Yesterday, Corp Fin added to its “CF Disclosure Guidance Topic” series with “Topic No. 10: Disclosure Considerations for China-Based Issuers.” It summarizes risks and corporate law & reporting differences that the may be unique to companies that are based in or have the majority of their operations in China – and lists questions for these companies to consider when drafting disclosures.
Corp Fin’s disclosure guidance isn’t completely unexpected. In August, I blogged about recommendations from the “President’s Working Group on Financial Markets” – a regulatory council whose members include SEC Chair Jay Clayton and Treasury Secretary Steven Mnuchin. The recommendations included the adoption of more specific disclosure requirements – or interpretive guidance – about the risks of investing in companies from “non-cooperating jurisdictions” like China.
The working group also recommended enhanced listing standards to ensure PCAOB access to audit work papers for Chinese companies. This Bloomberg article says that the SEC is planning to move forward with that initiative and might issue a proposal before year-end that could result in many China-based companies being delisted. Adoption of any proposal would then be left in the hands of the new SEC Chair – whoever that ends up being.
“Human Capital” Disclosure: SASB Sums Up Its Resources
Yesterday, SASB published this 10-page “Human Capital Bulletin” – which summarizes elements of SASB standards that can help companies prepare human capital disclosure as required by the recent amendments to Reg S-K. Here’s what it includes:
• A list of SASB industry standards that contain topics and metrics related to human capital.
• An overview of selected human capital-related topics and metrics across all 77 SASB industry standards – specifically, standards on labor practices; employee health & safety; employee engagement, diversity & inclusion; and supply chain management
• A summary of SASB’s Human Capital Management Research Project, which has the objective of identifying opportunities for the SASB Standards to further account for human capital-related risks and opportunities
The new Human Capital Bulletin follows updates last week to this statement from the SASB Investor Advisory Group. The statement – which hadn’t been updated since the Investor Advisory Group was formed in 2016 – urges companies to include SASB-based disclosures in their ESG communications to investors and now emphasizes that other reporting standards and frameworks may complement SASB standards, but aren’t replacements for them. Also see this SASB press release.
For more tips on human capital disclosure, make sure to tune in to our upcoming webcast, “Modernizing Your Form 10-K: Incorporating Reg S-K Amendments,” on Tuesday, December 8th, 2020 at 11am Eastern (note, this is an earlier time of day than most of our webcasts). If you attend the the live version of this program, CLE credit is available in the following 10 states:
CA, FL, IL, NC, NJ, NY, PA, TX, VA, WA.
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Thanksgiving: Different Look, Fresh Gratitude
Thanksgiving is looking different this year for a lot of folks. As I count my blessings, this community looms large. I’m grateful to get to connect with you all from afar – nerding out on corporate governance, securities and ESG, and sharing the highs & lows of work and life in general. Hopefully what we do around here is also making your work lives a little easier in the midst of everything that’s been happening this year. Thank you to everyone who follows this blog, subscribes to our sites, speaks at or attends our events, and reaches out with interesting stories, tips and questions. We couldn’t do it without you!
Now, on to the recipes, since John is handling the blog tomorrow and we’ve got to keep up our streak of “foodieblogs.” I plan to be feasting on more leftovers this year than usual. This article from the Kitchn will help you turn one turkey into 9 freezer meals to enjoy in the weeks and months ahead.
On Friday, the Corp Fin Staff updated its statement on use of electronic signatures in light of Covid-19 concerns to say that it would not recommend enforcement action with respect to Reg S-T signature requirements for companies that comply with amended Rule 302(b) in advance of the effective date.
As I blogged back in June, the statement also extends for an indefinite time the temporary “Covid-19” signature relief that allows signatories to retain manually signed pages and deliver them to the company for retention as soon as reasonably practicable.
