Here’s the latest “list” installment from Nina Flax of Mayer Brown (here’s the last one):
I’m currently the Office Practice Leader for our Northern California Corporate Group – but long before that I was a cheerleader (national champions in high school and, yes, even for a year in college – that surprises some and not at all others). So I think my “rah rah” focus on team work has been a contributing factor to some of these…
1. We Chide: Mostly about lunch. It is not okay to go to lunch by yourself. If the newer members of our team go to lunch without others, or without at least telling others, they get grief. I think deservingly so.
2. We Dance: Okay, maybe not the collective “we” so much as me. But randomly blasting music sometimes and dancing in the office is fun.
3. We Nickname: One of my close college friends was excellent at nicknaming people. He would “Mc” people. Like Sketchy McSpends-A-Lot (that was seriously one of them). I do not “Mc,” but I have come up with “Stealth” (sometimes referred to as “Sneaky,” when describing the way said colleague sometimes sneaks in or out of the office without saying hello or goodbye), “Stinky” (term of endearment, though said colleague sometimes doesn’t shower before 4am calls, which really we should all think is acceptable) and most recently “Bendit” (because said colleague had his hair cut at a barbershop co-owned by Beckham).
I am frequently referred to as “Stinky” (I promise there is no odor, it is a term of endearment, and has nothing to do with not showering before 4am calls) and “Lil’Bit.” I miss the days of “Bean” or “Neener.” I also miss being more creative – some of our nicknames are still just last names. We are working on that, but you can’t force it.
4. We Prank: There was recently a motion at an all-lawyer lunch (which we have each month) to move all of our snacks from the third floor kitchen to the second floor kitchen. Since we determined that the corporate folks present held proxies for all of the corporate colleagues not in attendance due to work travel and conflicting conference calls, the motion was vetoed. But later that night some elves in the office moved all of the snacks into the motioner’s office. In response, the motioner pretended to get said elves in trouble and spread a message through the office manager and others that snacks were being taken away.
5. We Hang: In the office, by having random conversations in our offices, in the kitchen or even in the hall. And importantly outside of the office, whether it is an impromptu dinner hosted at my house, a soccer game, a toddler’s birthday party or a random home drop-by. I have even helped the other Stinky clean and organize toys on a random Saturday – it was cathartic for both of us.
6. We Walk: Sometimes you just need a break – whether it’s from being indoors, or to vent about something that is on your mind. Me and my chief partner in crime have come up with a path around the office that we frequently walk and that we encourage others to walk with us when necessary – or just whenever!
7. We Conspire: Top of mind on this one is what funny artwork we will hang on Stealth’s wall – because it’s weird that they’ve never hung anything on office walls in years. By the time this is published, I will have brought in a print from my childhood bedroom (yes, that I still own). It is called “Shuffle Off to Buffalo,” by Harry Fonseca. My version of this print has buffalo in pink and white, WITH GLITTER, around the border. I am sure Stealth will love it. And even if they don’t, I suspect they won’t exert the energy to take it down, which is hilarious already. It will be a nice addition to the “farm” picture already pinned up courtesy of the other Stinky’s daughter. Stealth correctly identified the main blob as a chicken.
8. We Gift: Like bringing in an avocado with a “Happy Birthday!” post-it on it for a colleague who is on the keto diet. Or a sign from an event “The Future is Female” to put on a colleague’s door.
Tune in tomorrow for the webcast – “Navigating Corp Fin’s Comment Process” – to hear former Senior SEC Staffers Era Anagnosti of White & Case, Karen Garnett of Proskauer Rose and Jay Knight of Bass Berry explain the process by which the SEC Staff issues comments – step-by-step – as well as provide their practical guidance about how to respond. This program will cover both the basics, as well as advanced issues for practitioners to consider.
Although many of you know our work simply by the names of our “Essential Resources” – e.g. TheCorporateCounsel.net, CompensationStandards.com, Section16.net, DealLawyers.com and our related print newsletters – we’re actually part of a company called “EP Executive Press” that was founded by Jesse Brill over 40 years ago (here’s the last installment of Jesse’s “reminiscences” when the company celebrated its 35th anniversary).
