Some of you might know that we’re soon moving to “zone defense” in my house – my husband & I are expecting our third child any day now. We also took on parenthood later in life, and we love a challenge, so they’re all under age 5.
At about this point with our second, I went way out of my comfort zone and blogged about some of the issues I was facing. I loved that many of you responded with your own anecdotes, words of encouragement and advice. Even more gratifying was that a few people confided that they were facing similar issues and felt less alone after reading that post. I’ll say that most of the things in that list still apply the third time around, but I have a few more to add:
1. Living the Cliche: The biggest difference this time around is my “time flies” mindset. With our oldest starting kindergarten next year and our “baby” (soon-to-be middle child) well into the toddler phase, I’m really starting to grasp how quickly this all goes. I’ve barely accepted the fact that I’m pregnant and it’s already over!
2. ESG Is Everywhere: People are mad at Fisher Price/Mattel and the Consumer Product Safety Commission for failing to share stats about infant deaths caused by the Rock ‘n Play, a super popular product that we used for both of our kids. The info came to light, and the product was recalled, only because the CPSC accidentally shared product-specific info with Consumer Reports. So that’s not too reassuring. Only read the report if you can stomach the tragic human element of the story. This truly is a “buyer beware” world – which is scary when you’re desperate, sleep-deprived, faced with loads of conflicting info and in charge of keeping a defenseless human alive.
Will there be long-term legal or reputational fallout for the company or the agency? At least one well-known “baby sleep” author (yes, that’s a thing – she also runs a 45,000-member Facebook group) has renounced her trust of any products and is rewriting her book. I’m left wondering what kind of info the company’s board was getting and whether there’s an advisory board that will get more attention in future disclosures, since there don’t appear to be any pediatricians or child safety experts on the board itself. This WaPo article about “voluntary safety standards” set by companies is also…interesting. I guess that’s good for shareholders, at least in the short-term?
3. My Kids Make Me Better: I suspect that many in our community – myself included – can identify with this HBR article about overworking. Sometimes I try to do some “light work” around the family on nights & weekends. But lately, my 2-year-old walks up, shuts my laptop and carries it away – then he grabs my phone too, saying, “No more, mommy!!” Unfortunately, that’s the kind of “tough love” that I need right now to be able to live in the moment. Among other things, our kids are also constantly teaching me patience, new perspectives, organization, appreciation for beauty in small things and a nuanced understanding of bathroom humor. After seeing the two of them interact over the last couple years, I’m even more excited to see how the new baby’s personality will fit into the mix.
4. Transitions Aren’t Easy: I blogged last time about “transition mechanics,” which are very important. This is more about the “transition mindset.” I’m lucky in being afforded an opportunity to take leave – not everyone has that. However, I feel I’m not “optimizing” that benefit because – rather than gradually ramping down – I tend to work excessively until the moment it’s physically impossible. I know from personal experience that this makes the birth and recovery much more difficult and I’ll spend a few weeks or months afterwards regaining the ability to function and beating myself up for not taking better care of myself and the baby during pregnancy. I also have to set really firm boundaries for myself during leave, because I know I’ll struggle with not feeling “productive” (despite producing a brand new person and having the primary responsibility to feed and keep that new, helpless person alive).
I recall that returning from leave can be pretty rough too, though I’m not in that moment yet. Whether you’re “leaning in” or “leaning out,” it takes a while to find a rhythm – and this NYT piece points out that for many, the “push-pull” doesn’t ever fully disappear. I try to remind myself that – while parenting continues forever – leave itself is such a short time period in the big picture and it’s best to stay healthy and present. Parenthood is also just one example of a big transition – everyone has “life” stuff going on throughout their career, and we’re doing ourselves a disservice if we glorify robotic compartmentalization.
5. Cultural Shift: Last time around, I blogged that professional networking while pregnant is particularly awkward. I do enjoy bonding over the shared parenting journey, but I know there are other things that we can also talk about, and regularly fielding “body” comments can make even the most confident person self-conscious. I’ve experienced much less of that this time, which I love. One person was surprised when I mentioned I was expecting and said they now look at people only from the neck up – bravo!
Another positive change I’ve noticed in the last few years is that many more men are unapologetically – even proudly – taking parental leave. One fellow lawyer has been posting daily updates about the time away from his “easier” job and told me that the expectation at the firm these days is that everyone (birthing & non-birthing parents) will take their full leave – it’s frowned upon to do otherwise. Shortly after that, I received a to-the-point auto reply from another male contact – “I’m out on parental leave and will not be responding to messages” – with contact info for colleagues. Two thumbs up to that team approach.
