It looks like another effect of Covid-19 might be a shift of investors’ ESG focus by placing more emphasis on social issues – perhaps the focus on climate will need to share the spotlight. As noted in this SGP 2020 proxy season blog, the “S” issues in ESG were frequently focused on culture and diversity and now, there’s greater focus on worker safety and employee engagement.
ESG funds are getting a lot of attention these days with many noting how ESG funds fared better than the overall market during ongoing turbulence – here’s a WSJ headline and a Morningstar report showing how sustainable funds generally outperformed conventional benchmarks during the first quarter. Not too long ago, Rhonda Brauer blogged about initial investor responses to the Covid-19 pandemic and noted how some investors have been asking companies to prioritize worker health & safety among other things.
Climate concerns are clearly still a priority, but a recent letter from the International Corporate Governance Network about shared governance responsibilities places emphasis on social issues. The focus on social issues coexists with a long-term perspective aimed at protecting financial stability and longer-term sustainability. The letter says Covid-19 presents a new era of engagement and lists governance priorities for companies and for investors – with social issues topping the list. Here’s an excerpt:
The ICGN Statement of Shared Governance Responsibilities broadly emphasizes the need for companies to:
– Prioritize employee safety and welfare while meeting short-term liquidity requirements to preserve financial health and solvency
– Pursue a long-term view on social responsibility, fairness and sustainable value creation and publicly define a social purpose as we all adjust to a new reality
– Take a holistic and equitable approach to capital allocation decisions, considering the workforce, stakeholders and providers of capital
– Communicate comprehensively with all stakeholders to instill confidence and trust in a company’s approach to build resilience into strategy and operations
– The Covid-19 pandemic presents the most significant public health and economic crisis of our time and calls for new forms of cooperation on a global scale. It has ignited an acute recognition of social failures and deep gender, racial and income inequality.
Call for SEC to Sharpen Covid-19 Disclosure Guidance
Some may have read the Council for Institutional Investor’s letter to the SEC’s Investor Advisory Committee sent last week. Tucked in the middle of the letter between complimenting the SEC’s efforts on disclosure during the Covid-19 pandemic and concerns about virtual shareholder meetings is a call for the SEC to ramp up disclosure of human capital management and customer safety. Even though the request is in the context of Covid-19, one has to wonder whether this could lead to additional calls later. Here’s an excerpt from the letter:
A critical set of issues for successful operation now is safety of employees and customers. In many cases, it appears to us highly relevant to investors how companies are assuring safety, including policies on leave and sick pay, as well as safety equipment and protocols at workplaces. And for companies with operations in hiatus due to government orders and/or temporary absence of demand, the ability to gear back up will depend in part on credibility of safety steps that are taken. A question within this topic is whether and how companies are testing (or plan to test) workers for Covid-19 and for antibodies, which will be important for confidence to move forward, particularly to the extent there is not a broad and effective government-sponsored testing regime.
We believe it could sharpen the March 25 guidance for the Division to consider further relevant questions on these matters. We believe that some companies have been very forthcoming on these issues, and it may be early to render negative judgments on companies that have largely shut operations as we arguably are (at most) in the beginning stages of re-opening sectors of the economy. But it would be useful for the Division to consider whether it can prod useful Covid-19 related disclosure on matters of human capital management and customer safety, as it has in other areas.
Companies Targeted for Return of PPP Funds
John’s blogged a few times about issues with the Paycheck Protection Program. For companies that might be questioning whether to return PPP funds, a couple of recent memos high-light reasons it’d be a good idea to make sure PPP loan recipients were really the intended beneficiaries of this CARES Act program. The safe harbor to return PPP funds without penalty ends tomorrow – May 14 – John blogged about this extended deadline last week.
First, the U.S. House Select Subcommittee has targeted five companies to return PPP loans or to produce necessary supporting documentation. A McGuireWoods memo summarizes this development and says each of the targeted companies are public companies with market caps of more than $25 million, received loans of $10 million or more and had over 600 employees. The memo advises companies to carefully document the analysis used in determining eligibility for the loans and otherwise mitigate risk and potential future liability.
Next, a Nixon Peabody memo points out the government is keeping a close watch for potentially fraudulent activity. Last week, the Department of Justice announced criminal charges against two people who allegedly filed fraudulent PPP loan applications. The memo says that the DOJ caught on to the plot before any PPP funds were distributed to the individuals. The DOJ brought charges alleging conspiracy to make false statements and commit bank fraud, among other felony offenses. One clear takeaway from the memo is that all CARES Act beneficiaries should prepare for heightened government scrutiny.
