According to a recent study, there’s a pretty good chance that all of the stimulus money currently sloshing around may stimulate some good old fashioned insider trading among the politically well-connected – at least that’s what the experience of the last time Washington fired its cash bazooka suggests. This Stanford article says that the study looked at trading by politically-connected insiders at TARP fund recipients during the 2008 financial crisis.
That program bailed out a lot of financial institutions, but it wasn’t a model of transparency & key details of the program were never publicly disclosed. This excerpt from the article says that insiders used that lack of transparency to their advantage:
This gave corporate insiders advance knowledge of the likely scope of government intervention and its impact on their institution. Larcker’s study finds evidence that many seemed to trade on the basis of this private information to earn higher returns than public shareholders. Prior to massive government stimulus, political connections had far less influence on trading decisions, the study shows. But in the nine months after TARP’s inception, transactions by politically connected insiders were correctly predicting future stock performance.
Federal law requires executives to disclosure equity stakes in their own firm through regulatory filings that investors pore over for clues about potential share price swings. The researchers’ analysis shows that trades were ramped up 30 days prior to TARP announcements. During allocation of government funds, insiders made 3,058 trades averaging $105,987 and yielding $22,251 in average market-adjusted profits ($68 million overall), significantly outperforming their unconnected counterparts.
One of the authors of the study suggests that the key to preventing abuses with the current stimulus spending lies in increased transparency – which he suggests the bipartisan insider trading legislation that the House passed last year would provide – and a longer cooling off period longer between a job in government and an executive position in the private sector, and vice versa. If I were you, I wouldn’t hold my breath on either of those recommendations being adopted.
Regal, But Not Quite Princely: Leo Strine’s Titles are a Mouthful
Over on ProfessorBainbridge.com, Stephen Bainbridge notes that former Del. Chief Justice Leo Strine is currently sporting a mouthful of titles. Take a deep breath everybody, because Leo Strine is:
Michael L. Wachter Distinguished Fellow in Law and Policy at the University of Pennsylvania Carey Law School; Ira M. Millstein Distinguished Senior Fellow at the Millstein Center at Columbia Law School; Senior Fellow, Harvard Program on Corporate Governance; Henry Crown Fellow, Aspen Institute; Of Counsel, Wachtell Lipton Rosen & Katz; former Chief Justice and Chancellor of the State of Delaware.
Prof. Bainbridge points out that, with his 60 word moniker, Strine easily outpaces Queen Elizabeth II, whose full title comes in at a paltry 33 words (which at least gives her something in common with the Rolling Rock beer label). But I’ve got some bad news for the former Chief Justice & the Queen – her husband Prince Philip crushes them both. Ready? Here we go:
His Royal Highness The Prince Philip, Duke of Edinburgh, Earl of Merioneth, Baron Greenwich, Royal Knight of the Most Noble Order of the Garter, Extra Knight of the Most Ancient and Most Noble Order of the Thistle, Member of the Order of Merit, Grand Master and First and Principal Knight Grand Cross of the Most Excellent Order of the British Empire, Knight of the Order of Australia, Additional Member of the Order of New Zealand, Extra Companion of the Queen’s Service Order, Royal Chief of the Order of Logohu, Extraordinary Companion of the Order of Canada, Extraordinary Commander of the Order of Military Merit, Lord of Her Majesty’s Most Honourable Privy Council, Privy Councillor of the Queen’s Privy Council for Canada, Personal Aide-de-Camp to Her Majesty, Lord High Admiral of the United Kingdom.
That’s a grueling 133 words, for those of you playing along at home. Prince Philip’s heritage may be Greek, but those titles would guarantee him a warm welcome from the crew of The H.M.S. Pinafore. The former Chief Justice’s titles may fall short of those of His Royal Highness, but his penchant for Gilbert & Sullivan-inspired judicial robes likely would make him a welcome guest on the Pinafore as well.
Audit Committees: Meetings & Processes in a Pandemic
The most recent edition of Deloitte’s “Audit Committee Brief” discusses priorities for the current quarter & future periods. I thought the discussion of how audit committees have adjusted their meetings and other committee processes in light of the limitations imposed by the Covid-19 pandemic was particularly interesting. Here’s an excerpt on prioritization of agenda items and meeting materials:
Many audit committee chairs have been reassessing the way their time is spent in meetings. Regardless of how the meeting structure has changed, prioritizing the agenda has been key for the committee’s effectiveness. Audit committee chairs should consider taking a step back to reevaluate what’s top priority. Simply following a previously created annual calendar or last quarter’s agenda may not allow the committee to focus on the right topics. Some audit committee chairs have pushed topics that aren’t top priority to later in the year or to consent agendas to allow more time for some of these critical discussions.