I (still) know I’m not alone on this journey of balancing pregnancy, parenthood & lawyering. I’d welcome more emails with any experiences & “lessons learned” that you want to share – just don’t be surprised if you get an auto reply! I’m extremely grateful to John, Lynn, Dave, Alan, Mike, Mark and the folks in our HQ for being so on top of their game and willing to handle some “extras” these next few months.
California’s “Board Gender Diversity” Law: FAQs
It’s official – California-headquartered companies are now required to have at least one female director. This WSJ article says that 244 California-based companies have added a woman to their board since the law went into effect, and 41 companies added two. For companies with five or more directors, the law requires having 2-3 female directors by the end of next year. This Wilson Sonsini memo provides some up-to-date info on how reporting and enforcement will work in the days ahead. Here’s an excerpt:
Are there any reporting obligations for companies under SB 826? Yes and no. Because the California secretary of state has not yet adopted implementing regulations under SB 826, there is currently no official regulatory mechanism for reporting that would result in a fine (see list in next section). However, the secretary of state has modified the current annual Corporate Disclosure Statement for publicly traded companies to include questions regarding the number of female directors currently serving on a company’s board (see question 5 in the statement).
Based on our conversations with an individual handling SB 826 matters at the secretary of state’s office, during calendar 2019 and as of the date of this Alert, responding to those questions on the Corporate Disclosure Statement is the only current way a company can inform the secretary of state’s office regarding compliance with SB 826. We do not expect the secretary of state’s office to review a company’s annual report on Form 10-K, proxy statement, website, or any other documentation to determine whether a company had a female director serving during a portion of calendar 2019.
The memo goes on to say that it’d be unlikely at this point for a company to be fined for being out of compliance based on 2019 board composition. However, there’s a “public shaming” factor that could motivate companies to comply:
If there are currently no official reporting obligations, why should my company report on the Corporate Disclosure Statement? SB 826 requires the California secretary of state to publish on its website a report documenting the number of companies whose principal executive offices are located in California and who have at least one female director. An initial report was published in July 2019, and with no official reporting mechanism there were a number of anomalies reported.
No later than March 1, 2020, and then on an annual basis, the secretary of state must publish a more detailed report on its website regarding the number of:
• companies subject to SB 826 that were in compliance with the law during at least one point during the preceding calendar year;
• publicly held corporations that moved their U.S. headquarters to California from another state or out of California into another state during the preceding calendar year; and
• publicly held corporations that were subject to SB 826 during the preceding year, but are no longer publicly traded.
Based on our conversations with an individual handling SB 826 matters at the California secretary of state’s office, the March 2020 report is currently being prepared based on responses received during 2019 from the Corporate Disclosure Statement. If companies want to be named on the secretary of state’s annual report as being compliant because a female director has served on their board for at least a portion of the calendar year, they will need to inform the secretary of state’s office through the Corporate Disclosure Statement.
California isn’t the only state to be taking a closer look at board diversity – New York is the latest jurisdiction to adopt a law on the topic. Starting in June of this year, companies will be required to report the number of directors on their boards and how many of those people are women. See this Ogletree Deakins memo for more info…
Auditor Independence: Proposed Rule Changes are Good News for Dealmakers
Here’s something John recently blogged on DealLawyers.com (and also see this four-part piece in Francine McKenna’s newsletter about the SEC’s auditor independence proposal): This recent blog from Weil’s Howard Dicker & Lyuba Goltser reviews the potential benefits to PE funds, IPOs & participants in M&A transactions associated with proposed changes to the SEC’s auditor independence rules. This excerpt discusses how the rule changes would address inadvertent independence violations that can arise in M&A transactions when the buyer’s auditor has also performed impermissible non-audit services for the target:
The SEC proposes a transition framework to address these types of inadvertent independence violations. An accounting firm’s independence will not be impaired because an audit client engages in a merger or acquisition that gives rise to a relationship or service that is inconsistent with the independence rules, provided that the accounting firm:
– is in compliance with applicable independence standards from inception of the relationship or service;
– corrects the independence violations arising from the merger or acquisition as promptly as possible (and in no event later than six months post-closing); and
– has in place a quality control system to monitor the audit client’s M&A activity and to allow for prompt identification of potential independence violations before closing.
The blog also points out that for PE funds, rule changes would codify Staff practice concerning independence issues that arise when sister companies with a common PE fund owner have engaged an audit firm to provide non-audit services that could impair the independence of the audit firm with respect to another sibling company. The rule changes would also shorten the look-back period for auditor independence from three years to one year, which would provide increased flexibility for IPO companies to address potential disqualifying relationships with their audit firms.