Dates for Electronic Signatures: Controlling for “Time Stamps”
If an officer decides to authenticate his/her signature electronically (once the new rule goes into effect) via DocuSign and does so a day or two in advance of an electronic filing with the SEC, should the signature page filed with the SEC bear the date that matches that date/time stamp or can it still bear the date of the filing?
John responded:
I don’t think there’s ever been a hard and fast rule regarding the date of an individual’s signature on a 10-K or 10-Q filing. Rule 302 of S-T simply requires (as it always has) that the authentication document “shall be executed before or at the time the electronic filing is made.” That being said, I think the more common practice is to date the signature page the date of the filing, and I think that’s a better practice in this situation.
The reason I say that is that the filing speaks as of its date, and the officer’s responsibility for the accuracy of its contents does not end prior to the time that the document is filed. While obtaining signatures (electronically or otherwise) a few days in advance may be a matter of convenience, I think the company’s procedures should make it clear that a signatory’s responsibility for the filing do not end on the date that he or she has authenticated their signature, and that the signature in the filing will be dated as of the filing date.
I think the potential problem with not taking this approach can be illustrated by a situation in which the company obtains an officer’s signature a few days in advance of filing the 10-Q, but during the interim, there is a development that requires a subsequent event footnote. Now the company would find itself in a situation in which the officer has signed a document as of a date that precedes the date of a specific disclosure included in the document. I think a situation like that may well implicate the company’s disclosure controls and procedures unless it is clear from its policies that the signatories understand as of what date their signatures speak, and that their responsibility for the accuracy and completeness of the filing do not end with the date they sign it.
Auditor Independence: PCAOB Amends Standards to Align with SEC
Last week, the PCAOB announced it had adopted amendments to its independence standards to align the Board’s requirements with the SEC’s recent revisions to auditor independence rules. The PCAOB rules will be effective subject to SEC review.
Yesterday, Corp Fin issued three FAQs to address transitional issues that companies have been wondering about in light of the recent amendments of Regulation S-K Items 101, 103 and 105, which are effective for filings made after today. Thanks to the Staff for addressing these questions – and it was also great that the SEC sent out a separate email showing exactly which interpretations had been added. Here are the topics that are covered (also see this Cooley blog):
1. Whether a Form S-3 prospectus supplement that’s filed after November 9th, relating to a registration statement that became effective before that date, has to comply with the new rules.
2. Whether new Item 101 requires companies to disclose info in the Form 10-K for more than the fiscal year covered by the report.
3. Whether a company must always provide a full discussion of the general development of its business in an annual report or registration statement that requires Item 101 disclosure.
Tesla D&O Coverage Gets an “Elon Exclusion”
Earlier this year, John blogged that Tesla struck a deal in which CEO Elon Musk would personally provide D&O coverage to the board. Last week, the company’s latest Form 10-Q reported that the coverage came with a $3 million price tag for 90 days of coverage – which apparently was a 50% discount from the market quotes that Tesla received!
Tesla says that it’s now decided to line up a customary policy with third-party carriers. You’ve gotta wonder whether they’ve been able to negotiate a more reasonable price, since according to this article, the new policy has an “Elon exclusion.”
Will Mr. Musk play it safe without the safety net of insurance coverage? We’ll see, but my guess is he feels fine being self-insured. He now has $3 million more to cover mishaps, and that’s just pocket change for the fourth-richest man in the world.
Visit Our “Proxy Season Blog”
We continue to share daily posts on our “Proxy Season Blog” – which is available to TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Emerging Shareholder Proposal: B-Corp Conversions
– ISS to Cease Providing Draft Reports to S&P 500
– 14a-8 No-Action Letters: Key Points for Next Year
– Investors’ Letter-Writing Campaigns Just Got Easier
– Trends in Audit Committee Disclosures
Last year, Goldman Sachs’ CEO David Solomon announced that the bank wouldn’t be taking any company public unless the company met diversity quotas – one diverse director in 2020, two in 2021. In this LinkedIn post, DJ D-Sol notes that they’ve taken 54 companies public since the policy went into effect – and they’ve started a new initiative to get first-timers on boards.
