In her opinion last week, Vice Chancellor Zurn also made note of the lengthy tenure of many of Boeing’s directors and their skill-sets as “political insiders or executives with financial expertise.” She then discussed at length the transformation of the company from an organization run by engineers to one run by finance folks – recounting how the company moved its headquarters from Seattle 20 years ago in order to “escape the influence of the resident flight engineers.” The focus on cost-cutting allegedly impacted quality and resulted in more safety violations.
Our point today, however, is that 3G made cost-cutting a strategic goal for the company. It tied employees’ performance metrics and compensation to their ability to cut costs. Procurement division employees said internally that the former COO “push[ed] like crazy” for them to meet cost savings goals, and increased cost savings targets to unreasonable levels.
Faced with that relentless pressure to cut costs, employees then engaged in the prebate chicanery we mentioned above, and lots more.
That’s the lesson for internal control and compliance officers. If your business is based on a misguided strategic goal, eventually it will warp your corporate culture to the point where misconduct is the only way to execute the strategy — and then, all the internal controls in the world won’t do you any good.
The topics of board composition and director skills are huge right now. Tune in tomorrow for the free webcast – “The 21st Century Board: Changing Expectations For Diversity, Human Capital & Risk Oversight” – co-hosted by ISS Corporate Solutions and CCRcorp – to hear Digimarc Board Chair Alicia Syrett, Russell Reynolds’ Rusty O’Kelley, ISS Corporate Solutions’ Ben Magarik, and our very own Lawrence Heim of PracticalESG.com. They’ll be talking about the changing expectations of investors & stakeholders – and how boards are responding.
Tomorrow marks the twentieth anniversary of the September 11, 2001 terrorist attacks on the United States. It is hard to believe that twenty years have passed since that terrible day. I can still remember that morning so vividly – the sky was a crisp blue, the temperature was just right for a post-Labor Day morning and everyone was busy getting back into the swing of work after the end of the summer season.
I was in my office on the phone with a client when American Airlines Flight 11 crashed into the North Tower of the World Trade Center, and so I did not immediately know what was happening. My mother called while I was on the line and my assistant sent her to my voicemail – she was concerned because at the time I regularly traveled to New York and she wanted to see if I was OK. When I emerged from my office after the call, a group had gathered around a television to watch the events unfold, and it was then that we all watched in horror as United Airlines Flight 175 crashed into the South Tower. Having vividly remembered the 1993 World Trade Center attack, it was clear to me at that moment that this was no accident.
Within the hour, word came that American Airlines Flight 77 had crashed into the Pentagon, and the call was made to evacuate the building. At the time, I was working in the tallest office tower in Baltimore, and there was a concern that attacks could be unfolding in cities up and down the east coast. I distinctly remember exiting the fire stairs into a world that was transformed – the traffic was gridlocked as panicked office workers fled the city, cell phones did not work because the network was overwhelmed and there was a constant threat of the invisible enemy that could fall out of the sky at any moment.
After a taking circuitous route home, I was so relieved to be reunited with my family, but devastated to hear about the horrific loss of life that was unfolding as the Twin Towers fell, the Pentagon burned and United Airlines Flight 93 crashed in Pennsylvania. It was – and still is today – unthinkable that this despicable act of evil could be carried out against so many people who were simply trying to go about their lives and do their jobs.
We must always remember those who lost their lives on that day, and to this day – the flight crews, the passengers, the office workers, the incredibly brave first responders and many others who stepped in to help on the day of the attack and in the months after, as well as the members of our military who were killed or injured fighting the war on terror which followed that tragic day.
Please take a moment tomorrow to reflect on what it was like on that day twenty years ago, and please remember the fallen. I think that is the best way that we can all honor their sacrifice and secure their legacy.
I know my friends at the SEC had similar experiences on September 11, 2001. They were getting their work day started when the news of the crash of American Airlines Flight 11 broke, and when it became clear that New York and Washington were under attack, the agency evacuated the old office building at 450 Fifth Street and the staffers began a long trek home in a city that was in complete lockdown.
The New York attacks struck at the heart of the financial district, and so many financial firms were located in the Twin Towers and surrounding buildings that were impacted by the attack. As noted in this press release from then SEC Chair Harvey Pitt, the markets did not open for trading in New York on September 11. In fact, the devastation was so great that markets would not open again until the following Monday, September 17. As noted in this press release, the SEC took bold steps and used, for the first time, its emergency powers to ease certain regulatory restrictions so that the markets could open in an orderly manner. Amazingly, the markets did reopen thanks to the hard work of the SEC staff, the exchanges and all of the financial firms who pulled together in their darkest hour to show the world that the United States would not be defeated by terror. We should remember their efforts as one of the many ways the United States came together to demonstrate our strength and resilience in the face of these attacks.
The July-August issue of The Corporate Executive has been sent to the printer (sign up and order this essential resource today). It’s also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in the “remote work” environment. In this issue, I am pleased to bring you articles on preparing for employee activism, the potential issues that could be addressed in a Rule 10b5-1 rulemaking and our compliance guide for the Nasdaq’s new diversity listing requirements.
As we roll into (and through) September, the attention of some non-listed issuers will inevitably turn to an impending SEC rule change that could cause the quotation of their securities in the over-the-counter markets to abruptly cease. Back in September 2020, the SEC adopted a number of amendments to Rule 15c2-11 that the Commission believed were necessary to protect investors in securities that are traded over-the-counter, and compliance with the amendments must generally be achieved by September 28, 2021. As this Baker & Hostetler memo notes:
The Amendment adds additional investor protections by mandating that investors have access to the current and publicly available information of issuers whose securities trade on the OTC markets, and it further requires broker-dealers to confirm that certain information about the issuer and its security is current and publicly available before quoting that security.