A public company currently has up to four business days after the occurrence of a material corporate event before it must file or furnish a Form 8-K (the 8-K Gap Period). Current law does not prohibit insider trading per se during the 8-K Gap Period, absent a showing that the insiders have traded on material nonpublic information in their possession or violated the prohibition against “short swing” trading under Section 16(b) of the Exchange Act.
The purpose of the Act is to address this perceived loophole by directing the SEC to issue rules, no later than one year after its enactment, to require a reporting company under the Exchange Act to “establish and maintain policies, controls, and procedures that are reasonably designed to prohibit executive officers and directors of the issuer from purchasing, selling, or otherwise transferring any equity security of the issuer, directly or indirectly” during the 8-K Gap Period.
Under the current version of the bill, the SEC would be permitted to exempt transactions under Rule 10b5-1 plans that were adopted outside of the gap period – and the prohibition wouldn’t be triggered when an event is announced in a press release or publicly disseminated in a Reg FD-compliant way. A similar bill has been introduced in the Senate.
This follows another insider trading bill that the House passed last month. Meanwhile, a former Congressman was just sentenced to 26 months in prison for insider trading (a case that Broc and John blogged about when it broke).
XBRL: Check Your Public Float!
Time to double check your XBRL data. Here’s a recent announcement about XBRL “scaling errors” from the SEC’s Division of Economic Risk & Analysis:
DERA staff has observed that some filers are inconsistently reporting public float values. For example, one filer reported a public float of $800 million in its HTML filing, but reported a public float of $8 billion in its XBRL data. Filers should carefully review their XBRL data to ensure scaling accuracy. Furthermore, filers should verify that information in their HTML filing is consistent with their XBRL data.
Non-Financial Disclosure: What “Audit Assurance” Looks Like
One of the suggestions that keeps turning up for ESG disclosures is that companies should explain how they verify the accuracy of the info or provide some external assurance – for example, see the Chamber’s recent “best practices.” This 16-page memo from the Center for Audit Quality discusses shareholders’ increasing interest in non-financial info and notes some industry guidance for auditors on how to review it.
From the company perspective, this 52-page guide – from the World Business Council for Sustainable Development and the Institute of Chartered Accountants in England & Wales – is even more helpful because it explains what the assurance process would look like, how to decide whether it’s right for your company, and how to enter into an assurance engagement. The report shows that this endeavor doesn’t have to be “all-or-nothing” – e.g. a project’s scope could range from:
– Site visits to head office only, no detailed tests, only reviews
– Site visits to 5 of 10 locations, detailed tests at 2 sites and a review of information at other locations
– Site visits to 7 of 10 locations, detailed tests at all 4 major sites and a review of information at other locations
At one point or another, most of us have clients who want to avoid scrutiny of sub-par results and consider the “Friday earnings release” approach. Legend has it that everyone will be too busy with their weekend to pay any attention to Friday news.
Sadly, this WSJ article confirms that the opposite is true: because fewer companies release earnings on Fridays, there tends to be more attention – and market volatility – for those who do. The most popular days for earnings are Tuesdays, Wednesdays & Thursdays – typically three or four weeks into earnings season. And here’s what the article says happens on those days:
Attention paid to companies’ earnings—measured by metrics such as downloads of regulatory filings, Google searches and news articles—drops on popular reporting days, said Ed deHaan, an associate professor of accounting at the University of Washington’s Foster School of Business. Mr. deHaan and his colleagues analyzed the timing and impact of 120,000 results announcements in 2015 and found that trading volumes of individual stocks also went down on busy earnings days. Their findings were published in the Journal of Accounting and Economics.
The article also points out that companies may miss out on attention if they hold their earnings call at the same time as industry competitors. It spotlights Citrix, whose earnings date typically conflicts with Microsoft’s – Citrix is now considering moving its earnings date based on unsolicited feedback from analysts & investors. A move might be worth some thought if you’re not getting the attendance you want…
Using Tax Shelters? It May Affect Your ESG Reporting
Recently, the Global Reporting Initiative – one of the longer-standing and more widely-adopted frameworks for sustainability reporting – published a new tax disclosure standard that’s intended to discourage “tax avoidance.” See pages 5-13 for the recommended disclosures – the “effective date” is next January, but early adoption is encouraged. Here’s an excerpt from GRI’s announcement:
The GRI Tax Standard is the first global standard for comprehensive tax disclosure at the country-by-country level. It supports public reporting of a company’s business activities and payments within tax jurisdictions, as well as their approach to tax strategy and governance. Global investors, civil society groups, labor organizations and other stakeholders have all signaled their backing for the Tax Standard, as it will help address their growing demands for tax transparency.
