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Article | Executive Pay Memo North America

SEC statement emphasizes importance of forward-looking disclosures


Governance Advisory Services |Executive Compensation
COVID 19 Coronavirus

By Gary Chase and Steven Seelig | April 17, 2020

Companies that provide good faith, reasonable estimates of forward-looking information would not be second-guessed by SEC staff.

In a statement issued on April 8, Securities and Exchange Commission (SEC) Chairman Jay Clayton and Director of the Division of Corporate Finance (Corp Fin) William Hinman encouraged public companies to provide more expansive, forward-looking statements regarding the impact of the COVID-19 pandemic on their business in upcoming earnings releases and while conducting analyst and investor calls. The statement urged companies to provide as much information as is practicable regarding their current financial and operating status, as well as their future operational and financial planning, to respond to investor interest in:

  1. Where the company stands today, operationally and financially
  2. How the company’s COVID-19 response, including its efforts to protect the health and wellbeing of its workforce and its customers, is progressing
  3. How its operations and financial condition may change as all our efforts to fight COVID-19 progress

This statement was a follow-up to an earlier release on March 25 from Corp Fin, providing its views on how disclosure of evolving business risks from COVID-19-related effects may be necessary or appropriate in management’s discussion and analysis, the business section, risk factors, legal proceedings, disclosure controls and procedures, internal control over financial reporting and the financial statements. The prior Corp Fin guidance recognized the challenges of producing comprehensive financial and operational reports and gave companies leeway to provide reasonable estimates, where appropriate.

Nonetheless, many companies (subscription required) have decided that, for now, they would not issue annual or quarterly earnings guidance due to uncertainty of their estimates, while others that have issued earnings guidance have done so with doses of skepticism. Clayton and Hinman’s statement appears to respond to these trends and casts the need for more information on COVID-19’s impact and potential company and industry responses in order for the country, as a whole, to mitigate and (hopefully) more effectively treat its health risks. Their request is for companies to provide as much information as is practicable regarding their current status and plans for addressing the effects of COVID-19.

Clayton and Hinman make clear they are speaking for themselves as they urge public companies to provide the following information:

  • Detailed discussions of current liquidity positions and expected financial resource needs, which would be particularly helpful to investors and markets
  • Efforts to protect worker health and wellbeing, and customer safety
  • The extent to which the impact of financial assistance under the CARES Act or other similar COVID-19-related federal and state programs will or may have a material effect upon financial condition or results of operations, and the amount received

These and other relevant disclosures should not be boilerplate, according to the statement: Companies and their advisors should make all reasonable efforts to convey meaningful, insightful information that allows investors to see the key operational and financial considerations and challenges the company faces through the eyes of management.

Even though Clayton and Hinman’s statement recounts their personal views, the reality is that they help set the agenda on enforcement actions on inaccurate disclosures. They recognize that legal counsel often cautions companies to limit their forward-looking disclosures — in particular, specific estimates — to mitigate legal risk in the event the forward-looking estimates prove to be incorrect. The statement notes that companies should use the safe-harbor rules that would shield their liability for these disclosures and should expect that the SEC will not second-guess good faith attempts to provide investors and other market participants appropriately framed forward-looking information.

The human capital angle: As consultants in this area, we would be remiss not to mention that how a company is managing its human capital resources will become a key area of consideration in these forward-looking statements. Obviously, a company’s ability to deploy its workforce safely and without health risks will become a cornerstone of these disclosures. Doing so will require a wide array of planning for different industries, so these disclosures will vary greatly depending on how dependent face-to-face or in-person work is required to accomplish company goals. We’ve already begun to see press accounts (subscription required) of how different companies are adjusting their operations and worker activities, with some even staffing up to meet demands (subscription required). We would expect to see companies provide insights into these changes and their hoped-for impacts in their forward-looking statements.

We’ve also been hearing from companies about their immediate focuses in managing their business. These tend to fall into categories of company efforts at cost containment, the company’s ability to gear up or gear down to volatile changes in demand, continued efforts at resiliency planning for future risks to ensure business continuity, flexibility in moving workers to virtual work environments and the company’s overall approach to ensuring a safe workplace that promotes worker wellbeing. We would expect companies that take the SEC request to heart will spend time detailing their efforts in these areas and forecasting the potential impact of these efforts on their future operations and financial condition.

Executive compensation issues themselves may not necessarily be included in these expanded disclosures in quarterly reports. Immediate changes in those programs are tending to be the subject of press releases, many of which accompany Form 8-K filings. Most have tended to be reductions or deferrals of executive pay.

On the other hand, companies that actively change their annual bonuses and long-term incentives to measure success in accomplishing some of these workforce transformation issues, and that already disclose those changes in other public filings or statements, may consider including a discussion of those statements in their quarterly reports.

These decisions will be made in consultation with SEC counsel, of course, with the notion that revealing more immediate details on executive pay programs helps illuminate that the entire company is pulling in the same direction. Regardless of how the quarterly guidance is crafted, ultimately a discussion of annual bonus and long-term incentive plan changes, and company success in these areas, will appear in the year-end proxy, so the decisions about disclosure are really about timing.

Please see our recent article, Purpose, certainty and sustainability during COVID-19, March 31, 2020, for more of our firm’s thinking on the human capital themes discussed above.


Director, Retirement and Executive Compensation

Senior Director, Executive Compensation (Arlington)

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