Goldman Sachs isn’t alone in these initiatives – the NYSE is also involved with getting diverse directors connected with companies who are seeking new directors. This recent report from the NYSE & Diligent says that 81% of directors indicated that their board either already has a plan for increasing boardroom diversity or will have one soon. However, 45% lacked a specific timeframe for meeting diversity goals. Check out the full survey for info on board refreshment practices and other diversity efforts.
Critical Audit Matters: PCAOB Says CAMs Made Ripples, Not Waves
Last week, the PCAOB issued this analysis of the impact of the “critical audit matter” disclosure requirement, which has already been in effect for large accelerated filers and will take effect for other companies at the end of this year. This Cooley blog summarizes some of the high expectations and worries that people had when the requirement was adopted. But so far, other than auditors putting in some long hours (or maybe because of auditors putting in long hours), it seems like CAMs are making more of a ripple than a wave. Here are some of the key PCAOB findings:
• 2,420 audit reports contained CAMs – averaging 1.7 per report (7 was the highest). The most common CAMs reported related to revenue recognition (604), goodwill (462), other intangible assets (385) and business combinations (355).
• Audit firms made significant investments to support initial implementation of CAM requirements – but so far, they don’t appear to be passing those costs on to companies.
• Audit committee chairs and company preparers participating in the interview process indicated that the CAM implementation process was a “generally smooth experience” for companies, largely as a result of the significant upfront preparation by auditors. In particular, those interviewed considered the “dry runs” conducted by auditors to be useful.
• 41% of engagement partners who participated in the survey felt that the CAM requirement enhanced audit committee communications – less than 2% felt they constrained communications.
• Investor awareness of CAMs communicated in the auditor’s report is still developing, but some investors are reading CAMs and find the information beneficial. Only 31% of surveyed investors had seen a CAM “in the wild.”
• Only 2% of engagement partners reported issuer changes to internal control over financial reporting because of CAMs.
• The staff has not found evidence of significant unintended consequences from auditors’ implementation of CAM requirements for audits of large accelerated filers in the initial year.
COVID-19: Heightening Investors’ Focus on Social Issues?
Social issues are attracting greater attention from asset managers this year, compared to the “Before Times” – but governance remains the most important issue. That’s according to a recent survey of 65 asset managers by ISS ESG, asking how the pandemic has impacted their consideration of ESG factors in investment decision-making and stewardship or engagement activities. The press release lists these key findings (see our “ESG” Practice Area for a bevy of surveys and memos):
– 62.5 percent of respondents report that social issues attract more of their attention now than before the COVID-19 pandemic.
– Governance remains the most important ESG factor in the investment analysis and stewardship activities of 86 percent of respondents.
– Respondents report the primary drivers of growth in their ESG engagements include client and stakeholder demand, racial inequality and diversity, and regulatory changes.
– 44.1 percent of respondents expect future ESG ratings to place a greater weight on workplace safety, treatment of employees, diversity and inclusion, as well as supply chain labor dynamics.
– 37.5 percent of respondents have either already added or intend to add new staff to manage ESG-related issues.
Last week, Bloomberg reported that the SEC was shelving its proposal to raise the Form 13F reporting threshold. If that’s true, it would come as a relief to the 2,238 people who penned letters to oppose the proposal – and disappoint all 24 who supported it.
As Lynn blogged and others pointed out, the higher threshold probably would made things more difficult for corporate folks involved in shareholder engagement. Keep an eye on future Reg Flex Agendas to see if this one comes back or just fades into oblivion.
Measuring “TCFD” Disclosures
According to this progress report from Climate Action 100+, 120 companies now have a board committee with express responsibility for oversight of climate risks and 59 companies now formally support the disclosure framework from the Task Force on Climate-related Financial Disclosures. The TCFD is a voluntary set of climate-related financial risk disclosures that is intended to help price climate risks – the task force is chaired by Mike Bloomberg.
