The US is expected to reach its statutory debt ceiling tomorrow, unless both the House and the Senate can agree to a solution. This Politico article says that the looming fight will be one for the ages. It will likely drag on for months while the Treasury Department is left to cut certain contributions to avoid immediate sovereign default on US debts. The article says there’s not even the “hint of an endgame” right now.
The stalemate isn’t doing companies any favors. A new memo from Davis Polk outlines what you need to be thinking about as we face the prospect of dysfunctional US credit & capital markets – which the memo cautions is a threat at this point regardless of whether a sovereign debt default actually occurs. The Davis Polk team shares action items for:
– Board risk oversight
– Access to liquidity – capital markets & drawing on revolvers
– Annual reporting cycle – including guidance, annual reports currently underway, risk factors and forward-looking statements, and MD&A trends
– Other disclosure & market communications – potential Form 8-K triggers and insider trading issues
– Opportunistic acquirers & activist interest
– Impact on pending transactions
– Stock buybacks & 10b5-1 plans
– Executive & director compensation and other HR considerations
– D&O coverage
The memo points out that 2011 could be a good reference point for risk factor updates. Here’s more detail:
Companies will need to take a fresh look at their risk factors and forward-looking statement disclosure to ensure they adequately address the threat of a U.S. sovereign default, particularly if a company has not engaged in this exercise since 2011 when the United States first lost its triple-A credit rating.
While the SEC does not expect companies to include generic risk factors about events that affect companies broadly, companies should consider any specific impact on their own activities that could require such disclosure.
The debt ceiling isn’t the only threat on the minds of executives and investors right now. According to PwC’s annual CEO survey, 73% of global CEOs believe economic growth will decline this year – the most pessimistic outlook in a decade. What’s even more surprising is that 40% of CEOs believe their companies will go under within the next decade if they continue on their current path. Wow.
In line with that mood, yesterday’s NYT Dealbook shares that the key word at Davos this week has been “polycrisis” – the “swirl of global emergencies that include economic slowdowns and rising inflation, the war in Ukraine and more.” The World Economic Forum’s Global Risks Report and summary delve into the near-term and longer-term risks that are keeping execs up at night. Lawrence observed last week on PracticalESG.com that boards, execs & advisors are not only facing immediate risks, but also can’t take their eye off the ball when it comes to longer-term issues. The PwC survey reinforces that:
Climate change exemplifies a time-horizon challenge that comes into clearer focus when we look at a broader set of external threats to the global economy. Over the next 12 months, CEOs feel most exposed financially to inflation, economic volatility and geopolitical risk. All three are immediate, headline-grabbing issues that can reinforce and compound one another, as, for example, the war in Ukraine pushes up prices, encouraging central banks worldwide to intervene through growth-dampening interest rate hikes.
The picture changes for CEOs’ medium-term (five-year) outlook. Over that time frame, cyber risks and climate change join inflation, macroeconomic volatility and geopolitical conflict in the top tier of risk exposure.
The question that will come to mind for securities lawyers is, “Do we need to update corporate disclosures to reflect this ‘polycrisis’?” It’s a sensitive area, but this environment does seem to be calling out for a careful overview and update of risk factors, forward-looking statements, and MD&A “known trends & uncertainties” disclosures. If the company knows of specific risks & consequences, it can protect itself by warning shareholders (in a “non-hypothetical” way). I blogged a few months ago about risk factor tips – and we have lots of practical resources in these Practice Areas:
Also check out our deep dive into the practical aspects & process for updating your risk factors in the January-February 2018 issue of The Corporate Counsel newsletter – which recommends using your risk management program, minutes, and analyst reports as a resource for your risk factor review.
If you don’t already have access to our Practice Area resources or electronic back issues of newsletters, reach out to sales@ccrcorp.com for a no-risk trial.
Tune in at 2pm Eastern tomorrow for the webcast – “The Latest: Your Upcoming Proxy Disclosures” – to hear Mark Borges of Compensia and CompensationStandards.com, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of Morrison Foerster and TheCorporateCounsel.net, and Ron Mueller of Gibson Dunn discuss all the latest issues to consider as you prepare your upcoming proxy disclosures – including how to present newly required pay vs. performance data. Understand what to expect for the upcoming proxy season, so that you can prepare your directors and C-suite – and handle the challenges that 2023 will throw your way.