Now, we’re entering another new chapter – with a parent-company rebranding to “CCRcorp.” Our new name stands for “Corporate Counsel Resources” – but I for one will forgive anyone who mixes us up with a certain ’60s rock band, especially since we’ll be “chooglin’ on down to New Orleans” for our “Proxy Disclosure Conference” this September.
You may notice some logo changes following our formal announcement later this week. But rest assured, we’ll be providing the same practical info…and when Broc & John are at the keyboard, it’ll even be entertaining.
Financial Reporting of Climate Issues: On the Rise
Despite this blog in which SASB comes around to website sustainability disclosure, two recent reports indicate that reporting about climate change risks – and opportunities – is moving from standalone reports into SEC filings. First, this big survey from CDP (formerly the “Carbon Disclosure Project”) identifies a number of physical, supply chain, compliance and other risks – as well as cost savings and strategic opportunities – that are financially impacting companies. Here’s an excerpt from this Cooley blog:
The vast majority of the potential financial opportunities were categorized as “likely, very likely or virtually certain.” Of these opportunities, companies reported that $471 billion could be recognizable now, but $1.34 trillion (62%) was expected to materialize in the short- to medium-term. Over $1.2 trillion of these opportunities were identified by companies in the financial services industry, followed by manufacturing ($338 billion), services ($149 billion), fossil fuels ($141 billion) and food, beverage and agriculture ($106 billion).
The Task Force on Climate-related Financial Disclosures also announced the takeaways from its new status report – which looked at disclosures from 1100 large companies in 142 countries. Here’s an excerpt from a Davis Polk blog about the findings (also see this Cooley blog, which emphasizes the report’s suggestions for improvement):
At the time the 2019 status report was written, approximately 800 organizations expressed support for the TCFD framework. This support marks a 50% uptick compared to the number reported in the 2018 version. According to the 2019 status report, the average number of TCFD recommended disclosures per company increased by 29% from 2.8 in 2016 to 3.6 in 2018. Moreover, the percentage of companies that disclosed information that aligns with at least one of the TCFD’s recommendations rose from 70% in 2016 to 78% in 2018.
While companies still disclose more climate-related information that aligns with the recommendations in sustainability reports, the TCFD found that between 2016 and 2018 there was a greater percentage increase in information reported in financial filings or annual reports (by 50%) than the increase in sustainability reports (by 30%).
Tomorrow’s Webcast: “Joint Ventures – Practice Pointers”
Tune in to DealLawyers.com tomorrow for the webcast – “Joint Ventures: Practice Pointers” – to hear Eversheds Sutherland’s Katie Blaszak, Hunton Andrews Kurth’s Roger Griesmeyer, Orrick’s Libby Lefever and Davis Polk’s Brian Wolfe share “lessons learned” that will help you master the art of joint ventures.
At our “Women’s 100” event in NYC, Shelley Dropkin of Citigroup was honored with a lifetime achievement award. Shelley was kind enough to let us blog about her remarks. Here’s an excerpt:
Before I close, I would like to pay tribute to three women who in very different ways inspired and guided me. Interestingly, they are all named Ruth.
For years I carried for inspiration the words of Ruth Bader Ginsburg – who spoke most eloquently about what the support of her mother had meant to her – she described her mother as “the bravest and strongest person I have known, who was taken from me much too soon. I pray that I may be all that she would have been had she lived in an age when women could aspire and achieve and daughters are cherished as much as sons.”
The second is my sister-in -law Ruth Hochberger – Ruth was the editor in chief of the New York law journal raising her children in New York City when we met. She had figured out that balance that so many women were searching for and that I had just begun to grapple with. It was with her as a role model that I figured out that I could make a life as a mother and a professional work – and for that I am grateful.
Finally – and this is the most difficult – is my mother Ruth, who I lost way too young. She believed in me as only a mother can and made me believe in myself. I can only hope that I have provided that same foundation of love and support to my boys. It is to my mom that I dedicate this award.