Many committees have reviewed meeting materials when considering ways to enhance effectiveness. Some companies are sharing more memos or narratives with pre-read materials; these provide committee members a bigger picture view and allow the members to come better prepared with questions. It can also provide a way to stay informed in between meetings. Some committees are providing more written questions to management before meetings. This doesn’t mean that questions are limited to those provided in advance, but it may help management come more prepared to discuss what’s important to the audit committee and allow for more robust discussions.
The publication also addresses topics such as financial reporting, forecasting, risk oversight, compliance and other challenges facing audit committees in the current environment.
Some of my most vivid memories of my days nights as a young lawyer involve watching bulge bracket investment bankers & their lawyers sit in a Bowne or R.R. Donelley conference room in the wee small hours & obsess over a prospectus’ compliance with the terms of the bank’s style guide.
These style guides were sometimes elaborate documents with detailed instructions about proper fonts, spacing, logos, front & back cover page & underwriting section language, together with a bunch of other formatting details for every kind of offering document imaginable. Sometimes, they even specified the color of ink to be used (“Morgan Stanley blue” anyone?).
And woe to you if your document departed from the style guide! Punishment was swift and merciless (or so it was said). I remember one poor soul literally sweating as he meticulously measured & remeasured the distance between lines on the back cover page of the prospectus, and then turned his attention to the front cover, to ensure that the red herring language aligned perfectly with the top and bottom lines of the page. You’d have thought the guy was about to cut a 20 karat diamond.
That kind of obsessiveness is why the news that Goldman Sachs has come up with a new font that’s free to use, but comes with an interesting catch, doesn’t surprise me in the least. What’s the catch? This Verge article explains:
Investment bank Goldman Sachs has released its very own typeface: an inoffensive set of sans-serif fonts dubbed Goldman Sans. But in the spirit of bankers everywhere, these fonts come with a catch in the contract. As their license states, you’re free to use Goldman Sans for just about anything you like so long as you don’t use it to criticize Goldman Sachs.
According to the article, the license prohibits the user from using the licensed font software to “disparage or suggest any affiliation with or endorsement by Goldman Sachs.” It looks like Goldman’s PR folks got wind of the negative media attention, however, because the license agreement no longer contains the anti-disparagement language.
I guess some people saw this as overreach by a firm that’s long been a magnet for criticism, but anyone who has worked with an investment banker totally gets why they originally included the language in the license. For a Goldman Sachs lifer, there could be no greater affront than to have an element of the firm’s sacred style guide weaponized against it!
Inline XBRL: Accelerated Filers, Ask Not for Whom the Bell Tolls. . .
This Bass Berry blog provides a reminder to accelerated filers preparing for their second quarter filings that they are going to have to comply with the inline XBRL requirements, including cover page tagging and the new Exhibit 104 requirement:
Public companies designated as accelerated filers who are preparing their periodic reports for fiscal periods ending on or after June 15, 2020 (i.e., upcoming second quarter 10-Qs for many companies) will be required to comply with the SEC’s previously adopted Inline eXtensible Business Reporting Language (iXBRL) digital reporting guidelines. Per the SEC’s phase-in guidelines, filers will be required to comply beginning with their first Form 10-Q filed for a fiscal period ending on or after the applicable compliance date.
Tomorrow’s Webcast: “Distressed M&A: Dealmaking in the New Normal”
Tune in tomorrow for the DealLawyers.com webcast – “Distressed M&A: Dealmaking in the New Normal” – to hear Woodruff Sawyer’s Yelena Dunaevsky, Fredrikson & Byron’s Mercedes Jackson, and Seyfarth’s Paul Pryant & James Sowka discuss the unique challenges and opportunities presented by acquisitions of distressed targets.