We are making this CompensationStandards.com webcast available on TheCorporateCounsel.net as a bonus to members – it will air on both sites. And because there is so much to cover, we have allotted extra time for this program! It’s scheduled to run for 90 minutes.
If you attend the live version of this 90-minute program, CLE credit will be available. You just need to fill out this form to submit your state and license number and complete the prompts during the program. All credits are pending state approval.
Members of TheCorporateCounsel.net are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. If you have any questions, email sales@ccrcorp.com – or call us at 800.737.1271.
On Friday, the SEC announced that Renee Jones, who has been the Director of Corp Fin since June 2021, will be departing the agency February 3rd to return to her faculty position at Boston College Law School. Erik Gerding, who is currently Corp Fin’s Deputy Director, will be appointed Director.
Renee hit the ground running and had a very busy tenure as Director. The SEC’s press release highlights the rulemaking and other activities that have happened during the past 1.5 years:
While in the role, she oversaw the Division’s work that resulted in the proposal of 12 rules and the adoption of nine rules covering topics such as the disclosure of climate-related risks and cybersecurity risks, special purpose acquisition companies, executive compensation, and insider trading. She also oversaw the Division’s disclosure review program as it sought enhanced corporate disclosures on climate risks and crypto asset risks, and implemented the Holding Foreign Companies Accountable Act.
As many folks reading this know, in addition to many years as a law professor, Erik started his career as a lawyer at Cleary. Here’s more detail:
Mr. Gerding joined the SEC in October 2021 and leads Legal and Regulatory Policy in the Division of Corporation Finance. He has taught as Professor of Law and a Wolf-Nichol Fellow at the University of Colorado Law School, where he has focused in the areas of securities law, corporate law, and financial regulation. Mr. Gerding previously taught at the University of New Mexico School of Law. He also practiced in the New York and Washington, D.C., offices of Cleary Gottlieb Steen & Hamilton LLP, representing clients in the financial services and technology industries in an array of financial transactions and regulatory matters. He received an undergraduate degree from Duke University and a J.D. from Harvard Law School.
I look forward to seeing what Erik does as Director. As John and Dave recently blogged, Chair Gensler has put forth another ambitious Reg Flex Agenda for the upcoming year.
In the latest sign that the SEC’s Enforcement Division continues to investigate whether public companies are properly disclosing cyber attacks – and whether any insiders have made trades based on material non-public information about incidents – it’s come to light that the SEC has now asked at least one law firm to give it the names of clients that were affected by a breach. Understandably, the firm is not planning to voluntarily comply – so the Commission is taking the matter to court.
Last week, the SEC announced a subpoena enforcement action against Covington, looking to get the names of clients that were affected by a cyber attack against the firm in November 2020. Here’s the SEC’s court application to compel compliance with the subpoena, and supporting documents. Here’s more detail from the SEC’s press release:
Through its subpoena enforcement action, the SEC is seeking only the names of those clients whose files were viewed, copied, modified or exfiltrated by the threat actors. According to the filing, the SEC seeks this information to assist it in identifying any suspicious trading by the threat actors or others in those clients’ securities, and whether such trading was illegal based on material non-public information that the threat actors viewed or exfiltrated as part of the cyberattack.
In addition, the information will assist the SEC in determining whether the impacted clients made all required disclosures to the investing public about any material cybersecurity events in connection with the cyberattack. To date, Covington has refused to provide the names of all but two of the clients, and those two clients consented to providing their names to the SEC.
The SEC is seeking a court order from a DC District Court and is also continuing its fact-finding investigation. The Commission acknowledges that to-date, it has not found any violations of securities laws.
Covington’s counsel and other white collar lawyers are saying that if the SEC succeeds with its request, it could have implications for whether attorney-client privilege will hold up in the face of government investigations. This Law.com article reinforces why law firms will find this problematic – and says the SEC has a steep hill to climb:
In order to succeed, Rahman said the SEC would have to convince the judge that there’s no other way to get the information to conduct its investigation.
