Category: Corporate Governance
Companies divided on impact of COVID-19 on sustainability efforts
What has been the impact of the COVID-19 pandemic on companies’ sustainability efforts? On the one hand, as discussed in this article from the WSJ, C-suite occupants have been “trying to figure out what they’re willing to throw overboard as the economic storm spawned by the pandemic is swamping their ships. Businesses that were planning to help save the world are now simply saving themselves….History suggests this new [sustainability] paradigm is probably on the back burner.” Even BlackRock, which had previously announced that it was putting “sustainability at the center of [its] investment approach,” acknowledged in April, that “certain non-financial projects like sustainability reports had been ‘de-prioritized’ due to COVID-19. ‘We recognize that in the near-term companies may need to reallocate resources to address immediate priorities in these uncertain times.’ BlackRock’s report stated. BlackRock said it would ‘expect a return to companies focusing on material sustainability management and reporting in due course.’”
On the other hand, however, as this article from Financial Executives International observed, the COVID-19 pandemic has highlighted “the very issues that have been driving ESG concerns—managing resources, sustainability, community impact and employee well-being.” While it might have been “easy to assume the current crisis may permanently shift attention away from environmental, social and governance (ESG) concerns as management teams grapple with existential issues,” it turned out that “the very actions companies are taking will likely bring them closer to the multi-stakeholder, long-term value principles that lie at the heart of ESG.” How are companies viewing the effects?
NACD polls directors on reopening challenges and trends
To gain insight into the new governance challenges faced by boards over the next few months as companies begin a reopening and recovery process—hopefully a permanent one—the NACD undertook a pulse survey of 306 directors across multiple industries, conducted between May 14 and May 21. The survey revealed that directors expect the COVID-19 pandemic to have lasting effects—on business strategy, on the nature of work and on board-management interactions.
SEC Chair supports foreign companies delisting bill
In May, the Senate passed the Holding Foreign Companies Accountable Act, which would amend SOX to impose certain requirements on a public company that is audited by a registered public accounting firm with a branch or office located in a foreign jurisdiction that the PCAOB is “unable to inspect or investigate completely because of a position taken by an authority in the foreign jurisdiction.” And, as previously discussed, Nasdaq has also proposed rule changes aimed at addressing the same issue. (See this PubCo post.) A number of key players are speaking up to endorse these actions.
Failure to disclose perks continues to attract SEC Enforcement
All the focus on COVID-19 disclosures notwithstanding, the SEC has not taken its collective eyes off the basics. This Order discusses settled charges against Argo Group International Holdings, Ltd. related to its failure to disclose in its proxy statements—for five years—millions in personal expenses and perks paid to its CEO, such as personal use of corporate aircraft and cars, “personal services provided by Argo employees and watercraft-related costs.” Not to mention that the CEO was able to approve his own expense reports. According to the press release, Enforcement continues “to focus on whether companies are fully disclosing compensation paid to their top executives and have appropriate internal controls in place to ensure that shareholders receive information to which they are entitled.”
What’s the latest on virtual shareholder meetings?
It should come as no surprise that, in light of the COVID-19 pandemic, the number of virtual shareholder meetings this proxy season has jumped—off the page. But will this year’s broad experience leave companies wanting more? And will investor groups, which have tended to be skeptical of the virtual-only format, begin to view VSMs more favorably?
Auditors address non-GAAP financial measures in the context of COVID-19
Is EBITDAC a thing? Yes, according to the FT. This article describes the use of a new non-GAAP metric: “earnings before interest, tax, depreciation, amortisation—and coronavirus.” Applying the new metric, a few companies have actually added back profits they contend they would have earned but for the mandatory lockdowns resulting from COVID-19. Hmmm. While, according to the article, the add-back has “bemused some observers,” it does raise the question: how should companies employ non-GAAP financial measures (NGFMs) in the context of COVID-19? How should audit committees conduct oversight of the use of NGFMs that have been adjusted for coronavirus-related effects? Auditors weigh in.
SEC’s Investor Advisory Committee makes disclosure recommendations
At a meeting of the SEC’s Investor Advisory Committee last week, the Committee voted to make recommendations to the SEC on three topics: accounting and financial disclosure; ESG (environmental, social and governance) disclosure; and disclosure effectiveness. The ESG recommendation concluded that “the time has come for the SEC to address this issue,” and it should be no surprise that there was some controversy—including some dissenting votes—surrounding that recommendation. While recommendations from SEC advisory committees often hold some sway with the commissioners, given the long-held views of the current commissioners, it seems highly unlikely that the ESG recommendation will have much traction—at least not in the near term. The recommendations come as the membership of the committee undergoes a substantial shift as many members time out on their appointments. The recommendations are discussed below.
Nasdaq proposes new rules to address emerging market listings; Holding Foreign Companies Accountable Act
Yesterday, the SEC formally announced its July 9 roundtable on emerging markets. In the announcement, the SEC observed that, “while the U.S. securities laws and regulations applicable to emerging market companies listed on U.S. exchanges are the same as (or comparable to) the laws and regulations applicable to U.S. public companies, the practical effects often are substantially different, based on the inability of U.S. regulators to inspect for compliance and enforce these rules and regulations.” In the meantime, Nasdaq appears to have taken the matter to the next level. Nasdaq’s three new proposals haven’t been posted by the SEC yet—so there may still be a lot of behind-the-scenes negotiation before they see the light of day on the SEC’s website—but they are clearly designed to address these concerns about emerging market issuers, especially lack of accounting controls and transparency. Not to be outdone, the Senate yesterday passed a bill that could bar from listing on U.S. exchanges companies audited by firms that the PCAOB is prohibited by foreign authorities from inspecting.
NYSE provides temporary exception to certain shareholder approval requirements
The SEC has declared immediately effective (yet another) proposed change to the rules of an exchange—this one from the NYSE. The NYSE has adopted new Section 312.03T of the NYSE Listed Company Manual, which will provide a temporary exception, through June 30, 2020, from the application of the shareholder approval requirements for specified issuances of 20% or more of the outstanding shares (Section 312.03) and, in certain narrow circumstances, by a limited exception for issuances to related parties or other capital-raising issuances that could be considered equity compensation (Sections 312.03 and 303A.08). Although not entirely congruent, the exception appears to be modeled closely on the comparable Nasdaq exception that was approved just over a week ago. (See this PubCo post.) In light of the unprecedented disruption in the economy as a result of COVID-19, many listed companies “are experiencing urgent liquidity needs during this period of crisis due to lost revenues and maturing debt obligations.” The temporary exception is designed to respond to this unprecedented emergency and to help companies access necessary capital quickly.
SBA provides “safe harbor” for PPP loans under $2 million
New FAQ 46 from the SBA provides a “safe harbor” for borrowers of less than $2 million under the Paycheck Protection Program provisions of the CARES Act. Under the safe harbor, for borrowers of amounts below the $2 million threshold, the SBA will deem their certifications regarding the “necessity” of the loans to have been made in good faith. What’s more, while loans over the $2 million threshold will be subject to SBA review (as has been widely publicized), if the SBA determines that the borrower “lacked an adequate basis” for the required “necessity” certification, but the borrower then repays the loan, the SBA “will not pursue administrative enforcement or referrals to other agencies” with respect to the “necessity” certification.
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