In this 30-minute podcast, Dave Lynn welcomes a series of eminent guests to remember his great friend and “Radio Show” co-host Marty Dunn, who died on June 15, 2020 (here’s Dave’s written tribute). Topics include:
Although the social media sphere is quick to characterize this year’s parade of horribles as an “Act of God,” that characterization may be more difficult for companies that want to call off their contractual obligations. If you’re negotiating a contract right now and want to preserve an “out” for an inability to perform, check out this Vinson & Elkins memo for drafting tips (and for more resources, see the “Contractual Performance” memos that we’re posting in our “COVID-19” Practice Area):
Looking ahead, parties seeking to boost the chances that their inability to perform will be excused should specifically reference the COVID-19 pandemic on the list of events that would qualify as force majeure. In addition, the COVID-19 pandemic should be identified as unforeseeable and unpredictable. The reason: in many states, even if an event is specifically listed, courts require that a party claiming force majeure demonstrate that the event was not foreseeable.
The blog also recommends asking these four questions if you’re on the receiving end of a force majeure notice and want to continue to enforce performance:
1. Is the pandemic covered by the force majeure clause?
2. If so, is the activity that is not being performed as promised something that actually is being prevented by the covered event?
3. Is there a specific exclusion in the force majeure clause for that performance?
4. What are the notice requirements — was the notice sent within the specified deadline?
Cybersecurity Oversight: What Boards Are Doing
This article from Melissa Krasnow of VLP Law Group looks at recent NACD benchmarking in the cyber-risk oversight of public versus private company boards. Among other things:
– Public and private company boards engaged in the same top seven and the bottom cyber−risk oversight practices over the past year, with differences in terms of percentages
– Over 60% of public companies scheduled cyber risk at least once on the board agenda over the last year, versus over 40% of private companies
In addition, the “Private Company Governance Survey” – which was published in May 2020, about five months after the “Public Company Governance Survey” was published in December 2019 – alludes to the impact of the COVID-19 pandemic on cybersecurity: “The surge of remote workers in the first quarter of 2020 may expose companies to a new set of risks.” This impact continues beyond the first quarter of 2020 and affects both public and private companies.
At an open meeting yesterday, the SEC adopted amendments to its proxy solicitation rules, which are intended to give companies a more meaningful opportunity to review and respond to proxy advisors’ voting recommendations, ensure that proxy advisor clients have access to those responses prior to the meeting, and require the advisory firms to disclose potential conflicts of interest. The rules were adopted by a 3-1 vote, with Commissioner Allison Herren Lee issuing this dissenting statement. CII also issued a statement expressing disappointment with the rules.
– “Solicitation” Includes Proxy Advice for a Fee: Consistent with the Commission’s longstanding view, the changes amend the definition of “solicitation” in Exchange Act Rule 14a-1(l) to specify that it includes proxy voting advice, with certain exceptions.
– New Conditions for Exempt Solicitations: Under amendments to Rules 14a-2(b)(1) & 14a-2(b)(3), in order for proxy voting advice businesses to rely on the exemptions from information and filing requirements (which are essential for them to be able to carry out their business), they must satisfy the conditions of new Rule 14a-2(b)(9), including disclosure of conflicts of interest and adoption & disclosure of policies that allow for companies to review & respond to the voting recommendations. New Rule 14a-2(b)(9) also establishes non-exclusive safe harbors that will allow proxy advisors to meet the conditions.
– Application of Antifraud Rule to Proxy Advice: The amendments modify Rule 14a-9 to include examples of when the failure to disclose certain material information in proxy voting advice could, depending upon the particular facts and circumstances, be considered misleading within the meaning of the rule. These examples include material information about the proxy voting advice business’s methodology, sources of information, or conflicts of interest.
It is worth noting that the “registrant review” provisions of the final rule are less demanding that those that were originally proposed. That original proposal would have obligated advisors to provide companies with a copy of their advice in order to permit them to identify errors or other problems with the analysis in advance of their release, and would have also required proxy advisors to provide the company with a final report no later than two business days prior to its dissemination to their clients.
The amendments will be effective 60 days after publication in the Federal Register, but affected proxy voting advice businesses subject to the final rules are not required to comply with the Rule 14a-2(b)(9) amendments until December 1, 2021. At least that’s the plan – ISS has a pending lawsuit against the SEC challenging the agency’s ability to regulate it. The parties agreed to stay the lawsuit until the SEC adopted final rules. Now that the rules are in place, the real fight may be just beginning.
