Last week, Robinhood announced (on its company blog) that it agreed to buy Say Technologies – the platform that makes it easier for retail shareholders to vote proxies and to ask earnings call questions in real-time. We’ll be watching the potential voting impact of this as we head into the next proxy season. But for now, let’s talk about earnings calls.
Tesla helped pave the trail for Say when it started using the technology for its earnings calls a couple years ago. Back in 2019 – which feels like forever ago – I wrote that Say claimed that retail investors are more likely to ask about products and less likely to care about your detailed financial results – a more entertaining experience for everyone, although possibly less informative for analysts who are honing financial models.
At the time, it didn’t seem like many people would actually find entertainment value in earnings calls, but now it’s 2021 and that’s what’s happening. I blogged a few months ago that a number of companies were courting retail participation in quarterly calls. They’ve had some success! AMC’s latest call was held on Say and yielded 4600 retail questions.
Robinhood and Say both want to make it easier for retail investors to participate as owners. In 2023, will the CEOs of big, established companies be answering questions about their corporate mascots? If I’ve taken one lesson to heart over the past two years, it’s that anything is possible. If you’re looking at using Say, your product development (and mascot) folks might end up with a bigger role in preparing for your quarterly calls.
– Liz Dunshee
This Axios article says that climate change has been getting more attention in S&P 500 companies’ Q2 earnings calls. The article cites to a few examples of companies that gave specific info about ESG activities:
– Qualcomm: “As part of our ongoing ESG efforts, we recently started purchasing 100% renewable solar energy for our San Diego headquarters.”
– Interpublic Group of Companies: “[We] announced an action plan that consists of 3 climate roles: committing to set a science-based target; sourcing 100% renewable electricity by 2030; and joining The Climate Pledge, co-founded by Amazon in Global Optimism.”
– Caterpillar: “Our 2020 sustainability report highlights 7 new environmental, social and governance goals we’ve set to achieve by 2030. … One of these goals is to ensure that 100% of Caterpillar’s new products through 2030 will be more sustainable than the previous generation.”
– Liz Dunshee
Lynn blogged a few months ago that the NYSE wanted FINRA to start taking the lead in setting the fee schedule that brokers use to get reimbursed for proxy distribution costs. The problem was, FINRA didn’t want the responsibility either, and nobody besides the NYSE was very enthused about a change.
Yesterday, the SEC issued this order to disapprove the proposed rule change. The order basically says the NYSE is doing too good of a job here, and it bears the burden of showing that a change to the status quo would still allow issuers’ interests to be continued to be fairly considered. Here’s an excerpt:
The Commission is not foreclosing the possibility that issuers’ interests could be adequately considered in a reimbursement rate-setting process that the Exchange does not lead; however, in the Notice and in its response to the Order Instituting Proceedings, the Exchange did not provide sufficient information in the record on this point. In particular, while the Exchange acknowledges that the impact of eliminating the reimbursement rate schedule from its rules would be that FINRA becomes the de facto lead SRO for rate setting, the Exchange does not articulate or provide any information to suggest how FINRA, notwithstanding its lack of regulatory relationships with issuers, could potentially consider issuers’ interests if FINRA were to become the industry standard-bearer. Nor does the Exchange identify any other existing mechanism through which the interests of issuers could be adequately considered if proposed updates to the rates were to be developed under a FINRA-led regime.
Approval of NYSE’s proposed elimination of its rate schedule therefore would do more than simply conform NYSE’s rules to those of other exchanges; it would result in NYSE’s relinquishment of an important market-wide regulatory function that it currently performs, and without there being evidence in the record of this filing of an available and equally viable alternative for that function.
Earlier this week, I wrote on our Proxy Season Blog about a different NYSE rule relating to proxy distribution costs that the SEC did approve, which may give some relief to companies that saw those costs skyrocket last year.
– Liz Dunshee
Yesterday, the SEC announced insider trading charges against the former head of biz dev at a mid-cap company that was acquired at a premium 5 years ago. The guy was smart enough to not trade in securities of the target company that employed him. Instead, he bought out-of-the-money options in a competitor that was cited by bankers on the deal as a “comparable company” – allegedly based on the confidential info about the deal, and allegedly because he (correctly) assumed that the competitor’s stock price would go up when the deal was announced.
There are some unique facts here, but in insider trading lingo, trading based on confidential info from an employer looks a lot like “misappropriation” – which the Supreme Court upheld as a theory of liability in 1997, in United States v. O’Hagan, and which is reflected in the language of Rules 10b5-1 and 10b5-2. And sure enough, that seems to be how the SEC is positioning the case. Here’s an excerpt from yesterday’s SEC complaint:
– On August 18, 2016, and in the course of Panuwat’s employment at Medivation, Panuwat received confidential, nonpublic information in an email from Medivation’s Chief Executive Officer (“CEO”) that Medivation would be imminently acquired by pharmaceutical giant Pfizer, Inc. (“Pfizer”).