That’s what a recent report issued by the Council of Institutional Investors says. A lot has been said about the SEC’s proposed rules relating to the shareholder proposal process, including changes to the submission and resubmission thresholds – John blogged a while back about some of the colorful comment letters and one story says that the SEC was flooded with over 13,000 comment letters. CII’s report examined shareholder proposal data from 2011 through third quarter 2019 and found that, had the proposed resubmission thresholds been in effect, certain proposals would have been excluded more than others.
Here’s some of CII’s findings:
– CII estimates the 5/15/25 resubmission thresholds, paired with the 10% momentum requirement, would have more than doubled the number of proposals excluded
– Unlike the proposed higher thresholds, the new momentum requirement would have impacted governance proposals considerably more than environmental or social proposals
– Overall, CII’s study showed that proposals requiring independent board chairs and those relating to political contributions and lobbying were the types of proposals that would be most impacted by the proposed rules – meaning more frequently excluded from proxy statements
It’s not necessarily surprising that the new resubmission thresholds potentially increase the number of proposals that would be excluded, although it’s interesting that this study shows it would impact governance proposals more than others. At this time, it’s not certain the Commission will approve the rules as proposed or whether further changes are on the horizon.
SEC Chairman Clayton Executive Roster Updates
The SEC has been busy! Yesterday, SEC Chairman Jay Clayton released an updated roster of his executive staff, including some additions. After issuing and updating Covid-19 related guidance, holding virtual/web meetings and announcing awards to whistleblowers it looks like, for a brief moment anyway, the SEC’s focused on organizational matters.
John Moses was named Managing Executive in the Office of the Chairman and in the role, he will advise the Chairman on matters relating to agency administration, operations and management, and will serve as the Chairman’s primary liaison to divisions and offices on these matters. Moses was previously the Deputy Director in the SEC’s Office of Minority and Women Inclusion.
Peter Uhlmann, who has been serving as Managing Executive in the Office of the Chairman, will assume a new role in the agency’s Office of Compliance Inspections and Examinations. Uhlmann will join the OCIE’s Office of Chief Counsel as Assistant Director for Compliance, where he will oversee internal compliance, ethics, and operational risk management efforts for the SEC’s National Exam Program and its more than 1,000 employees.
Tomorrow’s Webcast: “Capital Raising in Turbulent Times”
Tune in tomorrow for the webcast – “Capital Raising in Turbulent Times” to hear Manatt, Phelps & Phillips’ Katherine Blair, Wilson Sonsini’s Richard Blake, Locke Lord’s Rob Evans and Jones Day’s Mike Solecki discuss the current state of the new issues market for debt and equity and they will explore financing and liability management alternatives. Don’t miss it!
Even though the market went up last Friday, with unemployment and food lines growing by the day and Covid-19 persisting, it’s clear we’re in a crisis. If anyone’s ever questioned the importance of a crisis response planning exercise, you might want to give them a copy of a recent study from State Street. And when crisis strikes, pull the PR team in and make sure the public hears about all the good things the company is doing.
The study shows how a company’s response to the Covid-19 pandemic impacts stock performance and institutional money flow – a good case study of the positive effects of crisis planning and response. State Street’s website provides this intro:
COVID-19 has forced companies to respond swiftly to the pandemic and highlight their resilience to investors. Exploring how their actions affect stock performance, we found that companies seen as protecting employees and securing their supply chain experienced higher institutional money flows and less negative returns, especially when those practices garnered significant public attention. Firms that most prominently re-purposed their operations to provide in-demand solutions to the crisis experienced a significant positive impact on returns. This evidence challenges the notion that shareholder and employee interests are in conflict. It also suggests that corporate disclosure and media coverage play a significant role in how corporate responses to crisis management decisions could influence investor behavior and impact stock performance.
Cybersecurity: What Investors Want to Know
Speaking of crises, we’ve blogged before about the potential for severe repercussions from a cyber breach – and cybersecurity continues to get significant attention from management and boards. You don’t have to look far to read about another data incident – MGM acknowledged one not too long ago. Back in February, I blogged about the SEC OCIE Observations and the importance of testing your cyber response plan and according to one pre-Covid-19 study, the vast majority of companies planned to increase cybersecurity budgets for 2020.