Proxy Advisors: SEC Supplements Guidance for Investment Advisers
Also yesterday, the SEC supplemented its 2019 guidance to investment advisers about their proxy voting responsibilities, and the steps they could take to demonstrate that they’re making voting decisions in a client’s best interest. As noted in Cydney Posner’s blog, that guidance:
“recommended that investment advisers satisfy their own fiduciary duties of care and loyalty and obligations to act in their clients’ best interests, in part, through careful oversight of proxy advisory firms (i.e., investment adviser as ‘enforcer’), such as by monitoring and analyzing the methodology and processes of proxy advisory firms, including their processes for engagement with companies and procedures to address errors.”
The supplemental guidance addresses how investment advisers should consider company responses to proxy advisor voting recommendations. This includes circumstances in which the investment adviser utilizes a proxy advisory firm’s electronic vote management system that “pre-populates” the adviser’s ballots with suggested voting recommendations or for voting execution services (so-called “robo-voting”). It also addresses their disclosure obligations and client consent requirements when using automated voting services. Here’s an excerpt:
An investment adviser should consider, for example, whether its policies and procedures address circumstances where the investment adviser has become aware that an issuer intends to file or has filed additional soliciting materials with the Commission after the investment adviser has received the proxy advisory firm’s voting recommendation but before the submission deadline. In such cases, if an issuer files such additional information sufficiently in advance of the submission deadline and such information would reasonably be expected to affect the investment adviser’s voting determination, the investment adviser would likely need to consider such information prior to exercising voting authority in order to demonstrate that it is voting in its client’s best interest.
Proxy Advisors: “Best Practices” Get New Oversight
Last week, the “Best Practices Principles Group” for shareholder voting research announced the appointment of an oversight committee to monitor the Principles that govern proxy advisor signatures, including ISS, Glass Lewis and Minerva Analytics. I most recently blogged about the BPPG last year when they updated the best practices from their original 2014 iteration. The international board includes:
– Six institutional investor representatives – including Amy Borrus of CII
– Three public company representatives – including Hope Mehlman of Regions Financial
– Two independent academic representatives
Among other responsibilities, the oversight board will conduct an annual review of the public reporting of each BPPG Signatory and present that information publicly. Congrats to Amy, Hope and the other members for being involved in this initiative.
A recent 12-page Moody’s report says that the Covid-19 pandemic has increased the likelihood that ESG will affect credit ratings over the long term – i.e., beyond 12-18 months from now. The report puts these trends into three buckets: risk preparedness for global risks, social considerations related to healthcare access & economic inequality, and a shift from shareholder primacy to stakeholder needs. Specifically, it predicts that in addition to the “usual suspects” of governments, companies in the healthcare industry and carbon-intensive companies, all sectors have the potential for greater scrutiny of these areas:
After Corp Fin supplemented its Covid-19 disclosure guidance last month to suggest what information companies should be considering for pandemic-related disclosure, we have been hearing from members grappling with their quarterly disclosure controls processes for their upcoming reports. To capture reportable events throughout the business, some are relying on questionnaires – like this one that we’ve posted in Word.
In our webcast last week – “Coronavirus: Next Steps For Disclosure & Governance” – Keir Gumbs also emphasized that companies should be thinking about how the “work from home” environment is affecting internal controls and disclosure controls. In addition to the topics covered in Corp Fin’s guidance, this Deloitte blog suggests thinking about these potential issues (also see this Freshfields blog):
– Store or facility closures
– Loss of customers or customer traffic
– The impact on distributors
– Supply chain interruptions
– Production delays or limitations
– The impact on human capital
– Regulatory changes
– The risk of loss on significant contracts
Quick Poll: Are You Reviewing Your Disclosure Controls?
When the BRT made the shift last year from “shareholder primacy,” many wondered what type of action the signatories would take to demonstrate a commitment to stakeholders. Earlier this year, Lynn blogged that 85% of those signatories published a sustainability report – and over half had adopted one or more sustainable development goals.
