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In mid-June, a large group of nonprofits, socially responsible investors, labor unions and others submitted a letter to SEC Chair Jay Clayton, stating that, while the guidance related to COVID-19 disclosure that he and Corp Fin Director Bill Hinman provided in April exhorting companies “to provide as much information as practicable” was a “step in the right direction” (see this PubCo post), it really did not go far enough in mandating the necessary transparency. They urged the SEC to impose new requirements for disclosure about how “companies are acting to protect workers, prevent the spread of the virus, and responsibly use any federal aid they receive.” With the SEC’s current propensity for principles-based disclosure, will it be persuaded to adopt these mandates?

In particular, the letter noted the importance of protection of workers’ health and safety for the benefit not only of workers, but also of customers and suppliers. For example, failure to provide paid sick leave or appropriate PPE to workers could lead to infection of customers or “undermine the functioning of supply chains and lead to declines in productivity or, worse, the need to temporarily shut down operations.”  They cite multiple closures of plants in the meat-packing industry and corollary damage to farmers as one illustration of a failure of workforce protection leading to a broad failure of business continuity.

COVID-19, they maintain, has shown that values affect value:  “Prior to the onset of COVID-19, it was often argued that human rights, worker protection and supply chain matters were moral issues not relevant to a company’s financial performance. As millions of workers are laid off and supply chains unravel, the pandemic has proven that view wrong. Businesses that protect workers and consumers will be better positioned to continue operations and respond to consumer demand throughout the pandemic.” The potential loss to shareholders could be significant.  The SEC, they argue, must require companies to provide “consistent, reliable data to investors about the economic impact of the pandemic on their business, human capital management practices, and supply chain risks.”

Moreover, applying the theory of “regulation by humiliation,” otherwise known as “name and shame” (phrases I remember first hearing in a presentation from the late Marty Dunn when he was still at the SEC), the authors suggest that the process of crafting disclosures could motivate companies to engage in a little self-examination of the adequacy of their efforts: “by requiring these disclosures, the Commission has the opportunity to encourage companies to review their current practices and consider whether updates are necessary in light of recent events. The process of preparing these disclosures may help some public companies to recognize that their current practices are not sufficiently robust to protect their workers, consumers, supply chains and, as a result, their investors’ capital given the impact of the pandemic.”

SideBar

A number of these topics have already been addressed through staff guidance, specifically Corp Fin’s Disclosure Guidance: Topic No. 9, which offers the staff’s views regarding disclosure considerations such as liquidity, business continuity plans, potential material expenditures and impact on human capital resources and productivity (see this PubCo post), and Disclosure Guidance: Topic No. 9A, which was issued subsequent to the letter and provides additional views of the staff regarding disclosure of material operational changes made in response to COVID-19, as well as new financing activities to address the adverse financial impact of the pandemic.  These operational adjustments could include, for example, increased telework, supply chain and distribution adjustments, and changes related to health and safety of employees, contractors and customers, including in connection with transitions back to the workplace.  (See this PubCo post.)  Of course, in both cases, the  guidance makes clear that it represents only the views of the staff, is not binding and has no legal force or effect.

The letter advocates that the SEC require disclosures that would cover these topics:

  • COVID-19: More detailed disclosure about the company’s infectious disease prevention and control plan, including its practices regarding hazard identification and assessment, employee training and provision of PPE; its policies for contact tracing and paid leave for infected employees; its compliance with government quarantine orders and phased re-openings and public health recommendations to limit operations; and the financial impact of the pandemic on “cash flows and balance sheet as well as steps taken to preserve liquidity such as accessing credit facilities, government assistance, or the suspension of dividends and stock buybacks.”
  • Executive and employee benefits: Disclosure of the “rationale for any material modifications of senior executive compensation due to the COVID-19 pandemic, including changes to performance targets or issuance of new equity compensation awards”; whether the company offers paid leave for worker illness, quarantines, temporary closure of facilities and family leave; the health insurance “coverage ratio” of the workforce; availability of employer-paid health insurance for employees laid off during the pandemic; the extent of employee health insurance, paid leave and other protections and benefits made available for part-time employees, temporary workers, independent contractors and subcontracted workers; and company anti-retaliation and whistleblower policies and contractual provisions designed to protect employees who raise concerns about workplace health and safety.
  • Supply chains: Disclosure of whether the company is current on payments to its supply chain vendors, which payments should “help retain suppliers’ workforces and ensure that a stable supply chain is in place for business operations going forward.”
  • Political activity: Disclosure of “all election spending and lobbying activity,” especially money spent through third-party organizations such as trade associations and tax-exempt 501(c)(4) social welfare organizations.