Our “Women’s 100” Events: 10 Things We Discussed
Our annual “Women’s 100 Conferences” – in both Palo Alto & NYC – continue to be my favorite thing. Here are 10 discussion topics that Aon’s Karla Bos & I came up with for our “Big Kahuna” session:
1. Linking executive compensation to E&S/sustainability metrics: will it get much traction outside of energy companies?
2. State Street’s new “R-Factor” ESG rating
3. Investor & company views on the “Long-Term Stock Exchange”
4. Providing non-GAAP reconciliations in the CD&A
5. Proxy advisor/shareholder proposal reform
6. How to get started with sustainability reporting
7. Investor & company views on involving IR in engagement meetings
8. Equal pay audits & disclosure
9. Investor expectations for “human capital” disclosure
10. How to interact with shareholder proponents at meetings
Sights & Sounds: “Women’s 100 Conference ’19”
This 45-second video captures the sights & sounds of the “Women’s 100” events that recently wrapped up in Palo Alto & NYC:
Since 2002, the Nasdaq & NYSE definitions of “Family Member” have differed – and that’s caused more than a few headaches for anyone who has to prepare or complete a D&O questionnaire or analyze director independence. According to this notice published yesterday by the SEC, the discrepancies are all due to an oversight when Nasdaq paraphrased its definition 17 years ago – and now the exchange is proposing changes to Rule 5605(a)(2) that would essentially revert back to the old formulation.
If the revisions are approved, the Nasdaq definition will no longer include step-children – and there will also be a carve-out for domestic employees who share a director’s home. Of course, the board still has to make an affirmative determination that no relationship exists that would interfere with a director’s ability to exercise independent judgment, and those relationships can be considered as relevant factors. Comments are due in mid July.
On Monday, the SEC also published this notice of an immediately-effective Nasdaq rule change that adds a definition of “Derivative Securities” to the Rule 5615 corporate governance & IM-5620 annual meeting exemptions – and modifies & adds exemptions for issuers of only non-voting preferred securities & debt securities. Nasdaq noted that the proposed changes would substantially conform to the existing rules of NYSE Arca.
Board Leadership Structure: Governance Impact
Investors remain mixed in their view of whether companies should have an independent chair. In this “CLS Blue Sky Blog”, ISS Analytics examines the gap between board leadership practices in the US and the rest of the world – and the possible consequences. Here’s an excerpt:
In relation to board composition, board refreshment and gender diversity improve as independent leadership on the board increases. In addition, shareholder rights and responsiveness to shareholders also improve with increased board leadership.
On the compensation front, companies that lack board leadership tend to pay their CEO at a higher multiple compared to the CEOs of peer companies. However, pay equity within the C-Suite mainly correlates with whether the roles of Chair and CEO are combined. Combined CEO-Chairs tend to get paid more relative to the rest of their executive team regardless of whether there is a Lead Director on the board.
One of the next logical questions is, “Do these consequences ultimately impact company performance?” As you might expect from an academic paper entitled “Irrelevance of Governance Structure,” a couple of researchers say that “shareholder rights” might not matter.
Based on comparing “real world” outcomes to a constructed model of an efficient universe, they conclude that “the relationship between the allocation of control rights and firm performance is more complex than just holding conflicted managers accountable.” In the model, the governance structure was irrelevant when other factors were at play – e.g. shareholders having imperfect information or market power, and managers having meaningful career concerns.
Boards Around The World
Spencer Stuart has taken data from its well known “Board Indexes” (here’s the US version) and created this interactive tool to compare “average” board practices around the world. Topics include board composition, diversity, director pay and board assessments.
Recently, ISS ESG (the “responsible investment” arm of ISS) announced its annual ratings of ESG performance for companies across the globe. At first glance, things look good:
This year’s report finds the share of companies covered by ISS’ Corporate Rating and assessed as “good” or “excellent” (both assessments lead to Prime status) now stands at 20.4 percent, up from just over 17 percent in the previous year. This year’s report also shows that the group rated with medium or excellent performance (on a four-category scale of poor, medium, good or excellent) now includes more than 67.5 percent of covered companies in developed markets. This represents an all-time high over the 11-year history of the report. Similar patterns can be observed among companies in emerging markets, the report finds, albeit at a considerably lower level.
