In this new Bulletin, consultant Protiviti identifies key issues for the 2021 audit committee agenda and—no surprise—at least half reflect the impact of COVID-19. The agenda includes four topics related to enterprise, process and technology risks and four related to financial reporting, with a reminder regarding ESG. Also available is an audit committee self-assessment questionnaire. The topics suggested for the audit committee agenda are summarized below.
Just in time for the new proxy season comes this Report of the 2020 Multi-Stakeholder Working Group on Practices for Virtual Shareholder Meetings from the Rutgers Center for Corporate Law and Governance, the Council of Institutional Investors and the Society for Corporate Governance. The report is replete with helpful guidance, detailing best and emerging practices for virtual shareholder meetings. The Working Group updates its 2018 report (see this PubCo post) in light of the deluge of pandemic-induced VSMs that were convened during the 2020 proxy season. Sorry to say, but it seems likely that this new proxy season will see a repeat for the same reason—at least in the first part of the season—so this report should be especially useful.
Happy holidays everyone! Good riddance to 2020! Hooray for science and scientists!
In its first action against a public company for misleading investors about the financial effects of the pandemic, the SEC has announced settled charges against The Cheesecake Factory. In mid-March, the company, which operates a chain of restaurants, was compelled as a result of COVID-19 to temporarily change its business model from dine-in restaurants to “an ‘off-premise model’ (i.e., to-go and delivery).” The company then issued two press releases (furnished to the SEC on Form 8-K) advising of the transition and indicating that the new model was “enabling the Company’s restaurants to operate sustainably at present under this current model,” but failed to disclose that the claim of sustainable operations excluded expenses attributable to corporate operations as well as the weekly loss of $6 million in cash. Those statements, the SEC concluded, were “materially false and misleading.” According to SEC Chair Jay Clayton, “[a]s our local and national response to the pandemic evolves, it is important that issuers continue their proactive, principles-based approach to disclosure, tailoring these disclosures to the firm and industry-specific effects of the pandemic on their business and operations. It is also important that issuers who make materially false or misleading statements regarding the pandemic’s impact on their business and operations be held accountable.”
Today, the SEC staff issued a revised Statement regarding the extension, for an indeterminate period, of temporary relief related to authentication document retention requirements under Rule 302(b) of Reg S-T in light of light of public health and safety concerns regarding COVID-19. This staff Statement is temporary and remains in effect until the staff provides public notice that it no longer will be in effect; that notice will be published at least two weeks before the announced termination date. Nothing new there. But what is new is that the Statement indicates that the staff will not recommend enforcement action if filers take advantage of the new electronic signature rules even before the effective date of those rules.
If Matt Levine has a mantra in his “Money Stuff” column on Bloomberg, it’s this: everything is securities fraud. “You know the basic idea,” he often says in his most acerbic voice,
“A company does something bad, or something bad happens to it. Its stock price goes down, because of the bad thing. Shareholders sue: Doing the bad thing and not immediately telling shareholders about it, the shareholders say, is securities fraud. Even if the company does immediately tell shareholders about the bad thing, which is not particularly common, the shareholders might sue, claiming that the company failed to disclose the conditions and vulnerabilities that allowed the bad thing to happen. And so contributing to global warming is securities fraud, and sexual harassment by executives is securities fraud, and customer data breaches are securities fraud, and mistreating killer whales is securities fraud, and whatever else you’ve got. Securities fraud is a universal regulatory regime; anything bad that is done by or happens to a public company is also securities fraud, and it is often easier to punish the bad thing as securities fraud than it is to regulate it directly.” (Money Stuff, 6/26/19)
In this rulemaking petition filed by the U.S. Chamber Institute for Legal Reform and the Center for Capital Markets Competitiveness of the U.S. Chamber of Commerce, petitioners ask the SEC to take on one aspect of this type of securities litigation—event-driven securities litigation arising out of the COVID-19 pandemic. Will the SEC take action?
ISS has provided some early guidance regarding how it will view pandemic-related changes to executive compensation as part of its pay-for-performance qualitative evaluation. According to ISS, the guidance was informed by direct discussions with investors as well as the results of its annual policy survey. The guidance is summarized below.
Don’t forget to vote!
NYSE again extends temporary waiver of shareholder approval requirements for certain equity issuances
In early April, the SEC approved and declared immediately effective an NYSE rule change to waive, through June 30, 2020 and subject to compliance with conditions, application of certain of the shareholder approval requirements in Section 312.03 of the NYSE Listed Company Manual. That waiver was extended through September 30. Now, the SEC has proposed to extend the waiver through December 31, 2020, and the SEC has declared the proposal immediately effective.
Yesterday, Corp Fin posted two new CDIs, the first relating to SPAC (special purpose acquisition companies) eligibility to use Form S-3 and the second relating to whether COVID-19 benefits should be considered perks.
In this new study, Equilar and the Rock Center for Corporate Governance at Stanford examine how COVID-19 has affected CEO compensation. Are boards focused more on making sure that CEOs have the right incentives to continue their jobs under trying circumstances? After all, in the case of the pandemic, the trying circumstances are not of their own making. Or are boards more inclined to focus on showing the public and other stakeholders, especially employees, that CEOs are “sharing the pain”? CEO pay attracts a lot of attention in ordinary times, but in times of severe economic distress when corporate performance and stock prices plummet and companies engage in substantial layoffs, furloughs and pay cuts for employees—who likewise are not responsible for the economic crisis—CEO pay can attract intense scrutiny. In those circumstances, paying the same or greater levels of CEO comp can seem unfair to the employees and invite shareholder and public criticism. How have boards addressed this issue?
With the SEC presumably about to adopt enhanced disclosure requirements for human capital next week (see this PubCo post), this new report from the World Economic Forum in Davos, prepared in collaboration with consultant Willis Towers Watson, offers a timely new framework for valuing human capital. While the COVID-19 pandemic has increased our focus on the value of the workforce as an asset, this shift in perspective is not entirely new: SEC Chair Jay Clayton has long recognized that, while, historically, companies’ most valuable assets were plant, property and equipment, and human capital was primarily a cost, now, human capital often represents “an essential resource and driver of performance for many companies. This is a shift from human capital being viewed, at least from an income statement perspective, as a cost.” But he also recognized that developing a metric around this issue was not so easy. (See this PubCo post.) The pandemic, however, serves as a springboard: the new WEF report contends that, as “companies look to reset for the new world of work that emerges from the pandemic, they would benefit from an approach that values talent as a key asset that contributes to an organization’s sustained value creation. This calls for the development of a new human capital accounting framework, which would enable a company’s board and management to track how their investment in people is augmenting the firm’s human capital, and support the delivery of better outcomes for the business, the workforce and the wider community.” The report seeks to offer that framework. Whether it actually catches on is another question.