Now investors are wanting to know more about cybersecurity too. A report from SquareWell Partners says that of the 20 largest institutional investors, 14 include cybersecurity as a major discussion topic during engagement with companies. Besides wanting to discuss cybersecurity with companies, the report says some investors have issued position papers about cybersecurity – and 2 of the 20 largest investors have incorporated cybersecurity into their voting policies – time will tell if more do this.
The report includes a list of questions to help investors understand a company’s policies, oversight and resources related to cybersecurity. The list might serve as a helpful prep tool for companies in the midst of engagement with investors.
Reference for State Reopening Status & Requirements
For those trying to keep track of the ever changing state reopenings and requirements to do so, this chart from Cleary Gottlieb might help. The chart covers all 50 states plus the District of Columbia and provides an overview of the status of closing orders and reopening plans, as well as any social distancing, sanitation, and occupancy operating requirements imposed on businesses during the closures and reopenings. Information in the chart is summarized so those relying on the chart are reminded to consult the relevant state orders and guidance for complete details.
Yesterday, Corp Fin issued 3 new CDIs arising out of the new mining company property disclosure rules – Broc blogged about the rules when they were adopted in 2018. The CDIs address when companies need to comply with the new rules and also incorporation of such disclosure by reference to an annual report. Here they are:
Question 155.01
Question: For purposes of filing an Exchange Act annual report, when must a registrant engaged in mining operations comply with the new mining property disclosure rules set forth in Subpart 1300 of Regulation S-K?
Answer:A registrant engaged in mining operations must comply with Subpart 1300’s disclosure rules beginning with its Exchange Act annual report for the first fiscal year beginning on or after January 1, 2021. Until then, staff will not object if the company relies on the guidance provided in Guide 7 and by the Division of Corporation Finance staff for the purpose of filing an Exchange Act annual report. [April 29, 2020]
Question 155.02
Question:For purposes of filing a Securities Act registration statement, may the registrant satisfy its obligation to include mining property disclosure pursuant to Subpart 1300 of Regulation S-K by incorporating such disclosure by reference to its Exchange Act annual report for the appropriate period, even if such annual report was not required to comply with the new mining property disclosure rules in Subpart 1300 of Regulation S-K?
Answer: Yes. Until annual financial statements for the first fiscal year beginning on or after January 1, 2021 are required to be included in the registration statement, the staff will not object if a Securities Act registration statement incorporates by reference disclosure prepared in accordance with Guide 7 from an Exchange Act annual report for the appropriate period filed by a registrant engaged in mining operations if otherwise permitted to do so by the Commission’s rules on incorporation by reference. See, e.g., Securities Act Rule 411 (17 CFR 230.411), which provides that information must not be incorporated by reference in any case where such incorporation would render the disclosure incomplete, unclear, or confusing. [April 29, 2020]
Question 155.03
Question: For purposes of filing an Exchange Act or Securities Act registration statement that does not incorporate by reference mining property disclosure from a registrant’s Exchange Act annual report, when must a registrant engaged in mining operations comply with the new mining property disclosure rules set forth in Subpart 1300 of Regulation S-K?
Answer:An Exchange Act or Securities Act registration statement that does not incorporate by reference mining property disclosure from an Exchange Act annual report filed by a registrant engaged in mining operations must comply with the new mining property disclosure rules set forth in Subpart 1300 of Regulation S-K on or after the first day of the first fiscal year beginning on or after January 1, 2021. For example, a calendar year-end company would be required to comply with the new mining property disclosure rules when filing an Exchange Act registration statement or a Securities Act registration statement that does not incorporate by reference disclosure from a registrant’s Exchange Act annual report on or after January 1, 2021, while a registrant with a June 30th fiscal year-end would be required to comply with the new mining property disclosure rules when filing an Exchange Act registration statement or a Securities Act registration statement that does not incorporate by reference disclosure from a registrant’s Exchange Act annual report on or after July 1, 2021. [April 29, 2020]
Covid-19: Going Concern Uncertainties
A recent Audit Analytics blog says that going concern uncertainties will likely see an uptick due to fallout from Covid-19 but so far anyway, it hasn’t been significant. Here’s an excerpt of the most current information from Audit Analytics:
As of April 20, 2020, there have been 16 audit opinions on annual reports for SEC filers that have cited the COVID-19 pandemic as a contributing factor to substantial doubt about a company’s ability to continue as a going concern for the next twelve months. Of those going concern opinions, 11 are repeat going concerns.