As this Paul Weiss memo explains, although the TCFD’s recommendations were first published only three years ago, it’s one of the frameworks that’s become more popular. Late last week, TCFD issued its third annual status report to document progress. Here are a few of the key findings (for more benchmarking, also see this 15-page memo from Vigeo Eiris and Four Twenty Seven):
– Almost 60% of the 100 largest global public companies support the TCFD, report in line with the TCFD recommendations, or both
– The largest increase in disclosure was related to how companies identify, assess, and manage climate-related risk – but disclosure of the potential financial impact of climate change on businesses remains low
– Less than 1% of companies disclosed information on the resilience of their business strategy, taking into consideration different climate-related scenarios
– The most useful piece of info according to “expert users” is the impact of climate change on a company’s business & strategy – check out Appendix 5 beginning on pg 93 to see how these users ranked the usefulness of other information, which could help you prioritize your disclosure efforts
– Guidance on Risk Management Integration & Disclosure: aimed at companies interested in integrating climate-related risks into their existing risk management processes and disclosing information on their risk management processes in alignment with the Task Force’s recommendations
Putting Sustainability into Action: 10-Year Roadmap
Recently, Ceres launched a 10-year sustainability action plan for companies to consider as a framework for governance, disclosure and strategic actions – along with this micro-site that includes performance milestones for each category of action, and other resources.
Speaking of putting sustainability into action, Coca-Cola recently announced that they would be discussing the company’s approach to sustainability, diversity and inclusion during a webcast for investors on November 13th. They’ll discuss the company’s sustainability strategy and goals, response to COVID-19 and stance on racial equity, among other topics.
Following its open meeting yesterday, the SEC announced that it adopted amendments to simplify & harmonize the private offering framework. The Commission had proposed these rules in March following a concept release last summer. Here are highlights from the SEC’s Fact Sheet about what the amendments do:
– Establish a new integration framework that provides a general principle that looks to the particular facts and circumstances of two or more offerings – and focuses the analysis on whether the issuer can establish that each offering either complies with the registration requirements of the Securities Act, or that an exemption from registration is available for the particular offering. The amendments also provide 4 non-exclusive safe-harbors from integration.
– Increase the offering limits for Reg A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits
– Set clear and consistent rules governing certain offering communications, including permitting certain “test-the-waters” and “demo day” activities
– Harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions
As has become the norm, the amendments were adopted by a 3-2 vote, with Commissioners Hester Peirce and Elad Roisman saying the rules don’t go far enough, and Commissioners Allison Herren Lee and Caroline Crenshaw saying that the rules strip away investor protections and were adopted without adequate data. Here’s a link to all of the statements from the Commissioners and SEC Chair Jay Clayton.
The amendments will go effective 60 days after publication in the Federal Register, except for the extension of the temporary Regulation Crowdfunding provisions, which will be effective upon publication in the Federal Register. Publication often takes about a month – so if that’s the case, that would put us in the February time frame for this new private offering regime.
New PPP “Loan Necessity Questionnaire” – 10 Days to Respond!
The Small Business Administration published a notice last week that it would release a new “loan necessity questionnaire” – Form 3509. If your company borrowed $2 million or more from the Paycheck Protection Program, you’ll need to complete the form to show the necessity of the borrowings – and it’ll be due within 10 business days of receiving it from your lender.
Although copies of the Form are popping up online, this Kaplan blog points out that the SBA website hasn’t posted an official version. This McDermott memo gives an overview of the information that borrowers will be expected to provide and suggests that they start collecting supporting documentation, given that the time frame for responding will be short.
Sustainability Reporting: XBRL Coming Soon?
