Securities Regulation Daily Advisory committee examines impact of COVID-19 on company disclosures, shareholder meetings
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Tuesday, May 5, 2020

Advisory committee examines impact of COVID-19 on company disclosures, shareholder meetings

By Amanda Maine, J.D.

Many committee members praised the SEC’s guidance relating to disclosure during the pandemic, but some voiced their support for requiring more detailed disclosures.

In its second virtual meeting of the year, members of the SEC’s Investor Advisory Committee (IAC) discussed the impact of the COVID-19 pandemic on investors, including how companies are approaching corporate disclosures and issues relating to virtual shareholder meetings. In addition to discussing the current issues relating to investors during the pandemic, several members expressed that the experience has taught valuable lessons that will shape disclosure and virtual participation in shareholder meetings in the future.

Chairman Jay Clayton noted that the market is in the midst of earnings season and when in normal times, companies would be conducting earnings calls comparing first quarter results with their prior year’s first and fourth quarter results. However, the coronavirus pandemic has required a changing approach, with a stronger focus on the current status of the company from a liquidity and operational perspective, Clayton said.

Principles-based or more detailed disclosure? Commissioner Hester Peirce said that the SEC’s principles-based disclosure framework is "tailor-made" for the current situation. "The beauty of our framework is that in the face of drastic and sudden changes brought on by the pandemic, management is afforded the flexibility to draft its disclosure to provide the material information about how COVID-19 is affecting its specific financial condition," Peirce proclaimed.

Others, however, expressed support for more detailed disclosure requirements. Commissioner Allison Herren Lee said that lessons learned from the pandemic can be used to reassess the SEC’s disclosure framework more broadly. For example, Lee suggested that if issuers were required to make more specific disclosures about their supply chains, investors might be better informed.

Committee member Damon Silvers of the AFL-CIO also advocated for more detailed and structured disclosures and encouraged the Commission to issue more guidance on the topic. He outlined several issues where the Commission might want to encourage more specific disclosures. One area would be identifying particular safety hazards at a company, including hazards to its employees, executives, and customers. Companies should also address both system controls (such as air filters) and administrative controls (such as regular cleaning schedules and hand washing breaks) meant to address these hazards, Silvers advised.

Silvers also recommended more detailed disclosures such as clear and comparable disclosures regarding protective equipment, what steps the company has taken with regards to training, and the company’s actions for contact tracing and isolating sick employees. This type of disclosure, Silvers said, is not necessarily seen under a principles-based disclosure regime, but in the current environment, investors need to have this information.

ESG and human capital. Some members of the committee seized on Commissioner Lee’s comments on learning lessons from the crisis to build on the SEC’s current disclosure framework to include more disclosure on environmental, social, and governance (ESG) factors and human capital. Anne Simpson of CalPERS called the pandemic a "brutal and vivid example" of why reporting on human capital management is important. She urged the Commission to pick up on previous work by the IAC on human capital disclosures, advising that such reporting will not be helpful unless there are standards that allow investors to compare the disclosures.

In particular, Simpson observed that while required SEC disclosures related to work force remuneration are focused at the top on executives, everything going on at a company is relevant to the company’s success, including strikes, provisions for sick leave, and training on health and safety. Simpson also urged the Commission to look at the Financial Stability Board’s Task Force on Climate-Related Financial Disclosure, which has produced a four-part framework on climate change disclosure and is currently working with the International Accounting Standards Board on how to incorporate these disclosures into financial statements.

Allison Bennington, former partner and chief global affairs officer at Value Act Capital, agreed with Simpson, stating that the current crisis illustrates why ESG disclosure is relevant, especially as related to human capital. There has been a debate whether ESG factors are material, Bennington said, and the COVID-19 situation has shown that it is material. Issuers are experiencing a "crash course" into taking these factors into account not just for their current business situation, but also for their future strategies, Bennington said. According to Bennington, issuers are finding out that they can provide these disclosures where in the past they have been reluctant to do so.

Commissioner Peirce, a noted skeptic of broadly mandating ESG disclosures, was not convinced, opining that nothing about the COVID-19 pandemic should lead us to conclude that "we suddenly have all the answers on ESG." It continues to be a nebulous area, Peirce advised, adding that approaching discrete areas of ESG is possible while expressing doubt about how the current crisis might shape future ESG disclosure in a broad sense.

COVID legislation and distancing. Professor J.W. Verret of the Antonin Scalia Law School at George Mason University said that further SEC guidance on forward-looking statements relating to COVID-19 issues might be helpful, but also stressed the difficulty of making such disclosures without historical information. Legislation to amend the Private Securities Litigation Reform Act may also be necessary, Verret said.

Also regarding legislation, Verret chastised Congress for including in the CARES Act, which provided aid for businesses and workers affected by the pandemic, a provision delaying the implementation of FASB’s new current expected credit losses (CECL) standard. Verret called the delay "an incredible assault on independent standard-setting," adding that it would probably not be the last time they use the pandemic as a reason to delay CECL implementation. Barb Roper of the Consumer Federation of America, who frequently takes the opposing side to fellow committee member Professor Verret’s positions, agreed with him about the attacks on the independence of FASB.

Professor John Coates of Harvard Law School expressed dismay that, due to the pandemic, auditors cannot make controls assessments in person. He acknowledged that there is not really anything to do about it now except disclose it, but this ad hoc system makes it harder for auditors to assess internal controls. He predicted that some companies will be overly optimistic about their controls in this new environment.

Virtual shareholder meetings. The committee also discussed how companies are conducting annual shareholder meetings during the crisis. Committee Chair Anne Sheehan noted that while shareholder meetings are traditionally an area of state law, the Commission does have a role to play by giving input as meetings are conducted remotely in a virtual environment.

Roper stated that one positive outcome of the crisis is that the capacity for virtual engagement will grow dramatically. There is now a potential going forward for "average" investors to participate in the process that had previously been unseen, and once the crisis is over to observe what did and did not work, Roper added.

Silvers agreed that technology can provide a great opportunity for orderly and productive participation at shareholder meetings for shareholders unable to travel to attend annual meetings in person. However, he cautioned that some companies are taking advantage of the crisis to deny shareholder proposal proponents the opportunity to speak at virtual meetings. In particular, he called out AT&T, which did not allow shareholders themselves to present their proposals at its recent virtual annual meeting and instead required the proposals to be presented through the company on the shareholders’ behalf. Even though it is understood that proponents of a Rule 14a-8 shareholder proposal have the right to move the proposal at the annual meeting, companies are trying to see what they can get away with in these unusual circumstances, Silvers warned.

Verret advised that the SEC has little to do with the process of conducting annual meetings. While there are SEC rules applicable to issues such as the date of annual meetings, 99 percent of law regarding shareholder meetings is governed by state law, Verret said. The SEC has no authority in this area, including who speaks at the meeting, unless it involves fraudulent activity, according to Verret. Sheehan acknowledged that it is mostly a matter of state law, but there are still opportunities for the SEC to issue guidance. For example, it can encourage more providers of virtual meetings, she said, noting that companies had very few choices regarding who they used to conduct the virtual meetings. It also doesn’t hurt for the SEC to remind companies to follow state law, Sheehan added.

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