The Tax Standard has been developed in response to concerns over the impact tax avoidance has on the ability of governments to fund services and support sustainable development – and to give clarity on how much companies contribute to the tax income of the countries where they operate.
Tomorrow’s Webcast: “Cybersecurity Due Diligence in M&A”
Tune in tomorrow for the DealLawyers.com webcast – “Cybersecurity Due Diligence in M&A” – to hear Jeff Dodd of Hunter Andrews, Sten-Erik Hoidal of Fredrikson & Byron and Jamie Ramsey of Calfee Halter discuss how to approach cybersecurity due diligence, and how to address and mitigate cybersecurity risks in M&A transactions.
After a 7-year hiatus, I’m thrilled to announce that Dave Lynn & Marty Dunn have resurrected their “Dave & Marty Radio Show.” Topics covered in this 21-minute episode include:
– “Top 10” expectations for this shareholder proposal season
– The latest issues with non-GAAP financial measures and key performance indicators
Airbnb Establishes “Stakeholder” Board Committee
On Friday, Airbnb announced a detailed “stakeholder” approach to governance and company-wide compensation. It identifies five key groups of stakeholders (including shareholders) – as well as principles for serving each group and detailed metrics to track progress against those principles. Here’s what it’s doing at the board level:
First, we will be establishing an official Stakeholder Committee on Airbnb’s Board of Directors. The Committee will be chaired by Belinda Johnson after she transitions from her current role as Chief Operating Officer to become a member of the Airbnb Board. This Committee will be responsible for advising our Board regarding our multi-stakeholder approach and the impact of our company on our stakeholders, the steps to institutionalize this approach into our company’s governance, and the application of our corporate governance principles to shape the future of our company.
Airbnb will report on its progress at a new “Stakeholder Day” – according to this NYT interview with the company’s CEO, that day will be similar to a traditional annual meeting but with a broader invite list that includes customers, hosts and employees. This WSJ piece ponders how the company’s approach will work out when it launches its expected IPO later this year.
Airbnb’s move arises out of last year’s statement on “corporate purpose” by the Business Roundtable. Don’t miss our webcast at 2pm ET today – “Deciphering ‘Corporate Purpose’” – to hear Morrow’s John Wilcox, Freshfields Bruckhaus’ Pam Marcogliese and Morris Nichols’ Tricia Vella discuss the debate over “shareholder primacy” – including what it means for directors’ fiduciary duties and disclosure.
Tomorrow’s Webcast: “2020 Section 16 Changes with Alan Dye”
Tune in tomorrow for the Section16.net webcast – “2020 Section 16 Changes with Alan Dye” – to hear Alan Dye of Section16.net and Hogan Lovells the latest developments and compliance requirements for Section 16, including the Section 16(b) plaintiff’s bar. Get answers to:
– What recent rule changes mean for your compliance program
– The status of cases challenging the Rule 16b-3 exemption for tax withholding
– What the latest issues are—and what you can do to resolve them
– Considerations to keep in mind for Form 5 reporting and Item 405 disclosures
– How to keep your compliance program up-to-date
Yesterday, Reuters reported (along with other outlets) that SEC Commissioner Rob Jackson will be stepping down on February 14th to return to his faculty post at the NYU School of Law. Rob’s term expired last June, so this has been expected for a while. Here’s a statement from SEC Chair Jay Clayton.
We don’t have a definite timeline for Jackson’s successor, but it’s expected that the White House will nominate Caroline Crenshaw – who’s currently an attorney in Rob’s office – to fill his seat (see this Cooley blog). Depending on how long it takes to confirm his successor, the SEC may be down to four Commissioners for a while after Rob’s departure.
“Top 10” Risks for 2020
This “risk barometer” report from Allianz identifies “top 10” risks for 2020 – as well as the macro trends behind those risks, which companies should watch. It’s based on responses from over 2,700 risk management professionals and is a helpful read, especially in light of SEC Enforcement’s focus on “hypothetical risk factors” – which I blogged about on Tuesday. Here’s an excerpt – see the full 23-page report for more (as well as my blog from yesterday on risk factor disclosure trends):
Cyber risk tops the list for the first time with businesses facing a number of challenges such as larger and costlier data breaches, more ransomware incidents and the increasing prospect of litigation after an event. The playing out of political differences in cyber space also ups the ante while even a successful M&A can result in unexpected problems.