PwC is working with SASB to translate its sustainability reporting standards into an XBRL taxonomy, according to this “Accounting Today” article – and the charge is being led by former SEC Chief Accountant Wes Bricker. The “Big 4” accounting firms definitely see an opportunity in ESG. As I blogged a couple of months ago on the Proxy Season Blog, they’re also working together to develop a set of common metrics for reporting.
Sure, common metrics and even XBRL could be helpful to investors, but I think the biggest opportunity here is to use this “alphabet soup” to create our very own, modern take on the “Mickey Mouse Club” song: S-A-S-B, X-B-R-L, E-S-G, M-O-U-S-E! Who’s with me?
Tomorrow’s the day everyone’s been waiting for: my son’s birthday. Also, Election Day. Lots of people think that if there’s a “Blue Wave,” it would accelerate the push for “stakeholder capitalism” – especially after a group of Democratic senators announced a working group on Friday to signal that the rights of workers and long-term, sustainable operations would be a priority if their party gets wins up & down the ballot.
That may well be the case, but I don’t think a Trump victory means that we’ll be able to write off ESG. Remember the aftermath of the 2016 election and the US withdrawal from the Paris Climate Agreement? It only moved ESG momentum from the government to the patchwork of private ordering – if anything, it seemed to energize investors and companies to push in that direction.
For example, BlackRock first urged companies to serve a “social purpose” in a January 2018 letter, which ignited interest in “long-termism” and “corporate purpose.” Then we had the BRT statement last year, which is still making waves. Last week, this As You Sow review catalogued shareholder proposals on the topic of whether companies are adopting plans to implement the ideals of the BRT’s “corporate purpose” statement. And we’ve all been drowning in the proliferation of ratings and disclosure standards over the last four years.
DOL Leaves “ESG Investing” on Life Support
Then again, this administration has done a thing or two to try to divert attention from ESG issues. On Friday, the Department of Labor published the final version of its rule to require private-sector retirement plans to prioritize “pecuniary factors” when making investment decisions (I blogged about the proposal on our Proxy Season Blog back in June). It doesn’t expressly limit the use of ESG-themed investments, as had been proposed – but the substance of the proposal remained largely intact. This “Plan Adviser” article gives more detail:
The final version does include some significant changes compared with the proposal, which will seemingly protect the use of ESG investing to some extent. Chief among these changes is the fact that the text of the final rule no longer refers explicitly to “ESG.” Rather, it presents a framework that emphasizes that retirement plan fiduciaries should only use “pecuniary” factors when assessing investments of any type—which is to say that they should only use factors that have a material, demonstrable impact on performance. In this sense, the rule does seem to leave ample room for the use of ESG-minded investments, presuming these types of investments are assessed in a purely economic manner and that their financial features make them prudent investments.
The preamble to the final rule, on the other hand, does speak directly to the ESG topic. The DOL and EBSA officials said the preamble seeks to help stakeholders understand how the pecuniary framework may apply to the assessment of ESG investments in practice.
Another important change emphasized by senior DOL and EBSA leaders is that the final rule does not explicitly prohibit the selection of a fund that uses ESG factors as a plan’s qualified default investment alternative (QDIA). Once again, the final rule requires that a fund being selected as the QDIA must be assessed using purely pecuniary factors that are directly material to its financial performance. Beyond this, the final rule does stipulate that a fund is not appropriate as a QDIA if its stated objectives include explicitly non-pecuniary factors—for example addressing climate change itself, rather than addressing climate change’s impact on the financial outcomes of investors.
Our November Eminders is Posted!
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Now that the threat of “cancel culture” is omnipresent, many of us spend a lot of time thinking about how to prevent or respond to current missteps. But today’s blunders are only part of the risk. According to this recent survey of 50 C-suite execs, only 8% felt comfortable that their company hasn’t previously engaged in practices that would be deemed unseemly under today’s ethics or standards – that broke down into 76% knowing of problematic practices or events, and 16% being unsure. Here’s an excerpt:
Executives might know what’s included in documented corporate histories, but not about matters that were not publicized or documented. Instances that, at the time were both legal and standard practices, but are now threats both in the courts of law and public opinion may be especially difficult for executives to get their arms around. Two acute examples of such practices are companies (or predecessor companies they acquired) that: 1) once owned, insured, or used slaves as assets for collateral and 2) participated in manufacturing or other industrial practices that contributed to the climate crisis.