But the jury’s still out on whether companies are following through on the sustainability strategies that they’re touting. We’ve blogged that CSR statements might serve as the basis for plaintiffs’ claims – and the ISS ESG analysis confirms that these types of disputes are on the rise. Here’s an excerpt:
Meanwhile, Norm-Based Research, which identifies significant allegations against companies linked to the breach of established standards for responsible business conduct, saw a more than 40 percent rise in the number of reported controversies across all ESG topics. This exemplifies a growing misalignment of corporate practices with stakeholder expectations that are grounded in UN Global Compact and the OECD Guidelines for Multinational Enterprises.
At the close of 2018, failures to respect human rights and labour rights together accounted for the majority (56 percent) of significant controversies assessed under ISS ESG’s Norm-Based Research. Industries that are most exposed to controversies in the environmental area are Materials, Energy, and Utilities. On social matters, Materials is also leading, similarly followed by Energy and Capital Goods. The governance area sees most controversies within Banks, Capital Goods, and Pharmaceuticals & Biotechnology.
ESG Ratings: Making Sure They’re Accurate
This 19-page DFin paper points out that it’s increasingly important to understand your ESG ratings and correct any errors, because investors are using them to evaluate non-financial performance and compare your company to other investment alternatives (e.g. this blog says that the universe of “sustainable funds” grew by 50% last year – also see this WSJ article). In addition to outlining the issues that factor into ratings, DFin gives seven steps to ensure accurate scoring:
1. Learn about existing ESG ratings frameworks
2. Know your ESG scores
3. Compare yourself to your peers
4. Understand how the various ratings standards compare to one another
5. Attend to the raw data your company provides – the data comes from SEC filings, your website, blogs, social media, etc.
6. Supply information proactively
7. Sharpen your communications
ESG: Advantages for Small & Mid-Cap Companies
We’ve blogged (sometimes more than we’d like) about the growing interest in ESG topics – among institutional as well as retail shareholders, and even credit rating agencies. While most large cap companies are now publishing sustainability reports and incorporating ESG metrics into business decisions, many smaller companies are just beginning that journey.
This blog from Next Level Investor Relations explains how even thinly-staffed small & mid-cap companies can identify strategic & disclosure-based ESG improvements that can improve their business, make important customers happy, and enhance their access capital. Here’s an excerpt (also see this blog from the Governance & Accountability Institute addressing ROI for sustainability efforts):
As highlighted in recent Gartner supply chain research, “ESG has emerged as a source of growth & innovation strategy for supply chains, spurring better performance & mitigating supply chain risks.” So why develop the widget (or ESG disclosure) that nobody wants? What are your customers (and competitors) focusing on in their ESG/Sustainability disclosure and supplier questionnaires?
AlphaSense search on ‘ESG Sustainability AND Profitability’ for the latest 12 months found 56 small and mid-cap companies across 10 sectors, with related disclosure including supply chain policies, expectations and supplier audit practices across the cap range, from $266mm market cap Natural Grocers by Vitamin Cottage [$NGVC] to Tetra Tech [$TTEK] and Goodyear [$GT], market cap $3.3bn and $4.2bn, respectively.
Last December, Broc blogged about the second-ever attempt at using proxy access – via a Schedule 14N filed for “The Joint Corp.” This Form 8-K reports that the nominee was elected – along with all of the incumbents that the company nominated. It doesn’t look like the company put up much of a fight (at least not publicly). The filings indicate that the proxy access nominee was added to the slate in lieu of one of the prior-year directors, who wasn’t renominated.
Our “Proxy Disclosure Conference”: Reduced Rates End This Friday
– The SEC All-Stars: A Frank Conversation
– Hedging Disclosures & More
– Section 162(m) Deductibility (Is There Really Any Grandfathering)
– Comp Issues: How to Handle PR & Employee Fallout
– The Top Compensation Consultants Speak
– Navigating ISS & Glass Lewis
– Clawbacks: #MeToo & More
– Director Pay Disclosures
– Proxy Disclosures: 20 Things You’ve Overlooked
– How to Handle Negative Proxy Advisor Recommendations
– Dealing with the Complexities of Perks
– The SEC All-Stars: The Bleeding Edge
– The Big Kahuna: Your Burning Questions Answered
– Hot Topics: 50 Practical Nuggets in 60 Minutes
Reduced Rates – act by June 14th: Proxy disclosures are in the cross-hairs like never before. With Congress, the SEC Staff, investors and the media scrutinizing disclosures, it is critical to have the best possible guidance. This pair of full-day Conferences will provide the latest essential—and practical—implementation guidance that you need. So register by June 14th to take advantage of the discount.