SideBar

The long debate over disclosure of political spending has been particularly fraught.  Legislation to compel disclosure has been attempted without success (see, e.g., this PubCo post), and petitions have been filed with the SEC requesting that the SEC adopt rules mandating political spending disclosure, including this 2011 rule-making petition submitted by a group of academics spearheaded by future SEC Commissioner Robert Jackson. (Here is a link to a 2013 video segment of the PBS Newshour showing a debate between Jackson and former SEC Commissioner Paul Atkins about the rulemaking petition. See this PubCo post.)   Although the petition received over 1.2 million letters in support, as discussed in this PubCo post, then SEC Chair Mary Jo White was firmly against any rulemaking on the topic, contending that the SEC should not get involved in politics. (But isn’t not acting also political?)  White faced criticism for her position from two former SEC Chairs and one former Commissioner, who politely berated (well, maybe not so politely) her failure to take action on the rulemaking petition. (See this PubCo post.) And in 2015, Senate Dems sent a letter to White adding their voices “to the many who have expressed frustration and disappointment that the SEC decided to remove this issue from its regulatory agenda entirely.” (See this PubCo post.) As discussed in this PubCo post, this PubCo post and this PubCo post, Congressional Republicans have long sought to prevent the use of SEC appropriations for adopting requirements for political spending disclosure, adopting riders to government funding legislation to block any regulation.  (Not that the SEC was addressing the issue anyway.) But you have to wonder, with all the current political unrest and social upheaval, will political spending disclosure find its way back on the agenda?

According to Jackson, the scarcity of political spending disclosure has made it “the second-most common subject of shareholder proposals at U.S. public companies. Although shareholder support for these proposals has doubled over the last decade, and given that the overwhelming majority of investors favor disclosure of corporate political spending, support for these proposals is lower than investor preferences would suggest.”  Why is that? The reason, Jackson contends, based on a study by his office of the “voting data for hundreds of the largest institutional investors over the last fifteen years,” is that “three of the largest institutions in America almost never support proposals that would require disclosure of corporate political spending.”  More specifically, according to Jackson’s data, they vote in favor less than 5% of the time, “regardless of the company or situation.” (Of course, it’s particularly ironic that institutional investors have, for the most part, shied away from political spending proposals, especially in light of their expressed concern with sustainability. See, for example, this PubCo post and this PubCo post. After all, corporate political spending could well be devoted to purposes inconsistent with those sustainability goals.)

Nevertheless, this article from the Center for Political Accountability indicates that 2019 witnessed upticks in both shareholder support for disclosure proposals submitted by CPA (and its “shareholder partners”) and the number of shareholder proposals withdrawn as a result of agreements reached with companies for disclosure of political spending and board oversight.  In 2019, 33 proposals on political spending disclosure submitted by CPA and its partners went to a vote, with an average vote in favor of 36.4%, an increase from 34% in 2018 (18 proposals) and 28% in 2017 (22 proposals). More specifically, two proposals actually received majority votes, while 11 were in the range of 40% to 50% and 12 were in the range of 30% to 36%.  In addition, proposals submitted to 13 companies were withdrawn as these companies reached agreement for spending disclosure and adoption of oversight policies, compared with three in 2018 and seven in 2017.  (See this PubCo post.)

One risk potentially arising out of political spending disclosure is reputational, which could have an adverse impact on the company’s relationship with its employees, customers and shareholders. CPA’s 2018 Collision Course report looked at just such “risks companies face when their political spending and core values conflict.” These risks seem to be exacerbated by the current political polarization—the “incendiary new political and digital media environment.” To the extent that companies enter the fray, “it leads to a heightened risk for companies: Will their actions align with their core values and brands? Increasingly, this question is being raised publicly about scores of U.S. corporations whose underwriting of political groups and trade associations contributes to outcomes that appear to conflict with core company values and messaging.”  (See this PubCo post.)

What are the chances that the letter could have some effect? Given the current composition of the SEC, it’s unlikely that political spending disclosure would be mandated any time soon. And the SEC may view the recent staff Disclosure Topics to suffice in addressing these issues. However, it’s not inconceivable that the nature and extent of mandated disclosure regarding the workforce could be expanded.  Not only has the SEC proposed amendments to Reg S-K  (pre-pandemic) that would include an expanded discussion of human capital resources, the SEC has appeared on some occasions to be open to enhancing the requirements proposed.

The current proposal would require a principles-based description of “any human capital measures or objectives that management focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the attraction, development, and retention of personnel).” The proposals provides non-exclusive examples of potentially material human capital measures and objectives. The exact measures or objectives discussed in a company’s disclosure could change over time and vary with the industry. The objective, according to the SEC, was to allow investors “to better understand and evaluate this company resource and to see through the eyes of management how this resource is managed.”  (See this PubCo post.) In addition, in the context of considering how to frame human capital disclosure requirements, Clayton has previously sought to understand what questions investors—those who are making investment decisions—ask about human capital. (See this PubCo post and this PubCo post.)  In a recent roundtable with investors, SEC Chair Jay Clayton and Corp Fin Director Bill Hinman heard investors clamor for more transparency regarding the composition of the workforce, discussion of “living wage” issues, and other social issues regarding human capital in general—and seemed to be persuaded by those appeals. (See this PubCo post.) We could be seeing a more expansive requirement for human capital disclosure taking shape.

Posted by Cydney Posner

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