But this 67-page analysis, from two profs at the London School of Economics & Columbia Business School, suggests the “stakeholder” cynics might be right. Not only did the BRT statement have little impact on signatories’ stock prices at the time it was announced, the data that the professors reviewed showed that relative to industry peers, signatories to last year’s BRT statement:
– Commit environmental and labor-related compliance violations more often (and pay more in compliance penalties)
– Have higher market shares (and thus may face more scrutiny in future M&A transactions)
– Spend more on lobbying policymakers
– Report lower stock returns alphas and worse operating margins
– Have higher paid CEOs
The professors also looked at stocks in the largest ESG ETF and ESG mutual fund and found found “barely any correlation” between the included companies and federal environmental & labor compliance violations. That’s despite large asset managers emphasizing that ESG and sustainability issues are used by them in screening or otherwise evaluating investments, or affect their voting. The professors also question whether ESG scores from third-party vendors accurately reflect ESG behavior.
The professors do acknowledge that their data is not very demonstrative of “governance” factors and is more focused on “E&S” – and one might wonder whether the size of the signatories had an outsized impact on some of these findings. But the results are sobering and suggest that investors who are focused on these issues likely need to do more of their own verification. As if you didn’t have enough surveys already…
Podcast: The Minority Corporate Counsel Association
A few weeks ago, I blogged on “The Mentor Blog” about specific things we all can do to help retain Black lawyers, as the stats are showing that “diversity” efforts to-date aren’t moving the needle and probably need to focus more on equity & inclusion. I continued that conversation in this 30-minute podcast with Jean Lee, who is the CEO & President of the Minority Corporate Counsel Association.
In this podcast, Jean discusses the work that the MCCA has been doing – and why it’s important to have diverse corporate lawyers. Conversation topics include:
– How MCCA assists its members in recruiting, retaining & promoting women and diverse attorneys
– How approaches to improving diversity & inclusion may vary by group
– The business case for diversity
– What types of corporations & law firms are involved with MCCA
– Ways that individuals can advance diversity, equity & inclusion in their day-to-day professional lives
July-August Issue: Deal Lawyers Print Newsletter
This July-August Issue of the Deal Lawyers print newsletter was just posted – & also sent to the printer (try a no-risk trial). It includes articles on:
– M&A Transactions & PPP Eligibility and Forgiveness Considerations
– Strategic Acquisitions of Distressed Companies in the COVID-19 Environment
– Due Diligence: “That Deal Sounds Too Good to Be True”
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
This blog from Doug Chia is getting a lot of traction. In it, he argues that calls for a focus on long-term “corporate purpose” – along with this year’s pandemic, market volatility and social unrest – are signs that it’s time to realign board committees in a stakeholder-driven way. Here’s an excerpt:
For the past 18 years, the committee structure for public company boards has been dictated by the Sarbanes-Oxley Act of 2002 and the related rules and regulations promulgated thereunder. Those rules and regulations essentially mandated all public company boards to have the “big three” committees: audit, compensation, and nominating. Some boards also created (or already had) other specific committees for oversight of finance, risk, public affairs, technology, and sustainability, just to name a few.
However, the big three committees largely address matters that directly relate to the interests of the company’s shareholders with the other three stakeholders being indirect beneficiaries. This required structure was appropriately coming out of the corporate failures of the early 2000s and fitting when maximizing shareholder value was still seen as the end-all, be-all. However, it may not be well-suited to a new era when boards are committing to place firm value in the context of a broader set of constituencies.
In an ideal world (where the current big three committees are not required), rethinking a board’s committees would start with a blank slate. The board would write down each of its annual agenda items, both those discussed by the full board and those covered in committee. It would then map each item to one or more of the four key stakeholders. Based on that exercise, the board would assign each item to one or more of four new stakeholder-focused committees and/or the full board, and it would adopt charters for each reflecting the end result. One of the many outcomes of creating committees this way would look like this:
Customers Committee: Focus on sales of products and services, go-to-market strategy, customer satisfaction, product safety, R&D, and innovation.
Employees Committee: Focus on the company’s overall workforce, health and benefits, compensation, labor relations, diversity and inclusion, talent development, recruitment and retention, training, employee engagement, and corporate culture.
Communities Committee: Focus on regulation, legal, compliance, tax, government affairs, public policy, sustainability, corporate social responsibility, philanthropy, community relations, and corporate reputation.
Shareholders Committee: Focus on financial and non-financial reporting, ESG disclosure, corporate finance, M&A, capital allocation, enterprise risk management, corporate governance, board composition, investor relations, and shareholder engagement.