Further down on the list was new technologies. The report says that while new technologies present opportunities, they can also bring considerable risk. Technologies identified as coming with the greatest risk potential include artificial intelligence, digital platforms, internet of things/smart objects, autonomous vehicles and digital assistance systems/virtual reality.
Tune in Tuesday, January 21 for the webcast – “Deciphering ‘Corporate Purpose'” – to hear Morrow’s John Wilcox, Freshfields Bruckhaus’ Pam Marcogliese and Morris Nichols’ Tricia Vella discuss the debate over “shareholder primacy” – including what it means for directors’ fiduciary duties and disclosure.
It’s that time of year again! Larry Fink – BlackRock’s CEO – is out with his annual letter to CEOs. This year, he says BlackRock is taking a more aggressive stance on sustainability. Here’s the high points:
– Continued emphasis that corporate purpose and consideration of a broad range of stakeholders is the “engine of long-term profitability”
– Encouraging companies to publish SASB-based sustainability info and disclose TCFD-based climate-related risks – BlackRock will use the disclosures and engagements to determine whether companies are adequately managing risks
– BlackRock will vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them
That last one is a biggie – but there’s not a lot of detail on what it really means. So as usual, some are skeptical of whether BlackRock’s commitments will go as far as the letter implies. But, as emphasized in this NYT article and a recent blog from Liz, the asset manager is getting more and more pressure from its investors to “walk the talk” on E&S issues. At the same time that the CEO letter went out, BlackRock published this letter to clients that details its sustainability efforts. Here’s some interesting tidbits from that:
– For active funds, BlackRock will accelerate to a “sustainable investing” approach and divest from the coal sector (i.e., as Matt Levine points out, maybe they’ll nudge clients into more sustainable investments, but this Bloomberg article explains that divestment won’t touch some of the biggest diversified producers)
– BlackRock is working with index providers to provide – and standardize – sustainable versions of flagship indexes (which will exclude businesses with high ESG risks)
– BlackRock’s engagement priorities for this year will be mapped to the UN Sustainable Development Goals
– BlackRock will start disclosing its votes quarterly – or “promptly” in the case of high-profile votes (as Liz has blogged on our “Proxy Season Blog, prompt – or even advance – disclosure of voting decisions is an emerging trend that could have a big impact)
– BlackRock’s annual stewardship report will start disclosing topics discussed during each engagement with a company
The client letter also touts that (just last week) BlackRock became a signatory to Climate Action 100+, which is led by Ceres. Here’s Ceres’ press release – which explains that members of the coalition commit to engage with companies to reduce emissions, implement a strong governance framework which explains the board’s role in overseeing climate risks & opportunities, and improve disclosure. However, as this Financial Times article points out, firms are under no obligation to vote for climate change resolutions even after joining Climate Action 100+.
We’re constantly posting ESG info in our “ESG” Practice Area. There you’ll find information on ESG voting and disclosure trends, investor policies and other engagement tips and resources. We also have information posted in our “Institutional Investors” Practice Area.
Risk Factors: Disclosure Trends
The other day I blogged about considerations for this year’s 10-K disclosures – and one of the biggest things to think about is your risk factors. For more on that topic, this recent Intelligize blog summarizes risk factor trends over the last year. Not too surprising, the “top 5” most common risk factors were:
– Failure to compete effectively
– Dependence on employees
– Business (miscellaneous)
– Cybersecurity, data privacy, and information technology
– Operational disruptions
And, for risk factors that saw the biggest increase in citations, the top 3 were:
– International trade restrictions
– Employee misconduct
– Anti-corruption law
As John blogged last summer, sadly “active shooter” risk factors were also rising among certain companies.
Investors Want You To Think About Stakeholders?
Despite some of the backlash to the BRT’s redefined statement of corporate purpose, a recent report from Edelman, a communications firm, found that most institutional investors want companies to balance the needs of all stakeholders – shareholders, customers, employees, suppliers and communities. The report summarizes findings from a survey of over 600 institutional investors – and appears to align with statements made by some large shareholders, e.g. BlackRock & Vanguard. Here’s what I found most interesting:
– 86% of surveyed investors said that they would consider investing with a lower rate of return if it meant investing with a company that addresses sustainable or impact investing considerations
– 90% of surveyed investors said that they would support a “reputable” activist investor if they believed change was necessary at a company
Last year, John blogged about a shareholder proposal submitted to Johnson & Johnson dealing with a mandatory arbitration bylaw. The SEC granted no-action relief to J&J but since then, the proponent filed a dispute and it’s pending. Now, the same shareholder proponent has submitted a similar proposal to Intuit and it’s up for a vote at the company’s annual shareholders’ meeting later this month.