Forty-two percent of respondents said they thought the broader public was aware of past actions by their company that conflict with today’s ethics or standards, but just as many were unsure. That more than four in 10 respondents don’t have a good grasp of the public’s awareness of their company history means too many companies haven’t done enough work to understand their own pasts or how their pasts are perceived by the public.
You can’t change the past – and ethics standards will likely keep evolving. But you can – and should – have a plan for addressing your history. According to the survey, only 26% of execs said they were “very prepared” to respond if problematic actions came to light, so there is room for improvement. In addition, there are differences in how executives and investors are viewing these threats. Here’s more detail on that:
• C-suite executives are far more concerned about the impact of unknown past racial injustices and somewhat more concerned about sex or gender discrimination than investors, who are significantly more concerned about past support for divisive social or political causes.
• Executives are more concerned about the damage that unseemly revelations may do to their brand equity. But investors are more concerned with the potential for media and customer backlash and lower valuations.
• More than half of investors surveyed would put specific contingencies on a deal after a problematic discovery was made and one in four would require the company to respond in writing to the claims. More significantly, 29 percent of investors said they would dismiss the investment opportunity outright.
• Among investors, 32 percent said they are very or somewhat unlikely to regain confidence in a company following the revelation of a past bad action – even if the company addressed the past action in ways the investors deemed appropriate.
IPO Governance Trends: Takeover Defenses Remain Common
According to the latest survey of IPO governance trends by Davis Polk, there’s been “widespread and generally increasing adoption” of takeover defenses at both controlled and non-controlled companies in advance of IPOs – even as seasoned public companies have been abandoning the same defenses due to shareholder pressure. The survey looked at the Top 46 “controlled company” IPOs and the Top 50 “non-controlled company” IPOs by deal size from April 1, 2018 through July 10, 2020. Here are some other findings:
– Exclusive Forum Provisions: The number of both controlled and non-controlled companies that adopted exclusive forum provisions (another governance attribute disfavored by some shareholder advocates) during the current survey period continued to grow from past survey periods. In the current survey, 91% of controlled companies and 98% of non-controlled companies adopted exclusive-forum provisions. These included both exclusive forum provisions addressing claims under the Securities Act of 1933 (the “’33 Act”) and exclusive forum provisions addressing other claims against the company. This is a substantial increase from the 14% and 26% of controlled and non-controlled companies, respectively,that adopted such provisions in our 2014 survey.
– Direct Listings: When we compared the one comparable direct listing during the current survey period (Slack Technologies, Inc.) to the non-controlled companies, we found similar governance provisions. Slack’s takeover defenses were identical to the vast majority of non-controlled companies, including a staggered board, prohibitions on shareholder action by written consent, shareholder ability to call a special meeting, the requirement of a super majority to amend the bylaws and plurality voting for uncontested director elections.
– Dual-Class Shares: Over 25% of controlled companies, and 28% of non-controlled companies, had a class of shares with unequal voting rights.
– Shareholder Written Consent: 9% of controlled companies and 12% of non-controlled companies permitted shareholder action by written consent. We’ve blogged on The Proxy Season Blog about how this is becoming a “hot topic.”
Check out the full 60-page survey for info on board & committee structure, advance notice bylaws, board & shareholder rights, equity awards, employment agreements, and more.