“The SEC has a ton of investigative tools at its disposal,” she said. “Asking a firm for a confidential information should be a last resort and they don’t say they used any other avenues.”
The SEC’s focus on cyber matters carries forward clear priorities from the past two years. In addition to the SEC aiming to adopt “cybersecurity risk governance” disclosure rules in April of this year, the Enforcement Division contacted companies affected by the December 2020 SolarWinds attack in a June 2021 enforcement sweep. The SEC also reorganized and created 20 new Enforcement positions dedicated to crypto & cyber last spring.
Here’s something John blogged on CompensationStandards.com last week:
The messy story of McDonald’s Corporation’s decision to terminate its former CEO Stephen Easterbrook added another chapter yesterday, when the SEC announced that it had initiated settled enforcement proceedings against the former CEO and the company arising out of his departure. This excerpt from the SEC’s press release explains its allegations:
According to the SEC’s order, McDonald’s terminated Easterbrook for exercising poor judgment and engaging in an inappropriate personal relationship with a McDonald’s employee in violation of company policy. However, McDonald’s and Easterbrook entered into a separation agreement that concluded his termination was without cause, which allowed him to retain substantial equity compensation that otherwise would have been forfeited. In making this conclusion, McDonald’s exercised discretion that was not disclosed to investors.
Subsequently, in July 2020, McDonald’s discovered through an internal investigation that Easterbrook had engaged in other undisclosed, improper relationships with additional McDonald’s employees. According to the SEC’s order, Easterbrook knew or was reckless in not knowing that his failure to disclose these additional violations of company policy prior to his termination would influence McDonald’s disclosures to investors related to his departure and compensation.
Without admitting or denying the SEC’s allegations, Easterbrook consented to a cease & desist order prohibiting future violations of the antifraud provisions of the federal securities laws, and imposing a $400,000 fine and a five-year officer and director bar. The company consented to a cease & desist order prohibiting future violations of Section 14(a) of the 1934 Act and Rule 14a-3 thereunder.
As Liz blogged last year, the company sued the former CEO and reached a settlement under which it “clawed back” over $100 million in equity awards and cash based on the company’s claims that the board wouldn’t have approved a separation agreement characterizing his termination as “without cause” if it had been aware of his dishonesty and additional misconduct. The company’s efforts to claw back that compensation, together with its other efforts to cooperate with the SEC’s investigation, resulted in the agency’s decision not to impose a financial penalty on the company.
Commissioners Peirce and Uyeda dissented from the SEC’s decision with respect to the company. In their dissenting statement, they expressed their view that the SEC was rewriting the disclosure requirements of Item 402 of Reg S-K through an enforcement proceeding. Here’s an excerpt:
We are unaware of prior Commission or staff actions or positions applying Item 402 in the way that the Order does. Additionally, the Order can be read to suggest that the underlying reasons for why the company decided to terminate a named executive officer “without cause” instead of “with cause,” and vice versa, need to be disclosed under Item 402. Such “hiring and firing discussion and analysis,” however, is beyond the rule’s scope.
The statement went on to note that industry practice for complying with Item 402 has developed over many years, and that an enforcement action is not “a reasonable regulatory approach” for announcing a novel interpretation.
It seems to me that the dissenters make a good point – executive termination disclosures tend to be terse, often for sound business and legal reasons. Imposing a requirement that companies must disclose the reasons why they opted to treat a particular termination as being “without cause” adds another layer of complexity to an already challenging process, without in most cases providing a significant benefit to investors.
Thanks to everyone who responded to my blog earlier this month with well-wishes and practical tips on “boundaries” in client service. Your heartfelt encouragement has put wind in my sails. And I’ll reiterate: it’s not goodbye. I look forward to staying involved here, hopefully for a long time!
