first buttoned-down American official to win Twittersphere adoration — the Chair of the Commodity Futures Trading Commission, Chris Giancarlo, had his turn in February after he gave Senators an unexpected education on crypto slang during a hearing.
Giancarlo was dubbed “Crypto Dad” by the cryptorati; inevitably, Peirce earned the moniker “Crypto Mom” from some Redditors.
The article includes a chart showing that Commissioner Peirce’s following on Twitter skyrocketed from around 1000 followers to more than 10,000 after her dissent.
Speaking of Twitter, be sure to follow Broc (@BrocRomanek) and Liz (@LizDunshee) – they tweet interesting & relevant stuff. You can follow me too if you want (@JohnJenkins36), but I mostly just whine about the Cleveland Browns.
SEC’s Proposed Transaction Fee Pilot: “Come at Me, Bro!”
Last March, the SEC proposed to implement a “Transaction Fee Pilot,” which would analyze the effects that fees & rebates have on how brokers route their orders to competing markets. It sounds pretty boring, but the comment process for this one has gone off the rails – accusations of “fearmongering” and “misleading” statements have been hurled by one side, while the other has been accused of “making a mockery” of the comment process.
So what is it about the proposal that’s causing such a ruckus? Well, one reason may be that public company stocks are going to play the role of “guinea pigs.” The SEC wants to create three test groups, each composed of 1,000 listed stocks. Each of these groups would have different levels of permissible transaction fees & rebates. For the remaining 5000 or so stocks serving as a control group, it would be business as usual. As proposed, the Pilot would run for up to two years, and companies would not be permitted to opt out from participating in it.
This “IR Magazine” article says that most major institutional investors are all-in on the Pilot, but that the Nasdaq & NYSE are not happy. In addition to concerns about driving trading away from the exchanges, the NYSE in particular has flagged some potentially significant downside consequences for listed companies:
Consider two hypothetical companies which are similar in profile. Both are large listed financial institutions with similar size, business profile and market capitalization. Company A is included in one of the SEC’s Transaction Fee Pilot. Company B is not included and still benefits from an exchange rebate program. We would expect Company A’s average bid-ask spread to widen due to the reduced or eliminated exchange rebates.
All else equal, Company A will now be a less appealing investment than Company B, as a wider bid-ask spread means that investors’ transactions costs will be higher when trading Company A’s stock compared to Company B’s stock.
The NYSE goes on to point out that wider spreads could make securities offerings & buybacks more expensive, and encourages listed companies to weigh-in through the comment process. Some heavy hitters – including P&G, Home Depot & Mastercard – have done so. One of the points made in several comment letters is the Pilot’s potential impact on peer group metrics. Here’s an excerpt from Mastercard’s letter:
The SEC has stated that stocks would be grouped into the control group and test groups based on stratified sampling by market capitalization, share price, and liquidity. This makes it likely that MasterCard, if included in the Pilot, would be separated from a peer group of companies that market partipants and investors compare to assess MasterCard’s financial performance. This separation could distort peer group metrics and complicate the comparison of peers by investors.
A number of companies have also asked to be put in the study’s control group if the study moves forward. In response, the CII followed up with a letter of its own to the directors of the 37 companies that opposed the proposal expressing its concerns about their opposition and its own “enthusiastic support” for the proposal.
The back-and-forth between one pair of commenters has gotten quite heated. In June, the Investors Exchange submitted a letter characterizing the NYSE’s statements as “fearmongering” built on a set of “knowingly false premises.” That prompted a blistering reply from the NYSE, in which it accused the IEX of “making a mockery of the Commission’s comment process” & targeting the NYSE in an attempt “to blame the NYSE for its own business failures.”
ICOs: The First “Token Securities Exchange” on the Horizon?
While the NYSE & IEX were slinging mud over the SEC’s Pilot Program, crypto-platform Coinbase was taking the first steps toward becoming the first national securities exchange for tokens. This recent blog from Gunster’s Gus Schmidt has the details. Here’s an excerpt:
In order to operate an exchange for securities, an entity must register as a national securities exchange or operate under an exemption from registration, such as the exemption provided for alternative trading systems (ATS) under SEC Regulation ATS. An entity that wants to operate an ATS must first register with the SEC as a broker-dealer, become a member of a self-regulating organization, such as FINRA, and file an initial operation report with the SEC on Form ATS.