For the five companies with new going concerns for fiscal year 2019, the impacts of the COVID-19 pandemic are expected to have a material adverse effect on results of operations, cash flows, and liquidity. However, three of these companies had certain pre-existing uncertainties prior to the pandemic – such as debt covenant obligations, recurring operating losses and negative operating cash flows – so it’s not surprising that impacts from the coronavirus would contribute additional uncertainty, resulting in substantial doubt about their ability to continue as a going concern.
No doubt Covid-19 will likely impact going concern issues for companies already dealing with financial challenges. And given the current economic environment, it seems the numbers are sure to change as the Covid-19 impact will be felt by companies in other industries that historically haven’t experienced going concern issues.
Former Chief Justice Strine Joins Wachtell, Lipton, Rosen & Katz
It was a just a couple of weeks ago that I blogged about Former Delaware Chief Justice Strine’s latest call for another “new deal.” He’s on the move – earlier this week Wachtell Lipton announced that he’s joined the firm and the NYTimes DealBook column carried the news too. Here’s an excerpt from the firm’s announcement:
Explaining his decision to join Wachtell Lipton, Mr. Strine said: “As a judge, I thought the importance of corporations in our society could not be measured by their stock price, and that it was critical to our nation’s well-being that powerful businesses treat their workers and consumers well, support the communities in which they operate, and focus on environmentally responsible, sustainable wealth creation.” Noting that “for more than two generations, Wachtell Lipton has been a consistent voice on behalf of that viewpoint and has embedded it in how it treats its people, and how it assists clients,” Mr. Strine concluded that the Firm would be “a great institution for me to help to put into practical application principles I believe are vital to our economy working for everyone.”
We’ve blogged before about data breaches…and if there wasn’t already enough negative press about the SBA relief program, last week various news outlets reported – and here’s a blog from Taft’s Privacy and Data Security team – that the SBA experienced a recent data breach affecting businesses that applied for the Disaster Loan Program (not the Paycheck Protection Program).
The SBA announced that nearly 8,000 business owners’ information may have been exposed to unauthorized users last month. SBA has reportedly addressed the issue but business owners who applied for relief through the Disaster Loan Program are encouraged to check their accounts and review their credit reports.
For a reminder about the prevalence of cyberattacks exploiting the current Covid-19 crisis and the increased work-from-home arrangements, this Data Privacy Monitor blog discusses that and what can be done to help guard against cyberattacks – helpful reminders to hopefully prevent falling into a mess like the SBA and end up needing to send breach alerts to customers.
Beyond Force Majeure: Tips for Entering New Tech Agreements During Covid-19
Many companies have been dealing with what to do about existing contracts during Covid-19, while many are also continuing to enter into new agreements. A new contract can present an opportunity to mitigate risks from the continued uncertainty everybody faces. A recent Perkins Coie memo outlines tips for negotiating new contracts during Covid-19 relating to provisions typically found in technology agreements. Here’s an excerpt:
Addendums: Consider including an addendum that contains terms and conditions that apply during the pandemic with an understanding that the pandemic-specific provisions preempt the terms and conditions in the main body of the agreement during the pandemic – the addendum can specify criteria that must be satisfied before the addendum can expire
Acceptance of Goods, Risk of Loss, Transfer of Title: Travel restrictions and stay-at-home orders may prevent inspection and acceptance of goods per the contract’s standard terms, which can then affect risk of loss, transfer of title and payment provisions so parties should consider alternatives such as relying on remote video or data measurements, permitting partial payment upon delivery or through use of buyer-funded escrows that could be released once inspection and acceptance occurs
Service Levels: Service providers may need to negotiate for more flexible service levels to accommodate bandwidth demands to regulate service usage – considerations could include temporary elimination of non-critical service features, throttle bandwidth, limitations on hours of operation, and service credits for service interruption
Other provisions addressed in the memo relate to ADR, limitations of liability, suspension, delivery terms, milestones, change orders, disclaimers, termination, health & safety, transition services, governing law, business continuity, confidentiality & reporting obligations, reps & warranties and insurance.
Podcasts: More “Women Governance Gurus” With Courtney Kamlet & Liz
Liz continues to team up with Courtney Kamlet of Vontier to interview leaders in the corporate governance field about their career paths – and what they see on the horizon. Check out the latest episodes:
When you’re the largest asset manager, any statements garner a lot of attention. Take for example, Larry Fink’s January letter to CEOs. A lot of media outlets reported on it, we blogged about it as did many others. Now, BlackRock, in its role assisting the Federal Reserve in administering some of the CARES Act relief programs, has arrows coming at it from all directions.