Based on this “thank-you” letter that CII sent to Intuit’s board, it appears that CII and management have found a shareholder proposal they both agree should be rejected. CII’s letter thanks Intuit’s board for opposing the shareholder proposal. In the letter, CII says that it opposes attempts to keep shareholders from courts through introduction of forced arbitration clauses. Here’s an excerpt:
Mandatory shareowner arbitration clauses in public company governing documents represent a potential threat to principles of sound corporate governance that balance the rights of shareowners against the responsibility of corporate managers to run the business. More specifically, among the many problems that our members have identified with shareowner arbitration clauses is the fact that disputes that go to arbitration rather than the court system generally do not become part of the public record and, thereby, may lose their deterrent effect.
Intuit’s statement of opposition points out that no other shareholders have identified a mandatory arbitration bylaw as a significant concern. In reference to the J&J situation, it also notes that another similar proposal is subject to litigation and says that adoption of such a bylaw would likely expose the company to unnecessary litigation.
Presuming the proposal at Intuit is soundly rejected by shareholders and how the proponent fares in the J&J dispute, it will be interesting to see whether these mandatory arbitration bylaw proposals continue to crop up going forward.
Heads up: 2020 Peak Edgar Filing Dates
Now that 2020 is here, plan ahead – the SEC published the list of peak filing days for 2020. If submitting test filings, the SEC says those should be submitted as early as possible prior to the filing due date – as processing times will take longer during these high-volume filing periods.
Tomorrow’s Webcast: “Pat McGurn’s Forecast for 2020 Proxy Season”
Tune in tomorrow for the webcast – “Pat McGurn’s Forecast for 2020 Proxy Season” – when Davis Polk’s Ning Chiu and Gunster’s Bob Lamm join Pat McGurn of ISS to recap what transpired during the 2019 proxy season – and predict what to expect for 2020. Please print these webcast materials in advance – it’s Pat’s deck that he will be working with.
The Business Roundtable’s “Statement on the Purpose of a Corporation” has been a frequent conversation and blog topic. Interesting to see that the Governance & Accountability Institute recently analyzed and reported on the reporting practices of the companies whose CEOs signed the BRT statement.
Of the stats included in G&A’s report, 85% of the signatory companies publish a sustainability/ESG report. Of the signatory companies that publish a sustainability report, 58% have adopted one or more Sustainable Development Goals – with the most common SDG being climate action and the next being decent work and economic growth.
To hear more about shareholder primacy and the corporate purpose, be sure to tune-in for our January 21 webcast, “Deciphering ‘Corporate Purpose’.” We’ll talk with John Wilcox of Morrow Soldali, Pam Marcogliese of Freshfields Brruckhaus and Tricia Vella of Morris Nichols to understand what the debate is all about and what it means for directors’ fiduciary duties and company disclosure.
Divestment: Another Investor Approach to Social Issues?
Last summer, Liz wondered whether shareholders would show renewed interest in “firearms responsibility” during the 2020 proxy season. In December, the Connecticut Treasurer announced a “responsible gun policy” that goes past engagement and right on to divestment. We’ve blogged about how the NY Comptroller is considering divestment as part of its “decarbonization” plan as well – but of course it’s too early to tell whether divestment will become a real threat on these types of “social” issues.
As State Treasurer, the costs and risks of gun violence are a matter of significant financial concern, and the business of guns is becoming an increasingly risky proposition. Under Connecticut statute, the State Treasurer is empowered to consider the social, economic and environmental implications of specific investments. The Treasurer will propose amendments to the current Investment Policy Statement, with appropriate public notice prior to consideration and approval by the Investment Advisory Council.Following amendment of the Investment Policy Statement, fund managers will be instructed to reallocate investments into comparable substitutes in a similar industry that have the same risk and return characteristics as civilian gun manufacturing companies.
The Connecticut Retirement Plans and Trust Funds (CRPTF) currently hold $30 million of equity investments in 5 companies involved in the manufacture of ammunition for the civilian market (Northrop Grumman, Olin Corp., Daicel Corp., Clarus Corp., and Vista Outdoor). These investments represent .08% of the CRPTF’s portfolio.
While the CRPTF currently does not own investments in Sturm, Ruger & Company, a publicly traded civilian firearms manufacturer headquartered in Southport, CT, the Responsible Gun Policy will prohibit consideration of future investments with this company unless they move to advance smart gun technology. Other manufacturers, such as Colt (based in West Hartford, CT), are privately-held and would not be impacted by divestment.