Because Coinbase is neither registered as a national securities exchange nor operates under an exemption, it cannot operate an exchange-based trading platform for blockchain-based securities. However, the recently announced acquisitions indicate that Coinbase may be headed in that direction. The three companies acquired by Coinbase were:
– Venovate Marketplace, Inc. (registered as a broker-dealer and licensed to operate an ATS)
– Keystone Capital Corp. (registered as a broker-dealer)
– Digital Wealth LLC (registered as an investment advisor)
The blog points out that by acquiring licensed entities, Coinbase may be able to speed up its plan to create an exchange-based trading platform for blockchain-based securities.
Last month, Delaware enacted legislation permitting businesses to signal their commitment to global sustainability by signing on to a voluntary certification regime. Here’s an excerpt from this Richards Layton memo summarizing the statute’s operation:
For an entity to seek certification as a “reporting entity” subject to the terms of the Act, the “governing body,” which is defined generally to mean the board of directors or equivalent governing body, must adopt resolutions creating “standards” (i.e., the principles, guidelines or standards adopted by the entity to assess and report the impact of its activities on society and the environment) and “assessment measures” (i.e., the means by which the entity measures its performance in meeting its standards).
The Act enables an entity to select its own standards, tailoring them to the specific needs of its industry or business. In designing its standards, the governing body may rely upon various sources, including third-party experts and advisors as well as input from investors, clients and customers. The Delaware Secretary of State does not evaluate or pass judgment on the substantive nature of an entity’s standards or assessment measures.
Entities that participate in the regime contemplated by the Act can obtain a certification of adoption of transparency and sustainability standards from the Delaware Secretary of State. Obtaining the certificate involves the creation of a standards statement (which includes the standards and assessment measures), the payment of relatively nominal fees to the Delaware Secretary of State, and the entity’s becoming and remaining a reporting entity. That an entity is a reporting entity allows it to disclose its participation in Delaware’s sustainability reporting regime.
Any entity that wishes to continue as a reporting entity must annually file a renewal statement. The renewal statement requires disclosure with respect to changes to the entity’s standards and assessment measures. The entity must also include in its renewal statement an acknowledgement that its most recent sustainability reports are publicly available on its website, and must provide a link to that site. If the entity fails to file a renewal statement (and thus becomes a non-reporting entity), it may have its status as a reporting entity restored through the filing of a restoration statement, which requires disclosure and acknowledgments similar to those in the renewal statement.
The statute does not give anyone a right to bring claims for an entity’s decision regarding whether or not to become a reporting entity – and there’s no penalty for a reporting entity’s failure to comply with its own standards.
Some people seem pretty excited about this new statute’s potential, but I’m skeptical. Maybe I’m too cynical, but since everything is voluntary & “do-it-yourself” and there’s no real liability exposure, the statute appears to be little more than a mechanism for virtue-signaling. You know what I mean – it’s sort of the corporate equivalent of buying a Subaru.
Universal Proxy: Rumors Say It’s “Face Down & Floating”
Earlier this month, Reuters reported that the SEC has shelved its proposal to implement a “universal proxy”. Despite Reuters’ report, there’s been no official word from the SEC indicating that the proposal has assumed room temperature. If it is gone, we’re kind of sad to see it go. It’s not that we’re pro or con – it’s just that universal proxy’s been such fertile “blog-fodder” for us here & on DealLawyers.com!
We’ve previously blogged about the potential impact on activism of an SEC decision to adopt – or not adopt – the proposal. We’ve also discussed Pershing Square’s unsuccessful efforts to persuade ADP to use a universal proxy card – and, more recently, SandRidge Energy’s decision to become the first company to use a universal proxy card in a proxy contest.