Doug points out that this isn’t a completely new concept, as companies often establish and dissolve committees based on their current circumstances. As I’ve blogged on CompensationStandards.com, there also have been growing calls to broaden the mandate of compensation committees to cover employee issues. Re-examining the board’s structure would require close attention to board composition and committee charters – which some view as an additional benefit and an opportunity to more closely align the board with strategy & culture.
ESG: GAO Sums Up Disclosure Dilemmas
The Government Accountability Office has issued a 62-page report on ESG disclosures – why investors want them, what public companies are doing, and the advantages & disadvantage of voluntary vs. mandatory disclosure regimes. The report itself doesn’t give much info that people in this space don’t already know – investors want ESG info, companies are working hard to provide it, there are gaps & inconsistencies in company disclosures due to the lack of standardized and prescriptive disclosure rules, and competing disclosure regimes pose important trade-offs.
One interesting tidbit – which may become relevant as investors & companies increase their focus on equity and resiliency going forward – is that companies seem to have come around to at least providing narrative cybersecurity information after the SEC’s emphasis on that issue for many years, but data about human rights and health & safety is harder to come by:
As shown in figure 2, we identified disclosures on six or more of the eight ESG factors for 30 of the 32 companies in our sample and identified 19 companies that disclosed information on all eight factors. All selected companies disclosed at least some information on factors related to board accountability and resource management. In contrast, we identified the fewest companies disclosing on human rights and occupational health and safety factors.
With regard to the 33 more-specific ESG topic disclosures we examined, 23 of 32 companies disclosed on more than half of them. The topics companies disclosed most frequently were related to governance of the board of directors and addressing data security risks. Conversely, based on disclosures we identified, we found that companies less frequently reported information on topics related to the number of self-identified human rights violations and the number of data security incidents.
In addition, we found that companies most frequently disclosed information on narrative topics and less frequently disclosed information on quantitative topics. There are several reasons why a company may not have disclosed information on a specific ESG topic, including that the topic is not relevant to its business operations or material.
Senator Mark Warner (D-VA), who had requested this report back in 2018, is now calling on the SEC to establish an ESG task force to consider requiring disclosure of “quantifiable and comparable” metrics. He seized on the GAO’s finding that even quantifiable metrics like carbon dioxide emissions are reported differently from company to company. As Lynn blogged last week – and as noted in this Wachtell Lipton memo – some standard-setters are starting to collaborate, which may help clarify reporting frameworks for companies & investors alike.
Quick Poll: Are “Stakeholder Committees” the Next Big Thing?
Earlier this week, the SEC issued a Sunshine Act notice for an open meeting scheduled for this coming Wednesday – July 22nd. Here’s the agenda that lists two items:
The Commission will consider whether to adopt proxy rule amendments to provide investors who use proxy voting advice with more transparent, accurate, and complete information on which to make voting decisions, without imposing undue costs or delays.
The second item on the agenda says the Commission will consider whether to publish supplementary guidance to the Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Release No. IA-5325 (Aug. 21, 2019), 84 FR 47420 (Sept. 10, 2019), regarding how the fiduciary duty and rule 206(4)-6 under the Investment Advisers Act of 1940 relate to an investment adviser’s proxy voting on behalf of clients.
The last time I blogged about the Commission calendaring an open meeting it was cancelled on fairly short notice. The proposed rules on proxy advisors are top of mind for many so hopefully the Commission keeps this meeting – those interested can listen in via audio webcast on the SEC’s website.
And, if rules are adopted, we’ll be covering this and discussing what it means at our upcoming “Proxy Disclosure” & “Executive Pay” Conferences – which will be held entirely virtually over three days – September 21 – 23. We’ve offered a Live Nationwide Video Webcast for our conferences for years – one of the only events to do so – and we’re excited to build on that platform and make your digital experience better than ever. Act now to get an “early bird” discount – here’s the registration information.
Return to Sender: Company Received $250 Million in Relief Funds – But Board Gives it Back
A recent Harvard Business Review article provides a quick read about how one company decided to return $250 million in government relief funds. The funds weren’t part of the PPP rollout fiasco where some companies applied for funds and then returned them as questions mounted about good-faith need certifications. So, with continued economic uncertainty some might question what led a company entitled to funds to give the money back.