I heard from folks who have chosen a variety of professional & personal paths, which was inspiring in & of itself. But they all share a few traits with everyone who reads this blog: we’re interested in corporate & securities issues, we’re high performers, and we like to be “in the know.” A dozen common themes emerged:
1. Remember Your Current Goals & Be Strategic: Whatever your current goals are, embrace them without shame and know you’ll need to be strategic to accomplish them. Whenever you are faced with an “ask” that involves using your finite time, ask yourself whether it furthers those goals. If not, pass. Just because you could help solve a problem, doesn’t mean you need to. That may mean passing along opportunities for speaking, committees, or even client matters to someone else.
2. It’s Okay If Your Goals Change: Your goals at 50 probably aren’t the same as what they were at 30. Life is dynamic. Know your values (and your value) – and go with the flow.
3. Practice Saying No: When something is difficult, you need to practice. Write down phrases that will help you say “no” – so that it’s easier to follow through with that in the moment. Example: “Because of competing demands for my time, I have a policy that I won’t open new clients unless the fees are very likely to be at least $X [or we set a minimum fee of $X]. This helps me to ensure that I can focus on the clients that I do take on.”
4. Be Consistent: Set “working hours” and stick to them. Only deviate if there is a true “emergency” – and define “emergency” in a way that means it happens only once/month instead of once/week. Whatever you determine is the best schedule for you (7am – 4pm, 9am – 6pm), block your calendar so that calls aren’t scheduled during your non-working hours. This also gives predictability to your clients and colleagues. It’s a slippery slope if you start to let those boundaries slide.
5. Let It Burn: In the words of one member – “You might ask, ‘But what if there is important work that must get done?’ The answer is it can wait until tomorrow and, if it can’t and the place catches on fire, ‘forget it — let it burn.’ As I am sure you can guess, the place hasn’t burned down. In fact, my team has flourished. I think I’ve had a profound impact on the younger partners and associates behind me because I’ve shown them how this can be done and that, despite what conventional wisdom would have them think, the practice isn’t where we derive our value and we shouldn’t kill ourselves for the benefit of it. Moreover, it has helped them grow because I have empowered them with my absence.” Clients, this does not mean that we are going to let you go up in smoke, it means you have a team to help you instead of just one person. And on that note…
6. Find Your Team: Make your specialty known and valued, but also establish a “team” mentality. Communicate to colleagues and clients who they can go to as a backup when you’re not available. This is a benefit to them, not a detriment, because they get double (or triple) the experience. Have confidence in your team – don’t second-guess each other.
7. Communication is Key: Communicate your schedule and approach to colleagues and clients. Sometimes you have to say “no” to clients or at least advise on timing. Most respect that approach. If they don’t, then keep your goals in mind, and consider gently advising them that you may not be the best fit to serve their needs. Communicate with your team so that everyone who is staffing a particular client is up-to-speed and you can all sub in seamlessly. This requires intentional effort, but it’s worth it.
8. Set Your Out of Office: I used to work with clients who would immediately call the next lawyer on their list if they got a bounceback – so there is some risk to doing this. But it goes back to communication. If you’re going to be “out” for a few hours at night or for a vacation, tell people! Also tell them when you’ll return and who they should go to in your absence. I’ve noticed that the pandemic led to a lot more auto-replies along the lines of: “I’m offline after 5pm ET each night and will respond to your message when I return to my desk at 8am tomorrow. Please contact […] if you need urgent assistance.” And I got a lot of love for my “vacation trailer” auto-reply this summer. I hope the profession has turned over a new leaf.
9. Be Open to Unique Arrangements: Law firms – and companies – are starting to recognize that we’re not all identical cogs in the machine. There are new roles emerging for people at all levels of seniority. If you have an ideal type of work or arrangement, you might be surprised by the receptiveness. For example, some accomplished and semi-retired lawyers are happily pitching in on “overflow” work during proxy season.
10. Don’t Judge Yourself (Or Others): Life is short and tomorrow is not guaranteed. I was touched that people in our community who have been navigating traumatic events wrote in to share their perspective, and this is the message they want us all to know: Make the most of today. Be confident and comfortable in your choices (remember your goals). Never explain why you need to be somewhere other than work. Just say you have a conflict. We don’t need others to evaluate whether our family, health, or other personal obligations are a worthy reason for being unavailable.