This recent blog from Cooley’s Cydney Posner provides some history on the universal proxy proposal. If the SEC’s proposal truly is on the shelf, it will be interesting to see if there’s a move toward more aggressive private ordering when it comes to the use of a universal ballot.
Cybersecurity: More Scrutiny from Boards than Regulators?
This Deloitte survey says that C-suite execs expect more scrutiny from their boards on cybersecurity programs this year than from regulators. Here’s an excerpt from a press release announcing the results:
As pressure to develop more effective corporate cybersecurity programs continues to mount, 63% of C-suite and other executives in a recent Deloitte poll expect board of director requests for reporting on cybersecurity program effectiveness to increase in the next 12 months. A slightly lower 57% percent of executives expect increased cybersecurity regulatory scrutiny during the same period.
One possible reason for executives’ expectations for increased board attention – the survey says that less than 17% of executives say they are highly confident in the effectiveness of their organization’s current cybersecurity program.
This recent “exechange” report notes that roughly 10% of CEO departures during 2018 at the 1000 largest companies were related to conduct issues – and says that corporate boards are increasingly unwilling to tolerate bad behavior from CEOs.
The report reviews a number of recent high profile departures. It points out that some departures were handled very differently than others – and suggests some reasons why. Here’s an excerpt:
The fact that companies deal in various ways with their fallen CEOs may be related to the specific characteristics of their alleged misconduct. However, it may also highlight differences in corporate governance and raise questions about the independence of the board.
After allegedly or actually violating codes of conduct, CEOs were terminated or resigned “voluntarily.” In some cases, they left with a golden parachute, in others not. In a spectacular case, the board “reluctantly announced” that it had “accepted” the resignation of the CEO, chairman and main shareholder.
On the other hand, boards often take advantage of the opportunity to take the incident as a cautionary tale.
The report notes that in the past, if misbehaving CEOs were ousted, they were “rarely publicly shown the red card.” Instead, those departures were typically characterized in a more neutral fashion. In contrast, one of the striking things about many of the disclosures described in the report is the degree of candor displayed concerning the executive’s alleged misconduct. The times, they are a changin’. . .
CEO Transitions: What Should You Say After You Say “You’re Fired”?
So when you kick your bad actor to the curb, what should you disclose? As this Washington Post article points out, the SEC leaves a lot of that up to you. Here’s an excerpt:
How much detail must companies share when a CEO is asked to leave?
The answer: Not as much as you might think. Within four business days of making the decision, companies must issue a securities filing called an 8-K if a material corporate event occurs, and the departure of a chief executive certainly qualifies. It must include that the fact that the CEO is leaving, what kind of related agreements result from that departure (such as severance pay) and if the CEO is also a director — which a CEO almost always is — whether the departure is the result of a disagreement on “operations, policies or procedures.”
So that’s it, huh? Not exactly – check out our “Checklist: Officer Departures- Procedures” for a more comprehensive breakdown of things you need to think about when you’re transitioning a senior exec.
Activism: When “Santa Claus” Attacks
Here’s something I recently blogged on DealLawyers.com: If shareholder activism ever had an “everybody into the pool” moment, it probably came last month when Berkshire-Hathaway announced that it would withhold support from USG’s slate of directors at its upcoming annual meeting. Berkshire wasn’t happy about the USG board’s decision to stiff-arm a potential bid from Germany’s Knauf. Last week, USG’s board apparently got the message, and agreed to talks with Knauf.
Many have expressed surprise about Warren Buffett’s willingness to openly oppose the board of a company in which he’s invested. But despite his carefully cultivated public image as the genial “Sage of Omaha,” nobody becomes a billionaire without an iron fist somewhere inside that velvet glove. These 2010 comments from Buffett’s biographer, Alice Schroeder, probably ring true with USG’s board right about now:
“When he sees something he doesn’t like in a company whose shares he owns, the famously passive investor can swing into action to protect his investment—jawboning behind the scenes, scolding, cutting opportunistic deals, even hiring and firing CEOs. For some of those on the receiving end of his activism, it can feel a bit like being attacked by Santa Claus.”