The CRPTF is currently invested in Northrop Grumman, a multi-billion dollar global security company which wholly-owns Adaptive Optics Associates Xinetics (AOX) in East Hartford. Since Northrop Grumman is also in the civilian firearms ammunition manufacturing market, its securities would be subject to the Responsible Gun Policy and as such, $28 million currently invested in Northrop Grumman would be reallocated to an economically equivalent substitute.
Besides prohibiting Connecticut’s pension funds from investing in such companies, the policy will also require banks and other financial institutions that want to work with the state to disclose their policies on guns. When making decisions to contract with a bank or financial institution, the state will consider the institution’s gun policies as one factor in its decision making process.
10-K Considerations to Keep in Mind
With calendar year Form 10-K filings coming up, Gibson Dunn issued a memo that walks through substantive and technical considerations when preparing 2019 10-Ks. The memo discusses SEC disclosure amendments in the last year and SEC enforcement actions that may impact this year’s disclosures. Here are some of the considerations, check out the complete 12-page memo for more:
– As of year end, of the 91 S&P 500 companies that filed a Form 10-K since the MD&A changes went into effect last April, 57% discussed 3 years of financial information rather than omitting discussion of the earliest of the 3 years from the MD&A
– Whether discussing 3 years or only 2 in the MD&A, companies should remember to review discussion of the earlier years to determine whether anything has come to light since the time of the original disclosure that would now make the original disclosure incomplete or inaccurate to an extent that it would be material – the memo provides examples of how or when this could occur
– Given SEC enforcement actions last year dealing with risk factor statements that phrased an event or contingency as a hypothetical, risk factors should be regularly revisited and treated as “living” as much as the rest of the filing – it may be preferable to refer to consequences of a risk that arises from time to time as a material contingency instead of as a hypothetical contingency
This Allianz report highlights 5 “mega trends” likely to impact boards and officers – and the D&O insurance market – in 2020 (also see this annual Protiviti memo that identifies emerging risk themes involving talent & culture and technology & innovation). The “mega trends” identified in the Allianz report include:
1. Litigation Risks: The report highlights the growing risk of “event driven” litigation – e.g. cyber security breaches, environmental disasters, product problems – as well as continued high levels of securities class actions & shareholder activist suits.
Allianz has seen double-digit growth in the number of claims it has received in the last five years and expects that increased claims activity to continue. According to Cornerstone Research, plaintiffs filed lawsuits in 82% of public mergers valued over $100 million. And event driven litigation often triggers claims under multiple policies – e.g. D&O and cyber.
2. Expectation that Boards Focus on ESG: As Liz blogged recently, D&O underwriters are paying attention to a company’s “social media temperature” as a factor in assessing reputational & brand risks
3. Slowing Economic Growth & Political Uncertainty: Allianz expects to see increased insolvencies, which have been rising for the last 3 years and lead to D&O claims
4. Litigation Funding: This fuels the other mega trends and is forecast to continue growing internationally
What does all this mean for your insurance? Here’s an excerpt from the report’s parting remarks:
According to Aon, D&O rates per million of limit covered were up 17.1% in Q2 2019,compared to the same period in 2018, with the overall price change for primary policies renewing with the same limit and deductible up almost 7%. Primary policies renewing with the same limit were at 93.5% in Q2 2019, but only 70.6% renewed with the same deductible and 66% at the same limit and deductible, suggesting tightening terms and conditions. Still, over 92% of primary policies renewed with the same carrier.
From an insurance-purchasing perspective AGCS sees customers that are unable to purchase the same limits at expiration are also looking to purchase additional Side A only limits and also to use captives or alternative risk transfer (ART) solutions for the entity portion of D&O Insurance (Side C). Higher retentions, co-insurance and captive-use indicate a clear trend of customers considering retaining more risk in current conditions.
Sustainability Disclosure Trends: Small & Mid-Caps
This new memo courtesy of White & Case is unique in showing sustainability reporting trends for small & mid-cap companies by number of years since IPO – and by whether a company is controlled/dual class versus widely held. Here are six key nuggets (for even more info on small & mid-cap perspectives on sustainability, also check out our recent webcast transcript):
1. Overall, more than 33% of surveyed companies include some form of website sustainability disclosure – either via a “sustainability” page or a standalone report
2. Sustainability disclosures are more prevalent among surveyed companies that have been public for longer periods
3. Surveyed companies with higher market caps are more likely to report on sustainability – but even among companies with a market cap below $1 billion, 25% are providing some form of disclosure
4. Among controlled or dual-class surveyed companies, 26% provide some sustainability disclosure – that compares to 35% of other companies who may be receiving pressure from significant institutional shareholders
5. Energy companies are the most likely to provide some form of sustainability reporting
6. The most common topics covered are: environmental impact & risk management (including waste reduction), human capital management (including diversity & inclusion and community engagement) and health & safety
MD&A: Corp Fin Wants More Info on Supplier-Finance Arrangements
In recent remarks at an AICPA conference, Corp Fin’s Deputy Chief Accountant Lindsay McCord said companies need to do a better job discussing the financial implications of supplier-finance arrangements on liquidity & cash flows in the MD&A. That’s according to this memo from Moody’s, which explains that supplier-finance arrangements – also known as “reverse factoring” – are arrangements where a bank or other finance company serves as an intermediary between a company and its suppliers. The bank agrees to pay the company’s invoices to the supplier in exchange for interest.
