In early April, the SEC reminded companies about the importance of disclosure during the current COVID-19 pandemic, challenging every board’s ability to forecast its performance for the rest of the year. In a joint public statement, chairman Jay Clayton and William Hinman, the director of the division of corporation finance, said they would like to see “high quality” disclosures that provide “detailed information regarding future operating conditions and resource needs” during this crisis.
Corporate directors should consider the SEC’s statement as a friendly warning: the SEC—and more importantly, investors—will be paying close attention to whether or not companies provide forward-looking transparent disclosures that help investors make competent decisions regarding the ability of corporations to weather this crisis. In its statement, the SEC warns boards that, “it may be tempting to resort to generic, or boilerplate disclosures that do little to inform investors of company-specific status, operational strategies and risks,” but encourages companies to freely disclose “information that provides investors a level of insight that allows them to see the key operational and financial considerations and challenges the company faces through the eyes of management.”
This call for disclosure transparency is a gut-check moment for every corporate director. Directors must look around their boardroom and ask, “Is this team capable of assessing our situation accurately enough to develop a strategy that we can openly share with shareholders, stakeholders and regulators because we are absolutely confident that it will allow us to successfully emerge from this crisis?” This is not meant to disrespect directors, but to question whether all directors are willing to respond appropriately to the difficulties COVID-19 can inflict on individual businesses.
Providing transparent disclosures means that the ethical values of every board will be tested in the coming months. It will be tempting to hide, delay, distort or leave out information during this crisis to avoid negative scrutiny of regulators and shareholders.
The challenge for boards will be to make sure ethical considerations factor into any decisions made involving negative impacts resulting from the COVID-19 pandemic. Most businesses have shut down or adjusted some aspect of their operations due to COVID-19, which means earnings results for many companies may be disappointing. Investors are expecting bad news; they just want to know how bad the news is and what plans the board has to deal with it. Directors may struggle with confronting disappointing news directly. Openly sharing decision-making regardless of the potential risk to the company stock price is also challenging. Exercising ethical tolerance during this crisis means:
• The board shares positive and negative information that is material to the financial condition of the company with investors and stakeholders in a timely fashion.
• The board provides detailed explanations why any forward-looking projections are as accurate as possible.
• The board makes certain predetermined incentives and goals will not be adjusted to protect the compensation levels of executives and directors at the expense of shareholders.
• The board provides disclosures that show that it has a thorough understanding of how the company is being impacted by the COVID-19 pandemic, and has detailed strategies to mitigate those impacts while continuing to move forward with new business development.
It can be argued that directors are likely in a no-win situation because shareholder lawsuits will almost certainly be filed if their company stock price declines significantly. However, if the board handles all disclosures ethically, that will help in its defense of those lawsuits. Handling this adversity ethically will also help avoid any reputational damage that could result if it were alleged that directors or company executives tried to profit from this crisis. Directors must think deeply about how their company can turn the challenges of the COVID-19 pandemic into an opportunity to communicate how they are working to emerge successfully from a catastrophic event without crossing ethical boundaries.