First, as discussed in this NYT article, a group of conservative leaning senators sent a letter to Fed Chairman Powell voicing concerns that BlackRock might avoid funding energy and transportation companies due to BlackRock’s own climate-related investment policies. This was followed by a letter from senators on the other side of the aisle requesting the underlying investment guidelines provided to BlackRock for use in managing the Fed’s programs and warning about use of federal funds “to help sustain industries that may drive a future climate crisis.”
But, there were more arrows sent BlackRock’s way. Here’s a post from the Federalist about a letter sent to BlackRock’s CEO from representatives of several conservative-leaning organizations, asking BlackRock to reconsider its plan to operate under a stakeholder model rather than supporting a shareholder primacy model. The letter goes on by urging BlackRock to stand against “unnecessary and harmful ESG shareholder proposals.” Coming at it from the other side, as part of an Earth Day event held last week – organized by a group named “BlackRock’s Big Problem” – the event flyer asked participants to call BlackRock to request it follow through on its climate commitment that BlackRock’s CEO made in his letter earlier this year.
BlackRock recently issued its 2020 Engagement Priorities and I blogged about it on our “Proxy Season Blog”. There was a fair amount of focus on environmental risks and opportunities in that report. No doubt though, by the end of the 2020 proxy season, somebody will likely have gripes about whatever BlackRock does. It seems when you’re the largest asset manager, you’re a big target and everybody wants the influence you carry on their side.
California Board Diversity Law Withstands Legal Challenge
You may remember back when California’s board gender diversity law (SB 826) went into effect, then California Governor Jerry Brown reportedly said his chief concern was possible legal challenges.
Well, a couple of suits were filed and one of them was recently dismissed. The plaintiff was seeking a permanent injunction preventing enforcement of the California law by saying it was unconstitutional under the 14th Amendment. Last week, a federal judge in California dismissed the case on the basis of lack of standing. See Cydney Posner’s Cooley blog for more on this story. And, stay tuned – it looks like this case will carry on as the plaintiff filed an appeal – see this blog post from Keith Bishop.
Earlier this year, California issued a report on the status of compliance with the new law through December 2019. The report said that of the 330 companies that filed the required disclosure statement, 282 reported compliance with the state’s board gender diversity requirement. Note that the 330 companies that filed the required disclosure statement represent slightly more than half of the impacted companies (meaning they are publicly held with principle executive offices in California).
Even with California companies seemingly increasing board diversity, the law isn’t out of the woods yet as the appeal in the case has been filed and there’s another suit challenging California’s law that’s ongoing in California State Court – Broc blogged about that back when it was first filed.
ESG Ratings: Morningstar & Sustainalytics Join Up
Liz blogged a little over a year ago about the crowded ESG ratings field. In case you missed it, last week, two firms joined forces when Morningstar announced it would acquire Sustainalytics. Morningstar already owned about 40% of Sustainalytics and now it’s buying the remaining 60% when the transaction closes later this year.
The combination should be a boost for Sustainalytics – Morningstar is a much larger organization and is spread across more markets. Like other deals, time will tell exactly how it shakes out…it’s expected that Morningstar will complete the integration of Sustainalytics data across its various products but anecdotally, my understanding is that Morningstar has everything it needs from Sustainalytics through the firms’ longstanding relationship.
If anything, Morningstar will now compete more directly with MSCI so there may be some investors who switch to Morningstar/Sustainalytics – although, surprisingly, a lot of investors already switch between MSCI and Sustainalytics and apparently some do so fairly often.
As many companies are releasing first quarter earnings and dealing with challenges related to earnings guidance, the next question to tackle might be whether to reopen the trading window. Most companies typically reopen the trading window within a day or two after issuing the earnings release. But, as this Bryan Cave blog points out, this time around some companies might want to think twice about that.
It might be fine for a lot of companies to go ahead as usual and open the window but with continued uncertainty and rapid change, the blog says some companies may want to pause. Here’s the crux of the blog’s message:
Insiders who have access to daily information about demand, the supply chain, pricing and other information may be better able to assess the trend of the business, and may therefore be better able to predict how well the company will be able to withstand and bounce back from the pandemic. Although this daily information might not ordinarily be deemed material nonpublic information for insider trading purposes, in the current environment and with the benefit of hindsight, the SEC could take a different position.
SEC Covid-19 Market Monitoring Group
In a press release last Friday, the SEC announced that it formed an internal, cross-divisional Covid-19 Market Monitoring Group. The announcement says the group is temporary and the purpose is to assist the Commission, including its various divisions and offices, in actions related to the effects of Covid-19 on markets, issuers and investors as well as responding to requests for information, analysis and assistance from other regulators and public sector partners.