As the article explains, the board decided to do what was right and made a unanimous decision to return the money. The article is in the form of a Q&A with the company’s CEO and provides a good case study illustrating board deliberations that considered “stakeholder interests.” The article says the CEO hopes to influence discussions in other boardrooms:
We’re a publicly traded company, and if our decision to return the money helps give other companies a bit of air cover to make the same decision, that’s a good thing. If more companies that aren’t risking their survival decide to return the money, millions will turn into billions of extra funding that can go to those truly in need. Then, hopefully, we emerge stronger as a country. There’s been a decade-long debate about ESG and the role of a company. In my opinion, we’re at a unique time in which CEOs need to act.
Fall Shareholder Engagement: Prep Questions
Here’s something I recently blogged on CompensationStandards.com: Off-season shareholder engagement is always important but this year it may be even more so with attention focused on social issues, company responses to the pandemic and related matters. As proxy seasons seem to be rolling from one right into the next, Teneo recently issued a memo titled “20 Imperatives for Fall 2020 Shareholder Engagement” to help companies prepare for upcoming off-season shareholder engagement and the 2021 proxy season.
The memo lists 20 topics and questions, primarily focused on diversity and executive compensation and suggests companies prepare for Fall engagement by asking themselves those questions. Here are a few:
– Strategy: How are we reassessing and resetting our strategy, business, brand, and reputation to align with the new normal? Over the medium and long term, the new normal may call for a different strategy, brand changes that mitigate inclusiveness concerns, or a reprioritization of business lines. Stakeholders will view the strategy through a new lens and expect companies to do the same.
– Diversity Goals: Should we set and disclose concrete diversity goals? The evolution of sustainability reporting has led to the practice of companies setting and disclosing concrete goals, typically relating to the environment. It is less common for companies to set and disclose any goals relating to social issues. However, the current environment could prompt investor calls for goal setting on this issue as well.
– Consistent Grant Values: How will our year-over-year grant values be perceived by investors? Maintaining year-over-year grant values during periods of extreme stock price volatility poses a unique set of challenges. While lowering annual grant values may raise retention and motivation concerns, proxy advisors and many shareholders expect lower grant date values when the stock price is low, as granting more shares has a dilutive effect. The recent stock market rally has only increased the scrutiny of significant gains from equity awards at the height of the pandemic.
Virtual board meetings offer basic benefits like no travel and potentially better attendance and a recent Harvard Business Review article says some fast-adapting companies have found virtual board meetings are better than the real thing. Other benefits mentioned in the article include improved governance and collaboration through shorter agendas, crisper presentations and broader exposure to key executives and outside experts.
The article quotes several board members providing positive feedback and cites Spencer Stuart’s North American CEO practice leader, Jim Citrin, as saying several CEOs have told him ‘they’re not going back to the way it was.’ Citrin also predicts most companies will move to a single physical meeting and a series of online sessions throughout the year. The article lists 8 tips to prepare for and get the most out of the next virtual board meeting, here’s a few:
– Shorten and energize the agenda – consider building the agenda in 15-minute increments to help avoid virtual meeting fatigue
– Spread sessions over a week or two – instead of holding a 3-day strategy session, one company held a 1 to 2-hour session a week for 4 weeks resulting in more engaged and productive meetings
– Use breakout rooms productively – if possible, keep the groups to no more than 3 participants and keep discussions to no more than 10 to 30 minutes then reconvene the board as a group to hear the report-outs
– Build in “candor breaks” – consider including short candor breaks on the agenda and ask what’s not being said
Investor Group Calls for Worker Protections During Covid-19
Not too long ago, I blogged about investors calling for mandated Covid-19 related disclosure requirements. Although Corp Fin appeared to address some of the requested disclosures in its most recent Covid-19 guidance, this recent blog entry cites activist investors as saying the latest guidance falls short:
Activist investors plan to continue pushing the SEC for stronger disclosure requirements from public companies about COVID-19-related business risks and worker protection programs.
One such investor said ‘the pandemic has exposed a wide range of risks faced by businesses that are financially material to investors, including, but not limited to, employee health and safety, access to paid leave, access to health care, supply chain management, worker engagement, political lobbying, and executive compensation. Unfortunately, the existing SEC guidance is not sufficient to ensure that investors have access to material information to properly assess whether companies are adequately confronting the risks.’