– As an employee and agent of Medivation, Panuwat owed Medivation a duty of trust and confidence, including a duty to refrain from using Medivation’s proprietary information for his own personal gain.
– Nonetheless, within minutes of receiving this highly confidential news from Medivation’s CEO, Panuwat misappropriated Medivation’s confidential information by purchasing—from his work computer—out-of-the-money, short-term stock options in Incyte Corporation (“Incyte”), another mid-cap oncology-focused biopharmaceutical company whose value he anticipated would materially increase when the Medivation acquisition announcement became public. Panuwat did not inform anyone at Medivation about his Incyte trades.
The twist in this case is that the info wasn’t directly about the company whose securities were traded. That competitor company wasn’t part of the deal, but the SEC is claiming that the biz dev guy used material non-public info about the deal to guess what would happen to that other company’s stock when the deal was announced. People who are smarter and more familiar with insider trading case law than me probably have opinions on whether this is an open & shut case – so please email me if you know of some precedent! But for the moment I’m not making assumptions about how the court will come down on this. At any rate, though, the trade seems to have violated the company’s insider trading policy. Here’s what that document said, according to the complaint:
“During the course of your employment…with the Company, you may receive important information that is not yet publicly disseminated…about the Company. … Because of your access to this information, you may be in a position to profit financially by buying or selling or in some other way dealing in the Company’s securities…or the securities of another publicly traded company, including all significant collaborators, customers, partners, suppliers, or competitors of the Company. … For anyone to use such information to gain personal benefit…is illegal. …” (Emphasis added.)
Sometimes when you’re reviewing an insider trading policy, the client asks whether it’s really necessary to include the part about prohibiting transactions in the securities of other companies. These charges are a reminder that it is – because it shows the company is doing its part to prevent transactions that could be illegal, and hopefully it keeps your employees out of hot water too.
If you need to drive the point home, you also now have a brand new case to use as a scare tactic in your compliance trainings. The guy’s profits were only $107k, the company in question wasn’t part of the actual deal, and yet this activity still came to the attention of the Enforcement folks. They’re seeking penalties and a D&O bar – and defense costs probably aren’t cheap.
– Liz Dunshee
Anecdotally, there seems to be a perception among some folks that in-person board meetings yield better interaction & decision-making. But a recent OnBoard survey of nearly 300 directors & staff members says those assumptions could be misplaced. Here are some takeaways:
– The rapid shift to remote meetings created a lot of challenges, but 79% of respondents said their boards have improved effectiveness in the past 12 months, including 56% who said they have improved slightly and 23% who have seen significant improvements in effectiveness.
– A full two-thirds of survey respondents said board collaboration has improved since the shift to remote work and meetings, with 54% saying they have seen some improvement and 12% seeing a lot of improvement. On the flip side, that means that nearly a quarter of respondents said their board’s collaboration deteriorated at least a little since Covid-19 forced their meetings to shift to a virtual format.
– About half said their boards have spent more time discussing strategic issues over the past 12 months than prior to the pandemic, while 39% indicated they spend about the same amount of time discussing such issues.
– When asked to describe the effectiveness of their board’s governance in a virtual environment, 54% of survey respondents said they have achieved good governance under challenging conditions. Board administrators and staff were slightly more affirming, with nearly 60% of non-directors saying good governance had been achieved versus 53% of executive and non-executive directors.
Like many corporate governance issues, investors and advisors may have to get comfortable with the notion that “best practices” don’t deliver the same results for every board. This particular survey seems to support the notion that the “future of board meetings” will include some lessons learned from pandemic times.
– Liz Dunshee
August is a often a busy time for board meetings. While everybody is eager to get back to “normal,” a few folks have told me that their careful plans to resume in-person meetings are getting thrown by the wayside due to the latest Covid surge. This recent straw poll from Financial Advisor IQ is focused on the wealth management field, but says that 38% of professionals are currently rethinking in-person business meetings – and 14% never resumed them in the first place.
Remember that we’re running a “Quick Survey” on board meeting health protocols – here are the results to-date. Please take a minute to participate!
– Liz Dunshee
Yesterday, the SEC announced a $1 million settlement related to “cyber breach” risk factor disclosures and inadequate disclosure controls & procedures. Here are more details:
The SEC’s order finds that Pearson made misleading statements and omissions about the 2018 data breach involving the theft of student data and administrator log-in credentials of 13,000 school, district and university customer accounts. In its semi-annual report, filed in July 2019, Pearson referred to a data privacy incident as a hypothetical risk, when, in fact, the 2018 cyber intrusion had already occurred. And in a July 2019 media statement, Pearson stated that the breach may include dates of births and email addresses, when, in fact, it knew that such records were stolen, and that Pearson had “strict protections” in place, when, in fact, it failed to patch the critical vulnerability for six months after it was notified.
The media statement also omitted that millions of rows of student data and usernames and hashed passwords were stolen. The order also finds that Pearson’s disclosure controls and procedures were not designed to ensure that those responsible for making disclosure determinations were informed of certain information about the circumstances surrounding the breach.