Direct Listings: CII Urges SEC to Deny Nasdaq Proposal
Last week, the CII sent this letter in response to the SEC’s request for comments on Nasdaq’s “primary direct listings” proposal. In line with the points raised in its September petition to stay the NYSE’s similar proposal, the Council urged the Commission to disapprove the proposal for two reasons:
1. It would compound problems shareholders face in tracing their share purchases to a registration statement (i.e., “proxy plumbing” issues)
2. It may lead to a decline in effective governance at public companies, by allowing companies to sidestep IPO governance checks (the letter looks at Palantir’s recent deal as an example)
These mid-year stats from Broadridge show what a watershed year it’s been for virtual shareholder meetings. Here’s some highlights:
– 1,494 VSMs hosted on Broadridge technology – 98% of those were virtual-only
– Average meeting attendance was 30 for small-caps, 37 for mid-caps and 122 for large-caps – higher if a shareholder proposal was being presented
– When it came to shareholder questions, 97% allowed live questions, 11% allowed pre-meeting questions, 5 questions were asked on average and one company somehow fielded 316
– Average duration was 34 minutes if a shareholder proposal was presented and 18 minutes if not
Check out this Skadden memo and other resources in our “Virtual Shareholder Meetings” Practice Area as you plan for the possibility of another virtual shareholder meeting in 2021. And don’t forget to tune into our October 29th webcast with CII’s Amy Borrus, Doug Chia of Soundboard Governance, Dorothy Flynn of Broadridge, Independent Inspector of Election Carl Hagberg and Bristol-Myers Squibb’s Kate Kelly to hear what you should be doing right now to prepare.
ISS Proposes Diversity and E&S Policy Changes: Comment By October 26th!
Yesterday, ISS announced a public comment period for proposed policy changes that would apply to annual meetings taking place on or after February 1, 2021. For the US, the proposed changes include:
– Board Diversity, Race and Ethnicity: Beginning in 2022, at companies where there are no identified racial or ethnically-diverse board members, the proposed ISS U.S. policy will be to recommend voting against the chair of the nominating committee (or other relevant directors on a case-by-case basis). Mitigating factors will be considered and the proposed coverage universe is all companies in the Russell 3000 and S&P 1500 indexes.
– Director Accountability: ISS policies globally will explicitly note that significant risk oversight failures related to environmental and social concerns may, on a case-by-case basis, trigger vote recommendations against board members.
– Shareholder Litigation Rights: ISS proposes modifications in the U.S. policy regarding management proposals to establish exclusive forums.
Submit comments to policy@issgovernance.com by 5 pm Eastern Time on Monday, October 26th. Unless otherwise specified in writing, all comments will be disclosed publicly upon release of final policies – which is expected during the first half of November.
COVID-19: Audit Committee Questions for the “New Normal”
COVID-19 disclosures remain a top area of focus for audit committees, according to this KPMG survey. Specifically, the uncertainty caused by the pandemic – along with expectations for companies to deliver forward-looking information and analysis – are leading to substantial discussion on disclosures about the pandemic’s effect on business, the preparation of forward-looking cash flow estimates, impairments, use of non-GAAP financial metrics and other topics.
This Deloitte memo suggests questions that audit committees should ask to ensure that disclosure is accurate and transparent. Here are a few:
– Is data from the 2008 financial crisis being used to benchmark the timing and pattern of recovery from the current pandemic? Has management carefully considered the differences between the two economic periods?
– What “new normal” conditions or future trends are included in the forecast assumptions?
– In considering the use of non-GAAP measures, has the company considered what costs might be part of the “new normal” and how certain non-GAAP adjustments may impact comparability in the future?
– Has the company reassessed its volatility assumption when valuing new stock awards in light recent market volatility?
– Has the company modified any significant contracts, particularly contracts with customers and leases?
Both memos note that audit committees are also focusing on reassessing or changing internal controls due to return-to-work plans, virtual working and cybersecurity – and that internal auditors are adjusting audit plans and activities to identify emerging risks posed by the pandemic. The KPMG survey says that audit committee members also indicated that they expect employee safety and diversity issues, as well as supply chain resilience and corporate reputation, to get significantly more attention from the board as a result of COVID-19 and recent protests against systemic racism.