As amended, Rule 15c2-11 provides a broker-dealer with two ways to satisfy this obligation: (i) independently obtaining such information from issuers (or their agents) and reviewing it for material accuracy and reliability or (ii) relying on a publicly available determination by a qualified interdealer quotation system (an “IDQS”). OTC Link LLC (which is owned by OTC Markets Group, Inc., formerly known as Pink OTC Markets Inc.) is an IDQS, and the old OTC Bulletin Board (which is a facility of FINRA) is an IDQS (FINRA filed with the SEC to shutter the OTCBB back in September 2020, after the SEC adopted the Rule 15c2-11 amendments.
For the so-called “catch-all issuers” that are not subject to disclosure and reporting requirements under the federal securities laws, broker-dealers and the IDQSs will have to review an expanded list of financial and nonfinancial information about the catch-all issuers that is likely difficult for many such issuers to provide. Further, Rule 15c2-11 requires broker-dealers to be able to provide such information upon the request of any person who expresses an interest in a proposed transaction in the issuer’s security with the broker-dealer. SEC-reporting issuers that are delinquent in their filing obligations (and therefore without current, publicly available information) are also treated as catch-all issuers, but only for purposes of initiating or resuming a quoted market in such issuers’ securities.
With the compliance date of the rule fast approaching, catch-all issuers without current and publicly available information that broker-dealers and the IDQSs can review will find themselves in a position of no longer being quoted in the over-the-counter markets (unless some exception to Rule 15c2-11 applies), and the investors in such issuers will be in for a rude awakening when they are unable to get quotes such issuers’ securities.
Following adoption of the Rule 15c2-11 amendments, OTC Link LLC — responding to suggestions made by the Commission itself that a so-called “expert market” could “enhance liquidity for sophisticated or professional investors in grey market securities” — submitted a request on behalf of certain broker-dealers for an exemption from certain of Rule 15c2-11’s requirements for quotations made on electronic platforms where the distribution of such quotations is limited to sophisticated or professional investors. In December 2020, the SEC proposed to grant OTC Link LLC’s request for exemptive relief and issue a conditional exemptive order, and solicited public comment on that proposal.
The hopes for an expert market alternative were dashed last month, when the staff of the Division of Trading & Markets put out a statement which said:
This proposed order is not on the Chair’s agenda in the short term. Accordingly, on September 28, 2021, the compliance date for the amendments to Rule 15c2-11, we expect that broker-dealers will no longer be able to publish proprietary quotations for the securities of any issuer for which there is no current and publicly available information, unless an existing exception to Rule 15c2-11 applies.
Without the expert market alternative available, those issuers who fall into the category of “OTC Pink – No Information” (i.e., those issuers who cannot or will not provide current and publicly available information) will fall off the Rule 15c2-11 cliff later this month, with nowhere to land.
The present day electronic platform for over-the-counter stock quotations operated by OTC Link had its origins back in the early 1900s, when the National Quotation Bureau printed a weekly inter-dealer quotation service on pink paper. This paper publication continued through the years until the late 1990s, when an electronic quotation service was launched. I can still remember looking at the actual pink sheets, because the SEC subscribed to the service back in the day. It is hard to believe in today’s environment, where traders seek to exploit information imbalances lasting milliseconds, that there was actually a time when broker-dealers would wait a week for updated bid and ask quotes on over-the-counter securities!
BSR, which describes itself as “an organization of sustainable business experts that works with its global network of the world’s leading companies to build a just and sustainable world,” recently announced the launch of the Sustainable Public Equity Offering Framework. This new framework is described as follows:
The SPO Framework aims to apply well-established ESG principles to address a specific gap in today’s financial markets for companies who are transitioning from private to public or are newly public. A SPO is intended to identify public equity offerings by companies with ESG profiles that have been assessed by one or more independent third-parties as having satisfied objective and clearly defined ESG criteria. It is our hope that the creation of the SPO Framework will further focus attention on the fundamental importance of sustainability in business, and particularly in the public markets, and will provide a valuable tool for companies, investors and other market participants in their efforts to facilitate and support sustainability and ESG practices.
The criteria applied to issuers under the SPO Framework is based on six specific topic areas: ESG rating; mission and purpose; climate and environment; value chain; people; and governance. In order to qualify as an SPO, one or more independent third parties assesses the issuer’s compliance with the Issuer Criteria, and a report is issued confirming that the issuer has satisfied the relevant Issuer Criteria prior to the completion of the IPO.
Allbirds, a footwear maker, recently filed a Form S-1 with the SEC for its IPO, and announced that it was hoping to pioneer the SPO Framework. The Form S-1 includes extensive disclosure about the Issuer Criteria for the SPO Framework, and notes that Allbirds worked with ISS ESG to assess and evaluate the company’s performance against the Issuer Criteria. The Form S-1 notest that “ISS ESG completed a review of Allbirds’ ESG commitments, processes, and practices and concluded in an External Review issued on August 30, 2021 that Allbirds has met all of the Issuer Criteria.” Allbirds states in the Form S-1:
We hope that Allbirds’ initial public offering will be the first step in establishing a framework for future SPOs. It is our expectation that an issuer who has conducted an SPO according to the SPO framework and continues to maintain all applicable requirements of the SPO framework will be viewed as a Sustainable Public Company, or an SPC. We will encourage the Advisory Council to continue to refine the SPO framework so that more issuers take into consideration positive ESG outcomes. We believe the establishment and public disclosure of the Sustainable Public Equity Offering framework will help investors better identify public companies that are committed to sustainability and positive outcomes for all stakeholders.
We will see whether the new SPO Framework catches on, as more issuers look for ways to differentiate themselves based on their ESG approach.