The group will be chaired by S.P. Kothari, the SEC’s Chief Economist and Director of the Division of Economic and Risk Analysis and assisted by Jeffrey Dinwoodie, Chief Counsel and Senior Policy Advisor for Market and Activities-Based Risk in the Office of the Chairman. The announcement also includes a list representatives from across the SEC that will participate in the efforts of the Market Monitoring Group.
SEC Goes Remote & Virtual Like the Rest of Us
If you’re wondering how the SEC is getting all of its work done these days, they’re working remote like a lot of people and seem to be adapting. A while ago, the SEC set up a webpage that gives general information about its operations during Covid-19.
The SEC’s recent open meeting, during which it approved offering rules for business development companies, was held virtually, although it’s not clear when they might do this again. For that meeting, the audio was played live through access on the SEC website (here’s the audio archive) and Bloomberg Law reported that apparently Chairman Clayton participated in the meeting from his office at SEC headquarters while Commissioner Allison Lee participated from her home kitchen. The SEC reportedly held “several dry runs” to prepare – an all too familiar exercise for many of us.
Meanwhile, this Notice for an upcoming meeting of the Small Business Capital Formation Advisory Committee says that it will be conducted via videoconference following the same format used for an ad-hoc meeting held earlier this month. The Committee has an archived webcast from the April ad-hoc meeting available on the SEC’s website.
Last fall, John blogged about “stakeholder governance” and the business judgment rule and noted that in Delaware, the business judgment rule provides protection for directors who conclude in good faith that considering the interests of other stakeholders may be helpful in maximizing long-term shareholder value. A recent memo from Wachtell Lipton says boards will need to understand Covid-19 related risks not only to the company but also to its various stakeholders. The memo also serves as a good reminder that despite all of the challenges from Covid-19, boards should fulfill their oversight responsibility as best they can and know the business judgment rule will be applied to board decisions.
The memo discusses director oversight along with management’s role in handling the day-to-day operations, including concerns relating to external obligations, including debt and regulatory requirements, liquidity, compensation and strategic threats and opportunities. Here’s an excerpt:
The decisions facing companies at this time are terribly difficult and painful. It will be crucial for the board and the management team to maintain an atmosphere of respect and shared concern in order to promote effective decision-making in this period of great stress. The board should be careful to resist any temptation to usurp the role of management in running the company’s day-to-day business and addressing the challenges resulting from the COVID-19 pandemic. Corporate America finds itself now in uncharted territory, and the ramifications of the crisis and the nationwide response are unknowable factors. While there may be substantial second-guessing once the COVID-19 crisis is past, directors should take comfort that the business judgment rule applies to board decisions regardless of how they appear in hindsight. The board is called to fulfill its oversight role to the best of its ability. Directors who act on an informed basis, in good faith, and in the honest belief that their decisions are in the company’s best interests will continue to have the protection of the business judgment rule.
Rulemaking Petition Seeks to Allow Electronic Signatures Under Reg S-T
In what could be a big step forward for the SEC, a rulemaking petition from Wilson Sonsini, Fenwick & West and Cooley asks the SEC to amend rules under Reg S-T that would permit companies to obtain electronic signatures for documents filed with the SEC. The rulemaking petition acknowledges the Staff’s recent statement providing flexibility regarding manual signatures during the current crisis and then encourages the SEC to go further.
In this day and age, electronic signatures seem to be more the norm and routing manual signatures to hold in a dusty, over-crowded file cabinet somewhere seems somewhat archaic – this change would be a nice improvement for many. Here’s an excerpt from the petition:
We acknowledge the Staff Statement: Regarding Rule 302(b) of Regulation S-T in Light of COVID-19 Concerns (March 24, 2020) (the “Staff Statement”) and appreciate the added flexibility it provides regarding manual signatures in the current extraordinary environment. We believe, however, and many of our clients have also informed us, that obtaining and retaining manual signatures in compliance with the Staff Statement remains a significant logistical burden. We and many of our clients believe the Staff Statement could be of greater effectiveness to registrants, with no compromise to the integrity of the document signing process, if registrants were permitted to use existing, proven electronic signature processes with respect to filing documents with the Commission.
Improvements in electronic signature software technology make it possible to confirm (with at least equal confidence to the collection of manual signatures) who has signed a document and when it was signed (and, indeed, far better accuracy as to the timing of execution), and make recordkeeping and storage of such signatures seamless and secure.
