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.
In a recent survey of over 70 nominating/governance committee chairs of S&P 500 and Fortune 500 companies, consultant SpencerStuart asked respondents about how their boards responded to COVID-19 and the nature of any long-term governance changes they anticipated post-pandemic. Somewhat surprisingly, given the issues COVID-19 has created or highlighted for companies, committee chairs do not appear to be in any kind of rush to institute changes—in fact, quite the opposite seems to be the prevailing perspective. Is it just too soon to be thinking about structural or other adjustments to the board? Or, does “stay at home” also mean “stay the course”?
Temporary secure file transfer process for electronic submission of supplemental materials and Rule 83 CTRs
In light of ongoing health and safety concerns arising out of the COVID-19 pandemic, Corp Fin has issued a statement regarding implementation of a new temporary secure file transfer process for the electronic submission of supplemental materials under Rule 418 and Rule 12b-4 and of information subject to Rule 83 confidential treatment requests.
In December 2019, as part of its strategy of enhancing transparency and accessibility through proactive stakeholder engagement, the PCAOB conducted conversations with almost 400 audit committee chairs, focused on audit committee perspectives on topics such as audit quality assessment and improvement and auditor communications, and reported on those conversations. (See this PubCo post.) As noted by PCAOB Chair William Duhnke in this PCAOB webinar for audit committees, the PCAOB prioritized this engagement, viewing informed and engaged audit committees as “force multipliers.” In addition, he noted, the PCAOB had heard criticism early in the process that the PCAOB did not play well with others and was not receptive to feedback—the conversations also represented an effort to address that problem. The PCAOB has continued this same outreach to audit committee chairs during 2020, focused this time on the unprecedented challenges created by COVID-19 and its effect on the chairs’ oversight of financial reporting and the audit. The responses regarding the impact of the pandemic varied widely, depending on the industry and company. The chairs identified a number of new or increased risks, including cybersecurity, employee safety and mental health, going concern, accounting estimates, impairments, international operations and accounting implications of the CARES Act. The PCAOB’s recent report summarizes two of the common themes the PCAOB regularly heard from audit committee chairs across industries and highlights some of the helpful questions and considerations that the chairs identified.
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 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. The waiver was designed to address the concern that, as a result of the impact of COVID-19, many listed companies with urgent liquidity needs had to access additional capital from insiders, but the NYSE’s shareholder approval requirements could have created impediments to quickly satisfying those capital needs. Since the implementation of the original waiver in April, the NYSE notes, “a number of listed companies have completed capital raising transactions that would not have been possible without the flexibility provided by the Waiver.” While equity markets have generally recovered from their initial precipitous declines, the NYSE observes, many listed companies are continuing to experience difficulty. Accordingly, the NYSE has now proposed to extend this temporary relief through September 30, 2020, and the SEC has declared the proposal immediately effective.
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.
It’s well known that COVID-19 provided an unanticipated shock to the economy as a consequence of what economist Paul Krugman termed the “economic equivalent of a medically induced coma.” As a result, many companies were compelled to disclose historic performance that was, to put it mildly, at odds with their expectations of a few months prior, with little insight about the shape of future performance. In this paper, The Spread of COVID-19 Disclosure, from the Corporate Governance Research Initiative at the Stanford Graduate School of Business and the Rock Center for Corporate Governance at Stanford University, the authors looked at how companies responded to this situation, examining the levels of transparency that companies provided in the “widely uncertain” setting of COVID-19.