Tomorrow’s Webcast: “Proxy Season Post-Mortem – The Latest Compensation Disclosures”
Tune in tomorrow for the webcast – “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – to hear Mark Borges of Compensia, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn analyze what was (and what was not) disclosed this proxy season.
– Liz Dunshee
At a recent meeting of the Twin Cities Chapter of the Society for Corporate Governance, Dorsey’s Bob Cattanach shared details on California’s Consumer Privacy Act – or as he called it, “the single most difficult cyber development in the US over the last decade.”
With the legislation set to become effective next January, Bob & other litigators are predicting a surge in class actions for companies that do business in that state. That’s because the provision that allows consumers to recover up to $750 in damages per incident makes it much easier to show that the breach caused injury (and as this Womble Bond Dickinson chart says, a pending amendment may even allow consumers to sue for violations other than data breaches). So plaintiffs’ firms are lining up – and there’s reason to think twice about automatically treating any cyber incident as a “breach,” before you’re certain that breach notification & disclosure requirements have been triggered.
Bob noted that practicing mock breach scenarios under your “incident response plan” is now all the more important. With so much more soon to be at stake, you will need to anticipate the challenges of assessing your many overlapping disclosure obligations, and the likely lack of sufficient & reliable information necessary to make decisions under increasingly shortened time periods, in advance.
For more details on California’s law – and similar legislation that is cropping up in other states – check out the memos in our “Cybersecurity” Practice Area…
Cyber Breach Disclosure: 90% of Incidents Aren’t “Material”?
One of the many things that makes cyber breach disclosure a tricky issue is that the market can get info from notices that are required by state law, even if a company doesn’t disclose the incident in a press release or 8-K. Last summer, I blogged that SEC Commissioner Rob Jackson was concerned that this creates an opportunity for “arbitrage” – and market overreactions.
Disclosure of cyber incidents seems to be trending up, but it’s still rare. That’s according to this WSJ article, which says that Rob is still focused on the issue – and that he thinks companies might benefit from a bright-line disclosure rule. According to his latest research, 10% of known cyber incidents were disclosed in SEC filings in 2018. That compares to 3% in 2017, before the SEC issued its disclosure guidance.
Consistent with those findings, this Audit Analytics blog reports that 121 breaches were disclosed in SEC filings last year – compared to the thousands of breaches & “incidents” identified in Verizon’s latest “Data Breach Investigations Report.” Audit Analytics also found that it takes companies a little over a month to discover a breach and another 4-6 weeks to report it – i.e. 2-5 months between the time of the initial breach and the time of disclosure – and companies vary widely in the level of detail they disclose about the breach.
Meanwhile, this blog says that the SEC’s Enforcement Division remains focused on cybersecurity controls & inadequate disclosure. Relevant factors for investigations include “how the information was accessed, whether there were sufficient walls in place, when the company knew about the intrusion, what the company did in response to the intrusion, and when the company came forward.”
Cybersecurity: When the Threat Comes From Inside
A significant number of cybersecurity incidents & breaches are the result of “privilege misuse” by employees and independent contractors, according to Verizon’s 11th annual “Data Breach Investigations Report.” It also says that “miscellaneous errors” are the second-most common cause of breaches! Hacks can happen if an employee or director is using a personal email account to send confidential documents, or faxing information to an unconfirmed number.
This “Insider Threat Report” – also from Verizon – suggests ways to minimize these internal risks through internal controls. The report’s sample fact patterns could serve as “table top exercises” to help you simulate all of the issues that arise when a data breach happens – including the need to make disclosure & insider trading decisions. Note that Verizon recommends limiting employee access to sensitive data (pg. 9), which is a step some companies are also taking to prevent insider trading. Also see this blog about how law firms can help clients address the risk of internal threats.