Buffett’s actions are a reminder that at a time when longstanding passive investors are more frequently collaborating with activists to “shake things up” at the companies in which they invest, boards & management can take nothing for granted when it comes to investor support. As USG found out, even Santa Claus sometimes puts coal in your stocking.
Yesterday, the SEC proposed amendments to Rule 3-10 & Rule 3-16 of Regulation S-X, which address the financial information about subsidiary issuers, guarantors & affiliate pledgors required in registered debt offerings. Here’s the 213-page proposing release.
According to the SEC’s press release, the proposed changes are intended to “simplify and streamline the financial disclosure requirements” applicable to registered debt offerings for guarantors and issuers of guaranteed securities, as well as for affiliates whose securities collateralize a registrant’s securities. Highlights of the proposed amendments to Rule 3-10 include:
– replacing the condition that a subsidiary issuer or guarantor be 100% owned by the parent company with a condition that it be consolidated in the parent company’s consolidated financial statements;
– replacing the requirement to provide condensed consolidating financial information, as specified in existing Rule 3-10, with certain financial and non-financial disclosures;
– permitting the proposed disclosures to be provided outside the footnotes to the parent company’s audited annual and unaudited interim consolidated financial statements in the registration statement prior to the first sale of securities;
– requiring the proposed disclosures to be included in the footnotes to the parent’s financial statements beginning with the annual report for the first fiscal year during which sales of the debt securities were made.
In addition, the obligation to provide the required disclosures would terminate when the issuers and guarantors no longer had an Exchange Act reporting obligation with respect to the securities – instead of terminating only when the securities were no longer outstanding, as provided under current rules.
– replacing the requirement to provide separate financial statements for each affiliate whose securities are pledged as collateral with financial and non-financial disclosures about the affiliates & the collateral arrangement as a supplement to the consolidated financials for the entity issuing the collateralized security;
– permitting the proposed disclosures to be located in filings in the same manner as the proposed guarantor disclosures under Rule 3-10; and
– replacing the existing requirement to provide disclosure only when pledged securities meet a numerical threshold relative to the securities registered with a requirement to provide the proposed disclosures in all cases, unless they are immaterial to holders of the collateralized security.
By reducing the compliance burdens associated with existing financial statement requirements for these entities, the SEC hopes to encourage issuers to register debt offerings, & thus provide investors with greater protections than they receive in unregistered offerings.
The Weed Beat: Doing Business with Cannabis Companies
With the DOJ’s reversal of the Obama Administration’s policy that provided federal tolerance of any cannabis business conducted in compliance with state law, the risks of doing business with these companies have become a greater concern. This Perkins Coie memo provides an overview of those risks & some tips on how companies can protect themselves. Here’s an excerpt with some questions companies considering such a business relationship should ask themselves:
– To what extent will the cannabis-related activities occur in a jurisdiction where cannabis is legal? So long as key federal concerns, such as violent crime, are not in question, federal prosecutors are unlikely to seek charges against companies that are only indirectly involved in the cannabis industry in states that have legalized the substance.
Indeed, cannabis-related activities that are otherwise legal in such jurisdictions do not involve “victims,” and are unlikely to be viewed as “serious” by USDOJ. An important corollary to this consideration is that the company directly involved in the cannabis industry should fully comply with the drug laws of the states in which it operates. The due diligence factors listed below become even more significant if the cannabis-related activities will occur outside of a jurisdiction where cannabis is legal.
– What is the level of support and involvement that your company is contemplating with the company undertaking cannabis-related activities? Will your company merely invest in or provide passive support to the company that is directly involved in the cannabis industry, or will your company take a predominant role in managing the other company (e.g., through seats on the corporate board)? The more significant your company’s role will be in managing the cannabis-related activities, the greater the perceived culpability of your company for those activities in the eyes of a federal prosecutor.
The memo also points out that companies should be particularly wary of involvement in the financial aspects of the company involved in the cannabis business – there’s a risk that the feds might characterize that activity as money laundering.