This Stinson blog highlights things to think about for the upcoming proxy season – meeting format, issuer status, recent SEC guidance, and other developments. Here’s an excerpt explaining that very few changes will be needed to D&O questionnaires:
As noted in previous years, the Tax Cuts and Jobs Act eliminated the exception to IRC §162(m) for performance-based compensation, subject to a transition rule. We continue to urge caution in eliminating questions in directors’ and officers’ questionnaires related to §162(m) for compensation committee members unless it is clear the compensation committee is not required to administer any compensation arrangements under the transition rule. The same can be said for eliminating references to §162(m) in compensation committee charters.
In February 2020, the SEC approved a Nasdaq proposal to amend the definition of “Family Member” used in its corporate governance rules, which is incorporated into the definition of “Independent Director.” The definition will no longer include step-children and will include a carve out for domestic employees who share a director’s home. The issuer’s board must still affirmatively determine that no relationship exists that would interfere with a director’s ability to exercise independent judgment.
As Lynn recently blogged, companies may want to consider adding a “demographics” question in order to gather diversity info – but undertaking that kind of addition is less straightforward than it might seem at first blush. This Dorsey blog offers a sample question.
Misleading Disclosures: SEC Enforcement is Watching…Everything
Enforcement Division Director Stephanie Avakian recently gave this speech to recap actions over the past 3 years (also see the speech from SEC Chair Jay Clayton) – the walk down memory lane touched on these headline-grabbing allegations:
– Fraudulent accounting practices intended to misrepresent a company’s underlying financial condition, as in the Commission’s actions against Theranos, Hertz, and Penn West and their former executives
– Intentionally distorted non-GAAP metrics and key performance indicators, as in the Commission’s actions against Wells Fargo, Fiat Chrysler, Valeant, and Walgreens
– Misrepresentations or omissions in connection with risk factors, as in the Commission’s actions against Facebook and Mylan
– Materially misleading and incomplete disclosures, as in the Commission’s actions against Nissan and Volkswagen and their former executives
Stephanie acknowledged that the Division’s focus on financial fraud isn’t new – but she emphasized the expansion of the types of info that Enforcement is tracking. If her remarks had a theme song, it would be Rockwell’s “Somebody’s Watching Me” – and it’s a reminder to companies to watch all forms of disclosure. Here’s an excerpt:
Our focus on financial fraud and issuer disclosure cases resulted in some significant changes in how we approach identifying and investigating potential misconduct. Our proactive efforts to identify cases has employed a variety of research, approaches, internal and external tools, and other information sets. We routinely look at all public information about an issuer – statements made by a company or its officers, in filings, during investor presentations, in tweets or blog posts; related commentary by others including analysts, shorts, competitors, shareholders – to develop a deep understanding of the company’s reporting environment and industry. This is not a low cost investment, but it has provided substantial value in identifying potential financial fraud.
Further, in appropriate cases, we are employing strategies to streamline these investigations in an effort to substantially accelerate the pace of our investigations. This has come through a purposeful effort by our investigative teams to efficiently triage issues, increase staffing, make more targeted requests at the outset, substantively engage early with relevant parties, and leverage cooperation. We have already seen some success in our acceleration efforts and expect to see those successes continue in the near and long term.
This recap actually occurred before the flurry of enforcement activity that we saw a couple of weeks ago – so you can add those settlements to the tally. Also see this Davis Polk memo – noting that the speech signaled that the SEC may seek increased penalties in future insider trading cases, rather than disgorgement.
Corporate Governance: The “Acronym” Challenge
I love a good quiz – and this acronym challenge from Soundboard Governance is a fun one. Can you decipher the 40 selections from the corporate governance field’s “alphabet soup”? I got over 30 and called it a win.