Yesterday, the SEC posted this Sunshine Act notice of an open Commission meeting next Thursday – May 9th – to consider whether to propose amendments to the “accelerated filer” & “large accelerated filer” definitions and related transition thresholds (the Commission will also be discussing the cross-border application of rules for security-based swaps). The agenda says that any proposed amendments would be intended to promote capital formation for smaller reporting companies that are currently included in the larger filer categories.
When the SEC adopted the higher $250 million definition for “smaller reporting company” last year, the definitions of “accelerated filer” and “large accelerated filer” didn’t change. As a result, companies with $75 million or more of public float that qualify as SRCs are still subject to the requirements that apply to accelerated filers, including the timing of the filing of periodic reports and the requirement that accelerated filers provide the auditor’s attestation of management’s assessment of internal control over financial reporting – and I blogged that that was a point of contention among the Commissioners.
We’ve blogged a few times since then about SEC Chair Jay Clayton’s desire to promote capital formation – and his view that the SOX 404(b) thresholds play into that. So a proposal to amend the definitions wouldn’t come as a surprise.
Audit Committee Independence: Still Important
We get a pretty regular stream of questions on our “Q&A Forum” to the effect of, “Is it really *that* important for our audit committee members to avoid any potentially conflicting relationships with the company?” And we know our members aren’t just making up these questions for fun – let’s just say, the enhanced independence requirements aren’t always front of mind for every director. If I had a dime for every time one of my clients discovered a consulting agreement that had some sort of tie to an audit committee member…well, anyway:
In remarks yesterday, SEC Chief Accountant Wes Bricker called out independence of committee members as one of the main drivers of audit committee effectiveness – along with time, information quality and training & experience.
So yes, it’s still important to at least one influential person, even as we debate whether the overall trend of “supermajority” director independence is worthwhile. Wes also suggested that the auditor’s understanding of the company’s business & audit risks should be something the audit committee considers when evaluating their performance. And he implied that the idea of mandatory auditor rotation remains pretty dead in the US, despite some European regulators requiring it:
As relevant information for the audit committees’ oversight, I believe it is also essential for the committee members to familiarize themselves with relevant research evidence. For example, existing academic research has not been conclusive on the relationship between an auditor’s tenure and either audit quality or auditor independence. Some studies document that mandated rotation may worsen an auditor’s efforts to be skeptical and may mask company “opinion shopping.” There is also some evidence suggesting that professional skepticism can, in some cases, benefit from a long-term auditor-client relationship.
ESG Ratings: The Field Gets More Crowded
There’s some consensus that ESG ratings are impacting investment decisions – but it’s getting very difficult to keep up with all the offerings. S&P recently jumped into the mix with this “ESG Ratings Tool,” which allows companies to participate in the ratings process from start to finish. Assessments are conducted at the request of & in consultation with a company, and the company can then also decide whether & how to disclose the rating.
Meanwhile, State Street Global Advisors is fed up with the ESG ratings free-for-all and is now applying its own scoring system – “R-Factor.” This Davis Polk blog has the details:
An April 2019 SSGA article provides further insight into which resources SSGA is actually using to generate its R-Factor score for any company. For environmental and social scoring, R-Factor leverages the Sustainability Accounting Standards Board (or SASB) Materiality Map as the key framework for materiality.
SSGA writes that, “The R-Factor scoring model is powered by multiple best-in-class ESG data providers — Sustainalytics, Vigeo EIRIS, Institutional Shareholder Services (ISS) Governance and ISS Oekom — as well as SASB meta-data for categorizing and weighting.” SSGA uses another in-house proprietary tool for governance scoring that takes into account region- or country-specific norms. State Street has stated in other publications that it utilizes the Task Force on Climate-related Financial Disclosures Framework (known as TCFD) and that CDP’s (formally the Carbon Disclosure Project) Framework is another possibility.
It’s a safe bet that the SEC still takes social media more seriously than Elon Musk – whose recent Twitter bio was “Meme Necromancer.” But last week they called a truce in their ongoing battle by filing an amended settlement for court approval (although this WSJ article says that SEC Commissioner Rob Jackson wasn’t happy with the deal). The earlier version required a Tesla lawyer to give advance approval for any tweets that “contain, or reasonably could contain, information material to the company or its shareholders.”
