SEC’s Q2 Roundtable Offers Insight to Investor Views

Betty M. Huber is counsel and Paula H. Simpkins is an associate at Davis Polk & Wardwell LLP. This post is based on their Davis Polk memorandum.

On June 30, 2020, Chairman Jay Clayton moderated a virtual roundtable titled “Q2 Reporting: A Discussion of COVID-19 Related Disclosure Considerations” to solicit views from a small panel of highly experienced and well-informed private investors and asset managers (“Roundtable”). The Roundtable included the following panelists: Gary Cohn, Former Director of the U.S. National Economic Council; Glenn Hutchins, Chairman of North Island and Co-Founder of Silver Lake; Tracy Maitland, President and CIO of Advent Capital Management; and Barbara Novick, Vice Chair and Co-Founder of BlackRock. The Director of the Division of Corporation Finance, William H. Hinman, also participated in the Roundtable.

Standardization, Transparency and Forward-Looking Information

There was a general consensus among panelists that companies’ providing greater transparency and forward-looking information is crucial when there is a lot of economic uncertainty, such as presented by the COVID-19 pandemic. Some panelists suggested that standardization of forward-looking information, including financials, among companies would be very helpful. The discussion also included recognition that standardization may be difficult because companies have different business models, cash flow needs, materiality thresholds, etc.

As part of the discussion regarding the insufficiency of forward-looking information, one panelist shared that less than 10% of S&P 500 companies have outstanding guidance. Panelists agreed that meaningful disclosures include providing specificity and articulating rationales. Cash burn factors such as working capital and inventory levels were provided as examples of helpful metrics. Similarly, analysis on a month-by-month basis (or perhaps weekly) of the availability of capital under a credit facility with an explanation of how the terms of the credit facility covenants impact the level of available capital during the time period in question.

SEC Staff has issued guidance, which was updated last week, to assist companies in analyzing the pandemic’s impact. Director Hinman acknowledged during the Roundtable that some of the questions that the Staff suggested have been more forward looking than before the pandemic. Director Hinman stated that he and Chairman Clayton have been “underscoring that forward-looking [financials are] at least as important as the historical financials that [the SEC] usually collects.” They have emphasized that they “don’t expect to second guess good-faith forward-looking statements.” Director Hinman explained that a company’s demonstrating good-faith boils down to showing consistency (e.g., consistency in discussions with the board and others externally). Later in the Roundtable, Director Hinman also noted that the value of disclosures goes beyond investors. Others, including members of the public and perhaps the company’s own competitors, rely on the company’s disclosures. Director Hinman believes reporting companies understand (1) that, generally speaking, there is potential risk of liability associated with disclosures and (2) the need to conduct certain analyses, assessments and due diligence prior to making a disclosure.

There was a general consensus among panelists that companies’ providing a range of “best-case” and “worst-case” scenarios and their outcomes would be very helpful. One panelist shared that credit ratings for hospitals are based, at least in part, on how many days the hospital can operate without revenue. Lastly, companies need to explain how they are going to handle the current environment in the short term while also being able to articulate their vision and approach to long-term issues.

Several panelists felt that if the SEC could identify and share examples of “model disclosures” that such examples may assist issuers in formulating and drafting their own disclosures.

All the panelists praised the SEC’s swiftness, foresight and helpfulness with regard to the COVID-19-related guidance issued to date by SEC Staff.

Resiliency and Adaptability

Panelists expressed that resilience and adaptability are highly critical to assessing how well a company is performing. Companies should consider reflecting on and learning from what has gone well and what has not. One panelist commented that this exercise will be crucial in preparing for the impact of climate change, which the panelist believes is coming down the pike.

Human Capital Management

Director Hinman mentioned that the SEC Staff has made a point of communicating that “human capital is going to be very material in this environment.” Through its issued guidance, Staff has suggested questions for companies to examine for themselves regarding the impact of human capital on their operations. Director Hinman commented that the SEC is seeing a lot more human capital disclosure such as its impact on costs and the SEC Staff are starting to “integrate that into [the SEC’s] rulemaking as well.”

The operation of small- and medium-size businesses also factor into the analysis by larger companies because of their roles as customers or vendors in the supply chain of larger companies. The small- and medium-size companies’ financial health and operability could materially impact a larger company and, in turn, that company’s disclosure.

Some panelists predicted that, when a sense of normalcy resumes, the big boardroom topics will include matters such as hiring practices, living wages, and diversity in the workforce.

Social Issues

Companies need to consider the social issues, including the public’s focus on social justice and public/community welfare, as they design their short-term and long-term strategies. Companies need to ask themselves how they are going to be perceived by customers and the public once the COVID-19 pandemic has passed.

Panelists recommended for the SEC to consider encouraging issuers to provide further disclosure regarding diversity and inclusion.

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