Separately, a blog post from a human rights advocacy organization says that 118 investors, representing $2.3 trillion in assets under management and led by the Interfaith Center on Corporate Responsibility, recently released a statement directed to meat processing companies calling for increased worker protections due to Covid-19. Here’s an excerpt:
While we are acutely aware that the COVID-19 pandemic creates unprecedented economic challenges for businesses around the globe, companies have a responsibility to implement enhanced protections to protect workers fulfilling corporate operations and those in their supply chains. The pandemic exposes meat processing companies to reputational, legal and financial risks that may significantly disrupt operations if COVID-19 outbreaks in plants continue.
The letter acknowledges that several companies have implemented some enhanced safety measures, health protocols and worker benefits but they want to ensure companies implement safeguards across all facilities and operations. The letter urges companies, for the long-term sustainability of their operations and the health and safety of their employees, to comply fully and in a manner that provides the greatest protection for workers.
The blog post says some of the targeted companies have responded and includes links to those responses.
Taking Cues from Pandemic Response to Prepare for Future Outlier Events
A recent study out of the Rock Center for Corporate Governance at Stanford University reviewed Covid-19 disclosure practices in SEC filings for the period between January 1 and May 29, 2020. The study shows how, over time, the focus of Covid-19 disclosures shifted from supply-chain impacts in the early months to disclaimers to forward-looking statements and disclosure on cash positions as fears about liquidity and solvency increased. Given the trajectory of the pandemic, the exponential growth in disclosures isn’t all that surprising. Understanding the pandemic is out of the ordinary, here’s what the study suggests we can take from analyzing the related disclosure practices:
The COVID-19 pandemic provides a unique opportunity to examine disclosure practices of companies relative to peers in real time about a somewhat unprecedented shock that impacted practically every publicly listed company in the U.S. We see that decisions varied considerably about whether to make disclosure and, if so, what and how much to say about the pandemic’s impact on operations, finances, and future.
The study examines competitor companies within the beverage, apparel, airline and big box sectors where it found vast differences in frequency of disclosures. Noting the differences in company disclosure practices, the study suggests boards might use insights from a company’s pandemic response to prepare for other possible outlier events such as climate events, terrorism, cyber-attacks and other emergencies while also considering whether to share these insights with shareholders.
We’ve wrapped up our latest survey relating to hedging policy disclosure. Here are the results:
1. We’re refining our hedging policies & practices in light of the new disclosure rule:
– Yes – 22%
– We considered it and decided not to – 22%
– We’ve seen no need to revisit our existing policy – 56%
2. In our proxy, we’ll include disclosure about our hedging policies & practices:
– Only as part of the CD&A – 56%
– Outside of the CD&A, and also incorporated into it – 19%
– In both the CD&A (for NEOs only) and another part of the proxy (for everyone covered) – 25%
3. To disclose our hedging policies & practices, we’ll provide:
– Our full policy – 7%
– A “fair & accurate summary” – 93%
Please take a moment to participate anonymously in these surveys:
Last year, Liz blogged about calls for standardized sustainability disclosure and the “alphabet soup” of reporting frameworks, which haven’t diminished with time. But now, in an effort to help companies and investors, the SASB and GRI announced a “collaborative work plan.” Each organization issued an announcement – here’s the SASB announcement and GRI’s. The collaboration sounds promising, an Accounting Today article helps explain what this means:
The collaboration aims to demonstrate how some companies have used both sets of standards together and the lessons that can be shared. SASB and the GRI also hope to help the consumers of sustainability data, such as investors and financial analysts, understand the similarities and differences in the information created from these standards.
The collaboration will initially focus on delivering communication materials to help stakeholders better understand how the standards can be used together. GRI and SASB also plan to develop examples based on real-world reports to demonstrate how the standards can be employed concurrently. These resources are expected to be delivered before the end of this year.
GRI and SASB both provide compatible standards for sustainability reporting, but the groups pointed out that they’re designed to fulfill different purposes and are based on different approaches to materiality. The two groups noted that independence is important to both the GRI and SASB standard-setting processes, and they plan to maintain their independence. This collaborative work plan may identify opportunities to consider how the SASB and GRI standards may be developed in the future. Decisions about standard setting, content of standards, and their interpretation are the sole responsibility of the independent standards-setting functions, which rest with the Global Sustainability Standards Board on behalf of GRI, and of the SASB Standards Board.
Transcript: “M&A Litigation in the Covid-19 Era”
We have posted the transcript for the recent DealLawyers.com webcast: “M&A Litigation in the Covid-19 Era.”