But, GAAP guidance doesn’t say whether supplier-finance arrangements should be classified as debt or accounts payable, or how the arrangement should be disclosed in financial statements. Usually the only evidence of supplier-finance arrangements in the financial statements is an increase in the accounts payable balance. So, improved disclosure would help shareholders & analysts identify financing arrangements that are otherwise embedded within working capital.
According to Deloitte’s highlights from the conference, Corp Fin has observed a lack of disclosure of the use, and sometimes, the existence of the arrangements in the MD&A. Key points Corp Fin expects companies to consider disclosing in the MD&A include:
– Material terms, general benefits and risk that are introduced
– Any guarantees provided by subsidiaries or the parent
– Any plan to further extend programs to suppliers
– Factors that may limit further expansion
– Trends and uncertainties, including interperiod variations related to the programs
Red state or blue state, Fox News or MSNBC, everybody can agree that when it comes to public companies, we’re all for good governance. But what exactly do we mean by that term? According to this recent Stanford article, nobody has the foggiest idea of what “good governance” really entails. Here’s the intro:
A reliable corporate governance system is considered to be an important requirement for the long-term success of a company. Unfortunately, after decades of research, we still do not have a clear understanding of the factors that make a governance system effective. Our understanding of governance suffers from two problems.
The first problem is the tendency to overgeneralize across companies—to advocate common solutions without regard to size, industry, or geography, and without understanding how situational differences influence correct choices. The second problem is the tendency to refer to central concepts or terminology without first defining them. That is, concepts are loosely referred to without a clear understanding of the premises, evidence, or implications of what is being discussed. We call this “loosey-goosey governance.”
The article identifies several governance practices that have become talismans of good governance – including independent chairs, elimination of staggered boards and the absence of dual class capital structures – and concludes that empirical support for their impact on the quality of governance is inconclusive at best. Other common good governance principles, like pay for performance and board oversight, are poorly understood and difficult to evaluate.
This article really resonated with me. I’m very dubious about a lot of corporate governance “best practices,” because I think many of them simply reflect the ideological position that shareholders and not directors should have control over the destiny of public companies. If after decades of research, we still can’t answer the question “what makes good governance?” then maybe cynics like me are onto something here.
Board Agendas: What’s On the List for 2020?
Deloitte recently published its list of topics that are likely to feature prominently on the agenda of many corporate boards during the upcoming year. These include the usual suspects – oversight of risk, strategy, executive compensation, board composition & shareholder engagement – as well as some more cutting edge topics. This latter group includes the role and responsibilities of the company in society. Here’s an excerpt on corporate social purpose:
Perhaps the most dramatic development―or, rather, series of developments―that boards may need to consider in 2020 is the intense focus on the role of the corporation in society. Starting in late 2017, companies have been urged to focus on and disclose more about their “social purpose” and their place in society.
Several theories have been advanced as to the origins of and continuing pressure for corporate social purpose, including concerns about persistent economic inequality, climate change, and the availability and cost of healthcare, as well as concerns about the ability of governments to address these and other issues. However, regardless of the reasons, investors, media, and other constituencies are asking companies to look beyond their bottom lines.
ESG Activism: YourStake’s Portfolio Analyzer
It isn’t news that ESG issues are a high-priority item for many investors. Last year, I blogged about a new organization called “Stake” that was intended to help amplify the voice of retail investors on these issues. It looks like that platform – now rebranded as “YourStake.org” – is expanding its capabilities.
Jim McRitchie recently blogged that YourStake’s booth was getting a lot of traffic at the SR130 investor conference due to a new tool targeted at financial advisors. The tool is designed to allow retail investors to evaluate the environmental & social impact of their investment portfolios. While there’s still a lot of “noise” around ESG-focused investing, it’s interesting to see the development of tools like this one – particularly when it’s targeted to retail investors & paired with a platform that’s intended to increase their ability to influence the companies in which they invest.