More Women on Boards Helps Ensure Consumer Safety
It’s been well documented and we’ve blogged about studies showing how increased board gender diversity may lead to better ESG and business performance. A recent abstract describes an academic study that looked at the influence female directors had on product recall decisions. The study found that as boards add female directors, product recall decisions change. The abstract says as boards add female directors, “firms make faster recall decisions for the most serious defects that are high in severity and dangerous for customers, highlighting the increased stakeholder responsiveness from adding female directors.”
This blog from Lehigh University provides further discussion of the study. Some basic stats cited in the blog include:
Compared to firms with all-male boards, firms with female directors announced high-severity product recalls 28 days sooner
The number of women on boards also impacted high-severity recall outcomes – only boards that had at least 2 female directors improved timeliness of severe product recalls and when there were 3, recall decisions moved along even more quickly
For low severity recalls – where executives have greater discretion, boards with female directors announced 120% more recalls compared to firms with no women directors
Yesterday’s NYT DealBook high-lighted notable business leaders who are advising President Trump on reopening the economy. The column notes many of those business leaders are members of, or represent industry groups that are members of, the Business Roundtable and the BRT recently published its “principles for reopening the economy.”
Last summer, Broc blogged about the BRT statement on shareholder primacy and a commitment to all stakeholders and that statement still generates a lot of press and commentary today. I’m not sure the BRT will get as much press this time around as it did last summer but the BRT principles are encouraging as they provide a framework for planning and preparing a coordinated response to the current crisis.
The BRT principles’ bottom line is that reopening the economy requires careful planning, that should begin now and activity restrictions should be lifted gradually as guided by public health officials. As the effects of Covid-19 persist, without taking sides on to restrict or not to restrict, hopefully the BRT principles and framework help give some order to a recovery process that mitigates health, safety and economic problems as each seem at risk of escalating even further if not handled appropriately.
BRT endorsed the following principles:
Safety first – A recovery strategy must give Americans confidence that they can safely return to work and public spaces
Coordination – BRT encourages state and federal coordination for protecting public health and safety
The BRT says that it will be preparing a more detailed document outlining approaches to a safe recovery and revitalization and it will focus on the following issues:
– Federal guidelines helping to define public health criteria used to inform local decisions about lifting activity restrictions as well as guidelines that outline appropriate safety measures.
– Access to critical resources and supplies like testing and virus monitoring, supplies, therapeutics and vaccines.
– Vital worker and community needs including safe schools, childcare, transportation and restoration of comprehensive healthcare services.
BRT included 5 exhibits outlining its framework to address these issues. The exhibits show how federal guidelines and states can coordinate their approach to lifting restrictions, considerations that should be taken into account for determining when and where to lift restrictions, how federal guidelines should define risk levels that guide the level of activity restrictions, examples of measures state and local authorities can take to implement federal guidelines and how the measures vary by federally defined risk levels.
Covid-19 Oversight: Does the Board need a Special Committee?
No doubt most boards are dealing with unprecedented challenges related to the Covid-19 pandemic. Some boards might currently have a risk committee positioned to provide oversight of Covid-19 related issues while others might not. As directors are likely stretched for time just like everyone else – some boards are reportedly holding weekly or bi-weekly calls – a recent blog from Hunton Andrews Kurth takes a look at whether the board should create a special committee to oversee the company’s Covid-19 response.
A lot of factors will play into whether a company should designate a special committee to oversee the company’s pandemic response, including the structure of current board committees, director availability, director experience/expertise, existing committee oversight responsibilities, among other things. Here’s an excerpt from the blog:
Establishment of a Special Oversight Committee may give the board and the company a better opportunity to get the benefit of board members who collectively are best suited to exercise oversight in this unique set of circumstances. Such a committee could be composed of those board members who are in the best position to participate in conference calls frequently and on short notice.
Use of a Special Committee also would enable the board to select a group of committee members whose combined experience and expertise best qualify them to address the special challenges that the pandemic presents for the company.
In addition, the combination of more frequent board meetings and the establishment of such a committee would provide an excellent framework for providing high quality company oversight as well as a demonstrable record of such oversight, which record may be important in years to come as corporations deal with the fallout of the pandemic.