11. Have an Accountability Partner: If you imagine it will be difficult to stick to your set schedule, get yourself an accountability partner. Text each other every day when it’s time to close the laptop.
12. Know That You’ll Make Mistakes: I’ve been processing these tips while also watching Stutz on Netflix (thanks, Mel). Jonah Hill’s therapist says that success is the sum of large & small actions – you just have to keep putting the next pearl on the string. But: “Within each pearl is a turd.” Meaning, no effort will be perfect – just keep moving. Others put it this way: “I have so many balls in the air, I have to be okay with a few on the floor.” That’s life, let’s go live it!
Happy “festive season,” everyone. Thanks again to everyone who reads this blog and subscribes to our sites. Big thanks as well to all of you who participate in our community through events, responding to these blogs, posting on the Q&A forums, or otherwise – including this blog’s “list contributor” from a few years ago, Nina Flax, who this list reminds me of. See you in the New Year!
It’s with great sadness that I share that Mary Hartman Morris has passed away. Mary was a longstanding fixture in the corporate governance community and a frequent speaker and participant in our events. She was always ready to share her reasoned perspective and kind smile. The news of Mary’s passing comes as we are all still grieving the loss of Sister Pat and Scott Spector, as well. Here is more information from the CII:
Mary Hartman Morris, a trailblazer for strengthening corporate governance and enhancing the quality of accounting and auditing, died earlier this month. An active CII member for many years, Mary was an investment officer for CalSTRS and was instrumental in the pension system’s work on corporate board diversity in the United States and globally. Before joining CalSTRS, Mary worked for more than 20 years at CalPERS, first in the audits department, and then for a majority of her career in the corporate governance unit. She retired from CalSTRS in 2021.
During her career, Mary served on the Public Company Accounting Oversight Board’s Standing Advisory Committee, the Financial Accounting Standards Board’s Investor Technical Advisory Committee and the International Corporate Governance Network’s Accounting and Auditing Practices Committee. Mary also co-chaired the Human Capital Management Coalition.
Our condolences go out to all of Mary’s family and friends, and to everyone who has lost someone they love this year.
As you look ahead to the new year, this 5-page Freshfields memo identifies trends in 7 key areas that you may want to raise with your board (or at least be prepared to discuss). Specifically:
– How to Be Prepared for M&A Strategies in 2023
– Fiduciary Duties in a Distressed Market
– Risk Oversight
– Activism
– Governance (Proxy Season & Disclosure)
– Compensation
– Cyber & Privacy
The Freshfields team explains that Delaware developments & recent SEC initiatives make it important that boards have adequate time to oversee “mission critical” risks – and that the record clearly reflects those efforts. They recommend 4 improvements to board structure & documentation (see the memo for even more context):
1. We are recommending that boards consider, as appropriate, creating specialized board committees to monitor discrete [“mission critical”] risks or ensuring that review of such risks expressly lies within the purview of existing committees, requiring dedicated management level teams to report periodically to the board on these risks, and engaging outside experts to conduct risk audits to ensure that the mission critical areas are being properly identified and addressed.
2. To receive credit for their work in fulfilling their duty of care, we are recommending that boards and committees adopt a more nuanced approach to minute-keeping, adding sufficient detail to show monitoring, consideration of, and reaction to, risks. We also recommend that minutes reflect factors and analyses considered in reaching decisions and list requests for management follow-up.
The minutes of subsequent meetings should reflect the extent to which management follow-up has occurred and whether the board is satisfied with management’s response or requests more follow-up. It is further important to record in the minutes (through addendums and introductory paragraphs) director interactions that occur between formal meetings, particularly if these discussions bear on significant board issues.
3. We recommend ensuring that comprehensive board-level records exist to obviate the need to delve into the directors’ and management’s emails, texts and internal materials [in response to expansive “books & records” demands]. In addition, we recommend additional management and board level trainings on best record-keeping practices and the use and preservation of privilege.
4. On the federal enforcement side, we recommend that audit committees review company preparedness for responding to regulatory inquiries and have a roadmap for responding constructively to potential subpoenas or requests for voluntary cooperation.