The Pearson action is the second cyber-related settlement out of the Enforcement Division’s Cyber Unit since mid-June. At that time, the Commission settled charges relating to alleged failures in disclosure controls & procedures, which resulted in management lacking the info they needed to make accurate disclosures. Just a few days later, the Enforcement Division initiated information requests relating to the SolarWinds cyberattack. So far, the dollar values of the settlements aren’t huge – but they’re sending a message: be transparent with your disclosures.
If you missed yesterday’s blog, I highlighted sample cyber disclosures – and insider trading considerations. Meredith reminded listeners during our recent webcast that if you have a cyber breach, you don’t just need to close your window, you also need to lock all the doors. The point is, take it seriously. The Enforcement Staff may not be cutting much slack. As always, we’ll be posting memos about the enforcement action and disclosure & governance considerations in our “Cybersecurity” Practice Area.
– Liz Dunshee
We’ve been posting a ton of good memos in our “Nasdaq” Practice Area about the new listing rule that will require listed companies to:
1. Annually provide matrix (or substantially similar) disclosure of board diversity characteristics in the company’s proxy, Form 10-K or on the website, and
2. “Comply or explain” in regards to a new board composition requirement to have at least two “diverse” directors, including one director who self-identifies as female and one who self-identifies as an “underrepresented minority” or part of the LGBTQ+ community
If you’re trying to sort through when exactly you’ll be required to comply with these requirements and whether you’re subject to any exemptions, you’d do well to keep an eye on Nasdaq’s FAQs – which, as our friends at Goodwin pointed out, are now in their third or fourth iteration since the rule was approved. The FAQs:
– Emphasize that companies need to make the initial matrix disclosure in 2022:
• If a company files its 2022 proxy BEFORE August 8, 2022 and DOES NOT include the Matrix, then the company has until August 8, 2022 to provide the Matrix.
• If a company files its 2022 proxy ON or AFTER August 8, 2022, then it must either include the matrix in its proxy or post the Matrix on its website within one business day of filing its proxy.
• If a company only posts the Matrix on its website, then the company has until August 8, 2022 to provide the Matrix. Companies that elect to provide the Matrix on its website must also complete a short form through the Listing Center that includes the URL link to the disclosure.
– Continue to say that companies have until August 7th, 2023 to have at least one “diverse” director on the board (or explain why they don’t) – and a longer transition period for having two diverse directors
– Continue to explain the flexibility for smaller reporting companies, the SPAC exemption, etc.
Nasdaq has also invited listed companies to a series of webcasts – including one at noon eastern today – to help companies understand the listing rules and access free board recruiting services. The webcasts are also available for replay.
– Liz Dunshee
Last week, the SEC Commissioners issued this joint statement to thank Joe Brenner for 10 years of service as the Enforcement Division’s Chief Counsel – where he advised the Director of Enforcement as well as the Staff on investigations and recommendations to the Commission. Previously, Joe had been a Partner at Wilmer Hale.
– Liz Dunshee
Although the SEC hasn’t defined “human capital,” it does require companies to provide info about those resources, to the extent that info is material to the business as a whole. Staff comment letters & revised company disclosures can help us understand what Corp Fin is looking for – or at least what the Staff has flagged as potentially inadequate.
This Bass Berry blog does a nice job of outlining comment letter trends. They note that most of the comment letters so far are on registration statements, not Form 10-Ks. Here’s an excerpt:
As reflected in the underlying data chart, the SEC Staff’s comment on the human capital disclosures often simply cited the new regulation without any further explanation or guidance. However, an analysis of the revised filings by the registrants in response to the SEC Staff’s comments shines more light on the SEC’s expectations, or at least how registrants interpreted the requirements. While there were broad differences in which and how many human capital metrics companies disclosed, the following were the most common:
– Number of employees.
– Geographical distribution of employees.
– Breakdown of types of employees (e.g., full-time, part-time, seasonal).
– Steps taken to identify, recruit, and retain new and existing employees.
– Commitments to diversity and inclusion.
– Whether employees are represented by a labor union or covered by a collective bargaining agreement.
– Status of the company’s relationship with employees (e.g., good, satisfactory).
– Employee incentives and benefits (e.g., insurance packages, stock-based compensation awards, cash-based performance bonus awards).
– Employee learning/development/training programs.
– Core values (e.g., learning, development, inclusion, diversity, teamwork).
– Social impact and social justice initiatives.
– Impact of and response to the COVID-19 pandemic.
– Employee safety measures.
– Diversity statistics.
– Use of employee engagement surveys.
It is clear from our review that human capital disclosures are individualized and industry-dependent. Most filings addressed only a few of these subjects. Companies also varied in taking a qualitative or quantitative approach in response to comments, but the general theme is that quantitative information was typically not provided in the response, and, if it was, the information related to diversity statistics.
– Liz Dunshee
