April 1, 2020
April 1, 2020
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:
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.”
COVID-19. Uncertainty. Fear. Recession. Fiduciary Duties.
It’s essential that directors know what to focus on and when.
NACD: Tools and resources to help guide you in unpredictable times.