I wrote about how the original settlement didn’t work out so well in practice, when Elon tweeted production numbers without getting pre-approval and the two sides couldn’t agree on whether those numbers were “material.” So, page 3 of the amended settlement attempts to be more specific – it says pre-approval is required for communications that contain information on any of the following topics:
– the Company’s financial condition, statements, or results, including earnings or guidance;
– production numbers or sales or delivery numbers (whether actual, forecasted, or projected) that have not been previously published via pre-approved written communications issued by the Company (“Official Company Guidance”) or deviate from previously published Official Company Guidance;
– new or proposed business lines that are unrelated to then-existing business lines (presently includes vehicles, transportation, and sustainable energy products);
– projection, forecast, or estimate numbers regarding the Company’s business that have not been previously published in Official Company Guidance or deviate from previously published Official Company Guidance;
– events regarding the Company’s securities (including Musk’s acquisition or disposition of the Company’s securities), credit facilities, or financing or lending arrangements;
– nonpublic legal or regulatory findings or decisions;
– any event requiring the filing of a Form 8-K by the Company with the Securities and Exchange Commission, including:
A. a change in control; or
B. a change in the Company’s directors; any principal executive officer, president, principal financial officer, principal accounting officer, principal operating officer, or any person performing similar functions, or any named executive officer; or
– such other topics as the Company or the majority of the independent members of its Board of Directors may request, if it or they believe pre-approval of communications regarding such additional topics would protect the interests of the Company’s shareholders
To anyone involved with insider trading, disclosure, Reg FD or social media compliance, this list looks similar to the materiality examples that those policies typically provide – i.e. info that’s not to be selectively shared, or publicly announced unless it’s fully-vetted. Hopefully there are controls to make sure those policies are followed!
While it’s not a bad idea to cross-check your own policies against this list, if you work with a limit-testing exec, you also might need to remind them it’s a baseline deriving from a (heavily) negotiated settlement – not an exhaustive list. So a principles-based approach remains best for most companies. As this article points out, it’s even hard to determine whether the tweet that caused this scuffle would require pre-approval, since Musk’s lawyers argued that the info was consistent with what was previously published in the company’s Form 10-K. This saga will likely continue.
Still More on “10-K/10-Q/8-K ‘Cover Page’ Changes: Courtesy of the Fast Act”
Yesterday, I blogged that the SEC had (very promptly) posted updated cover pages for Forms 10-K, 10-Q and 8-K – which companies now need to use due to the “Fast Act” rules being effective – and pondered why the Form 10-K cover page seemed to require companies to make redundant disclosure about the title & class of securities registered under Section 12(b). Now the SEC has moved the new “trading symbol” disclosure to a more logical location. The zombie Item 405 checkbox remains, for the time being…
More on “Human Capital: Investor Coalition Sends 45-Page Survey”
Last summer, I blogged about a lengthy survey sent to 500 companies by a 120-member investor coalition called the “ShareAction Workforce Disclosure Initiative.” The initiative stems from the UN’s Sustainable Development Goals and aims to get companies to disclose comparable workforce information. Now the coalition is reporting the results.
First off, 90 companies responded to the survey – which is honestly more than I expected – and apparently more companies plan to report human capital information to WDI in future years. But in most cases, the info they shared wasn’t as specific or transparent as WDI wanted. For example, here’s what the investors say about governance descriptions that were shared in the survey:
Although almost all (98%) companies reported extensively on their governance of workforce issues, the quality of these responses was highly varied and often missing key information. For example, while all companies named an individual or committee responsible for workforce issues, only 40% referred to specific areas of oversight – some companies referred to the credentials of individual board members or the composition of a committee rather than what they were tasked with delivering, while others did not even mention workers in their response. 10% of companies disclosed information on the regularity of oversight mechanisms and internal review of workforce issues (including Lloyds Banking Group).
There were significant weaknesses in the reporting of governance related to the workforce. Around half reported how overall responsibility for workforce issues is filtered down from the board to the rest of the organisation (including AIA Group, BAE Systems, Enel, Pearson, SSE, and Svenska Handelsbanken), and less than half provided specific examples of workforce-related performance indicators (including BHP, Cranswick, Inditex, Intel, Pearson, Veolia, and VW). Most companies only discussed corporate responsibility in general terms rather than linking workforce issues with performance-related remuneration.
