COVID-19: SEC Filings Are a Communication Platform

On March 25, the US Securities and Exchange Commission (SEC) issued another round of relief for public companies with regard to financial filings in light of the Coronavirus Disease 2019 (COVID-19) outbreak. The Commission provided public companies with a 45-day extension to file reports originally due between March 1 and July 1, 2020. This new order is an extension of the SEC’s earlier March relief order. As companies prepare their 10-Q and 10-K filings, boards need to ensure that their companies’ filings not only accurately identify and reflect the impact of the pandemic on their businesses, but also effectively communicate with investors.

A recent NACD poll on board responses to the COVID-19 crisis found that only 34 percent of boards at the time the survey was conducted in mid-March had reviewed their company’s external communications strategy, but this number is bound to grow as the crisis continues. As the SEC states in its recent order, “we encourage public companies to provide current and forward-looking information to their investors,” adding an important reminder about safe-harbor rules for such statements.

In speaking about future developments, companies can deprioritize issues and engagement not related to COVID-19, which is the topic most important to investors in this moment. As stated by one major investor group, such engagement “should be postponed where not related to COVID-19 to allow management and boards the ability to focus on crisis management.” 

To help directors and their management teams understand the current landscape of COVID-19 risk disclosure, NACD mined data from MyLogIQ—Multidimensional Public Company Intelligence to identify trends in 10-K filings from January 1 to March 30, 2020 using the search terms “coronavirus” and “COVID-19.”

Fifty-one percent of Russell 3000 companies that have filed a 10-K or NT 10-K as of March 30 mentioned “coronavirus” or “COVID-19” in their disclosures. As boards continue to meet with management to discuss the crisis, directors should ensure that they are probing executives on business continuity risk. NACD’s recent poll found that only 45 percent of boards were pressure testing management assumptions about the business impact of the virus as of mid-March.

NACD’s study of coronavirus disclosures first compared filings by industry, using MyLogIQ’s classification for eight different sectors. The pharmaceutical and life sciences industry, for one, saw the greatest number of companies release COVID-related disclosures, followed closely by the financial services industry (see chart below).

NACD also compared coronavirus disclosures by market cap. Small-cap companies, those with a market value between $300 million and $2 billion, are the most likely to discuss the novel coronavirus in their 10-K filings (see chart below). This could be caused by small-cap companies being more affected at the onset of the crisis than more mature, larger cap companies with better cash reserves.

As companies discuss the pandemic in their filings, NACD found that disclosure details and style vary widely. Many companies have a boilerplate statement about the pandemic in their filings such as “the extent to which the coronavirus may impact our business is uncertain.” However, some companies are using the public filing as a platform to communicate with investors on the impact of the virus. For example, many companies are discussing the following:

• New cyber risks associated with the rapid move to remote work.
  • “We have seen an increase in phishing and spam emails as well as social engineering attempts from ‘hackers’ hoping to use the recent COVID-19 pandemic to their advantage. In addition to traditional computer ‘hackers,’ malicious code (such as viruses and worms), employee theft or misuse and denial-of-service (‘DoS’) attacks, sophisticated nation-state and nation-state supported actors now engage in attacks (including advanced persistent threat intrusions).” (MongoDB, 10-K)
  • “COVID-19 may have an adverse impact on our information technology systems, including telecommuting issues associated with our employee population working remotely or an increase in online orders due to disruptions or closures of our retail store operations.” (Macy’s, 10-K)
• Impact on cash flow.
  • “… if the global response to contain the 2019 Novel Coronavirus escalates or is unsuccessful, [it] would have a material adverse effect on our business, financial condition, results of operations and cash flows. Although we have insurance coverage with respect to some of these events, we cannot assure you any such coverage will provide any coverage or be sufficient to indemnify us fully against all direct and indirect costs…” (Las Vegas Sands Corp., 10-K)
  • “… if our cash flows from operating activities decline significantly, including any such decline related to reduced store traffic and widespread temporary store closures as a result of the coronavirus disease (COVID-19) pandemic, we may be required to reprioritize our business initiatives to ensure that we can continue to service or refinance our debt with favorable rates and terms. We cannot reasonably estimate the length or severity of this pandemic, but we currently anticipate a material adverse impact on our consolidated financial position, consolidated results of operations, and consolidated cash flows in fiscal 2020.” (The Gap, 10-K)
• Human capital risk to operations.
  •  “We could also be adversely affected if key personnel or a significant number of employees were to become unavailable due to an outbreak in the places they live. Although we have business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective in mitigating the adverse impacts of any significant external event.” (First Internet Bancorp, 10-K)
• Supply chain disruption risk and impact.
  • “Any disruption of supply could materially harm our business if we cannot remove the disruption or are unable to secure an alternative or secondary supply source on comparable commercial terms. While we continue to take steps to find alternative supply channels and lock in supply with preferred sources through multi-year and/or minimum commitment contracts, such mitigating efforts may not prove successful at ensuring a steady and timely supply or may require us to pay significantly higher prices for such product.” (Charles River Laboratories International, 10-K)
  • “While we are a domestic company, the Company participates in a global supply chain, which includes materials and components that are sourced from China. A prolonged disruption could result in the delay of equipment and materials that may impact our ability to reliably serve our customers.” (Xcel Energy, 10-K)

Directors should ensure that while they aid management during the current crisis, they are not neglecting their other fiduciary duties. In a March 2020 update to its stewardship priorities, BlackRock states, “With regard to director responsibilities and commitments, we seek to understand the board’s role in crisis management in the face of, for instance, cyber events, sudden departures of senior executives, negative media coverage, or a proxy contest given the likelihood that such events are often material and can significantly detract from a board’s ability to carry out its other responsibilities.”

Key Questions for Boards:

• Does the board have a robust understanding of the potential impacts of the virus on cash flow, human capital, supply chains, and cyber risks specific to the company?
• What is the frequency of reporting from management on these risks? Is management presenting a comprehensive risk metric report that includes emerging risks?
• Is the company effectively using public disclosures to communicate and inform investors about the business impact of COVID-19?