Tuesday afternoon, SEC Chair Jay Clayton moderated a virtual roundtable, with Corp Fin Director Bill Hinman alongside, to hear how investors viewed current disclosure in connection with COVID-19 and, given that Q2 reporting is around the corner, what they would like to see. Participants on the panel included Gary Cohn, Former Director of the National Economic Council; Glenn Hutchins, Chair of North Island; Tracy Maitland, President and CIO of Advent Capital; and Barbara Novick, Vice Chair and Co-Founder of BlackRock. While it was entirely predictable that forward-looking information about liquidity would be a key concern, the call by all the participating investors for disclosure about social issues—particularly human capital and diversity—was something of a revelation.
[Based on my notes, so standard caveats apply.]
As Clayton and Hinman have both previously stressed (see this PubCo post), under the current circumstances, forward-looking information can be more critical than historical information. With regard to liquidity, some of the panelists emphasized the need for less generality and more standardization and specificity, including discussion regarding items such as cash burn and inventory, as well as days cash on hand. One panelist suggested that the company may discuss its draw-downs from a line of credit that occurred during the quarter, but what he really wanted to read about was whether there were impediments to draw-downs in the future.
The panelists sought other forward-looking financial and operational information. Companies were advised to discuss a range of scenarios and possible outcomes, or, as one investor put it, a base case, worst case and best case. Clayton later observed that companies needed to disclose their assumptions in these cases—if a company assumes a scenario in which it is operational and back to normal at a particular point (hopefully reasonably and based on consensus), it should articulate that, but then also discuss the implications if that assumption turns out not to be true. One investor observed that companies can certainly acknowledge a lack of clarity—less than 10% of the S&P 500 have given earnings guidance for the quarter, he noted. Another wanted to see how the company was looking at the next quarter, particularly the potential downsides.
Some of the panelists had specific suggestions for issues to take into account. For example, one investor suggested that companies consider the impact on freight and supply chain issues of the closing of borders as a result of COVID-19. Similarly, he suggested a discussion, where applicable, of worker availability in the event of continued school closures.
Hinman stated that the staff would not second-guess forward-looking statements made in good faith. (Of course, that doesn’t mean that the plaintiffs’ bar won’t.) What does that mean? In essence, consistency of public statements with what the company tells the board, its lenders (presumably including under the CARES Act) and analysts. One investor floated the need for a (better?) safe harbor and suggested that the SEC provide some models or examples of good disclosure as best practices. Hinman indicated that the staff would be looking at second quarter disclosures and would “expect more” from companies at this point. Highlighting examples of good disclosure sounded like it might be a possibility.
Especially interesting was the call for more holistic disclosure, including disclosure regarding social issues, such as the recent social upheaval arising out of racial inequality and injustice. How are companies addressing this issue? How are they addressing diversity? One panelist wanted more transparency regarding the composition of the workforce, pointing to the SASB framework as a potential reference that would offer consistency without homogenization. What about “living wage” issues and human capital in general? Another investor wanted information regarding community—how were the big companies that, as a result of the pandemic and shutdowns, may have eclipsed smaller businesses going to help those smaller businesses survive? They may well be customers. That investor predicted that, once COVID-19 and its economic impact were under control, in his view, the biggest topic for boards would be social issues. Another investor noted that companies may find their “social licenses to operate” could be suspended or revoked if the public perceived that they were not doing “the right thing.” One panelist suggested that the SEC use its bully pulpit to highlight these social issues. Hinman adverted to the SEC’s 2019 proposed amendments to Reg S-K to modernize the description of business, which included an expanded discussion of human capital.
Finally, the panelists were looking for indicia of adaptability and long-term “operational resilience” in the wake of COVID-19. One investor suggested that the effect of COVID-19 was to substantially accelerate already existing trends, such as e-commerce and telemedicine. How were companies adapting to that acceleration? Another investor wanted to know what boards and CEOs have learned from the current crisis. He also posited that it might be a couple of years before the pandemic and its impact were fully resolved. One concern is certainly how the company is managing the current environment, but perhaps more important is: what does the company look like in 2023?