The 13-page report summarizes five primary findings. WDI plans to post more analysis – and recommended disclosure & workforce practices – on its website in coming months.
The SEC’s “Fast Act” rules go effective tomorrow – which means you need to start using new cover pages for Form 10-K, Form 10-Q and Form 8-K. I blogged last month about our Word versions – and we’ve updated those to match the format that the SEC has now posted.
Also note that the way the trading symbol disclosure is set up for Form 10-K, companies will now need to identify the title(s) & class(es) of Section 12(b) securities twice on the cover page. That seems a little odd since page 82 of the adopting release acknowledged that the Form 10-K cover page already required that info and implied that the new rules would just add the trading symbol. Some of our members are speculating that this was done to facilitate tagging requirements and others think it was an oversight. Drop me a line if you know!
Fast Act: More FAQs on Expanded Hyperlinking Requirement
With the effective date looming for the Fast Act changes, we’ve been fielding tons of questions in our “Q&A Forum” about the new exhibit and hyperlink requirements. Here’s one (#9868):
Do the recently-adopted FAST Act disclosure simplification rules require registrants to include hyperlinks for the reports that are incorporated by reference into Part II, Item 3 of Form S-8? The adopting release does not mention Form S-8, but the amendments to Rule 411 could impact Form S-8 through general application of Regulation C (per Instruction B.1). Arguably, Item 3 should not be subject to the hyperlinking requirement, because the incorporation by reference required by Item 3 serves a different purpose than the incorporation by reference permitted under Rule 411, and because Item 3 also contemplates forward incorporation by reference (as to which hyperlinking is, obviously, impossible), but I haven’t seen any guidance on this.
John answered:
I think in the absence of guidance from the Corp Fin Staff to the contrary, people should assume that the hyperlink requirement does apply to S-8s, for the reasons you suggest. People raised the issue about forward incorporation by reference for other registration statements during the comment process, but the SEC wasn’t persuaded. See the discussion on pg. 77 of the adopting release.
In addition, John blogged last week about informal Staff guidance that suggests a link isn’t required if you’re incorporating by reference from one item to another within the same filing. Now, Bass Berry’s Jay Knight has followed up with thoughts on another common situation:
Question: How does this new hyperlinking requirement apply when the registrant cross-references the reader to other information that is contained either within the same filing or in a prior filing, without explicitly incorporating the information by reference?
For example, is a hyperlink required if the registrant in the legal proceedings item in Form 10-Q says that no material updates have occurred since the last Form 10-K and cross-references the reader to such prior disclosure, without explicitly incorporating the information by reference?
Here’s Jay’s answer:
Answer: Based on a review of the rules as well as the SEC’s adopting release, we believe it is reasonable to conclude that a “cross-reference” to other information, whether in the same or prior filing, should not be treated the same as the disclosure by a registrant that such other information is “incorporated by reference.” We believe this view is supported by the language in the new rules where incorporation by reference and cross-referencing are mentioned separately.
For example, new Rule 12b-23(b) states, “In the financial statements, incorporating by reference, or cross-referencing to, information outside of the financial statements is not permitted unless otherwise specifically permitted or required by the Commission’s rules or by U.S. Generally Accepted Accounting Principles or International Financial Reporting Standards as issued by the International Accounting Standards Board, whichever is applicable.” (emphasis added) We believe the phrase “or cross-referencing to” demonstrates that the SEC views incorporating by reference and cross-referencing differently.
In contrast, Rule 12b-23(d), which is the operative rule related to hyperlinking in the Form 10-Q context, omits any reference to cross-referencing. Rule 12b-23(d) states, “You must include an active hyperlink to information incorporated into a registration statement or report by reference if such information is publicly available on the Commission’s Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”) at the time the registration statement or form is filed.”
Therefore, unless the registrant specifically incorporates by reference the information (perhaps even using that language explicitly), we believe it is reasonable to conclude that a hyperlink is not required by the new rules.
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