– Finders & Unregistered Broker-Dealers
– Governance Perils Involved in Financing Transactions by Emerging Companies
– Impact of the European GDPR on M&A
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According to this “Compliance Week” article, the new audit report standard’s requirement to disclose auditor tenure in audit reports may result in audit committees devoting more attention to tenure-related issues. This excerpt explains why:
There are plenty of public companies that have engaged the same audit firm for decades, according to the latest study. The average tenure for the first 21 companies listed in the Dow 30 is 66 years, the study says. Analysis from Audit Analytics shows nearly 20 companies have had the same audit firm for 100 years or longer – and nearly 200 have had the same firm performing the audit for 50 years or longer. More than 850 companies have engaged the same firm for at least 20 years or longer.
That puts the onus on audit committees to determine whether the company is benefiting or not from a longstanding relationship with the firm. And the new disclosure puts it front and center before investors, which may serve to heighten pressure on audit committees, says Kevin Caulfield, managing director at Navigant Consulting. “Because it’s disclosed now, it’s a chance for audit committees to take that second look to think about are we still getting quality audits from this auditor,” he says.
The article goes on to note that while audit committees must be sensitive to the potential risks associated with long-tenured auditors, they should also consider the benefits associated with having an auditor that is well-acquainted with the company & its operations, systems & processes.
Risk Management: “It’s a Mad, Mad, Mad, Mad World”
Did you know there’s a theory that we’re all just living in a computer simulation – a video game – being played by some super-advanced alien intelligence? If so, then I think that some alien teenager grabbed the controller in 2016 & has been messing with us ever since.
I believe that I can even pinpoint the date that the kid grabbed the joystick: Sunday, June 19, 2016. That’s when Cleveland overcame a 3-1 Golden State lead to win the NBA Championship. That was followed by the Chicago Cubs winning the World Series (against the Indians, no less), and then the 2016 election. . .
It’s been a little more than 2 years, and it looks like the alien kid is still calling the shots (Nick Foles? The Washington Capitals?). Since that’s the case, corporate boards would be smart to take the advice in this EY memo and factor today’s volatile geopolitical environment into their risk management oversight efforts. Here’s an excerpt:
Rising geopolitical tensions and increasing electoral share for populist parties are a concern for businesses. With policy becoming harder to predict, many executives see policy uncertainty, geopolitical tensions, and changes in trade policy and protectionism as key risks to their business.
At the same time, business leaders are optimistic about the near-term US outlook – in part because of deregulation and the passage of US tax reform. In fact, the recent Borders vs. Barriers report from EY, Zurich Insurance and the Atlantic Council indicates that despite concerns about policies restricting their ability to transport goods and raise capital, global CFOs are overwhelmingly bullish on investing in the US – and 71% expect continued improvement in the US business environment in the next one to three years.
These dynamics underscore the need for companies to proactively address strategic opportunities and risks stemming from geopolitical and regulatory changes. For the board to provide effective oversight in this area, it is imperative that directors understand the geopolitical and regulatory landscape and how relevant developments are identified and evaluated within their strategy-setting process and Enterprise Risk Management (ERM) framework. Boards should also consider whether they have access to the right information and expertise to effectively oversee this space.
How to Deal With Leaks
This recent “Corporate Secretary” article by Iridium Partners’ CEO Oliver Schutzman reviews the leak of Saudi Aramco’s financial information to Bloomberg, and uses that as jumping off point for a general discussion on dealing with leaks. Here are some of the article’s “golden rules” for responding to a leak:
– Have a leak strategy in place. Regularly reviewed and updated, the strategy should sit alongside procedures for handling a crisis or operational disaster and should receive the same senior-level investment and attention.
– When a leak occurs, do not embark on a witch hunt to find the leaker. Instead, put all energy and efforts into executing the leak strategy.
– Don’t hide behind ‘no comment’ if there is truth to the leak. Acknowledge it and state the facts. This may be unpalatable and painful. It may involve criminality or unsavory behavior. If this is the case, confess errors and present the measures and consequences taken to ensure prevention going forward. Only by dealing with the substance of a leak can a company regain the initiative
Companies should act to address any shortcomings exposed, & then take back control of the narrative. All actions should be taken with complete transparency.