March-April Issue of “The Corporate Counsel”
We recently mailed the March-April issue of “The Corporate Counsel” print newsletter (try a no-risk trial). The topics include:
1. A Disclosure Framework for the Coronavirus
– The SEC Weighs In
2. Coronavirus Disclosure Considerations
3. Executives in Trouble: Is Disclosure of Uncharged Conduct Required?
– Other Potential Disclosure Considerations
4. “Test the Waters for All” Means WKSIs, Too!
– What WKSIs Can Do Under Rule 163
– The “Test the Waters” Rule 163B Alternative
– Mix & Match? Rule 163B is Non-Exclusive
– Conclusion: WKSIs Should Keep Rule 163B in Mind
Rhonda Brauer has provided a couple of guest blogs, here’s her most recent post. We’re grateful for her work this time that takes a look at where investors are turning their attention during the Covid-19 pandemic:
Recently, we have seen a number of investor-organized responses to the COVID-19 pandemic, which will likely refine investor agendas as we move forward.
As Lynn recently blogged, there will likely be increased calls for tying ESG metrics to executive pay and for more sensitivity to and limits on pay given the harsh impact on the larger workforce. Two notable additional examples of investor focus are:
First, a global coalition of institutional investors – public pensions, asset managers and faith-based funds – recently called on companies to step up to support their workers, communities, and businesses, as well as the markets, to help respond to the crisis. The coalition, organized by Domini Impact Investments, the Interfaith Center on Corporate Responsibility (ICCR) and the New York City Comptroller’s Office, has grown to over 250 investors representing over $6 trillion in assets under management, with more investors still signing on. Companies are asked, among other things, to:
Provide paid leave for all their workers,
Prioritize health & safety for their workers and communities,
Maintain employment for their workers, to enable an eventual resumption of operations more quickly,
Maintain supplier & customer relationships to help stabilize the economy, protect communities, and ensure stable supply chains, and
Exercise financial prudence & responsibility, particularly in such areas as share repurchases and executive compensation.
Companies should expect further calls from investors and investor-led organizations, such as PRI, to prioritize COVID-19-related issues in their ESG policies and engagements.
Second, as we begin to understand where the funds are flowing from the $2 trillion CARES Act rescue package, it seems inevitable that investors will increase focus on transparency in corporate political spending. Among others, Bruce Freed, president and co-founder of the Center for Political Accountability, has already asked, “Will we ever know whether undisclosed political contributions influenced which companies benefited most from the legislation?” He pointed to the relationship between One Nation, a 501(c)(4) group, and the Senate Leadership Fund (a so-called “527 Super-PAC”), closely associated with Senate Majority Leader Mitch McConnell, and evidence — through political spending reports and voluntary disclosures — of corporate money flowing through One Nation to this Fund. Such relationships, he said, feed fears that contributions could improperly influence who benefits from legislation. Freed believes that “it’s critically important that an increasing number of publicly owned companies … embrace… corporate political disclosure.”
Companies should be prepared for even more shareholder resolutions on political disclosures and more investor pressure to disclose all of their political spending, particularly those corporate funds channeled into so-called “dark money” vehicles: trade associations and 501(c)(4)s (organizations originally designed to promote social welfare and cause-related activities, to help educate the public), as well as the 527 Super-PACs that enable corporations to advocate indirectly for and against political candidates.
Additional Insight on Investor Stewardship & Covid-19
SquareWell Partners recently issued a report providing additional insight from asset managers about how they will fulfill their stewardship responsibilities given the continued uncertainty resulting from the Covid-19 pandemic. The report summarizes information based on feedback from 20 asset managers representing about $7.2 trillion in managed assets. They want to know more about what the board’s doing…here’s some of what they said:
– Most investors are prepared to deal with the current disruption and defer to regulatory guidance about the format for annual meetings – with a preference that companies revert back to a hybrid meeting format after the uncertainty subsides
– Investors expect communication from companies about the impact of recent events either through public disclosures or direct contact with management teams and would appreciate more information about how the board is overseeing the situation
– In terms of executive pay, investors expect boards to focus on more critical business issues and investors aren’t going to place additional importance on pay but note that there will be societal pressure to demonstrate restraint and manage reputational risk
California AG: No Delay in Enforcing CCPA
A few weeks ago, I blogged about the latest round of changes to the California Consumer Privacy Act. Some had requested a delay in enforcement of the CCPA due to ongoing need to focus on Covid-19 related concerns. This blog from Taft says that the California Attorney General provided an answer to the delayed enforcement request, and in short it’s “No”. As noted in the blog, there is some question about the exact start date for enforcing the CCPA – although it sounds like practitioners should plan on July 1.