Yesterday, SEC Chair Jay Clayton and Corp Fin Director Bill Hinman issued a statement on the Importance of Disclosure – For Investors, Markets and Our Fight Against COVID-19. The statement urges companies, as they issue earnings releases and conduct analyst and investor calls in the coming weeks, to provide as much information as practicable, focusing their disclosure less on historical information and more on "current financial and operating status, as well as future operational and financial planning" under "various COVID-19-related mitigation conditions." Among other topics, they encourage companies to address liquidity and resource needs, receipt of financial assistance under government programs, company efforts to protect worker health and customer safety and strategies to incrementally resume regular operations as the crisis resolves.
Clayton and Hinman place their call for more forward-looking information in the context of a widely supported "national, full-mitigation response to COVID-19" that has led inevitably to the current "deep contraction" of the economy, tempered to some extent by a hopeful "emerging consensus that, as we develop more tools to fight COVID-19...we can, anchored by advice of healthcare specialists, incrementally foster economic activity."
Just as an aside, my vote for most insightful metaphor for the "deep contraction" of the economy—from Paul Krugman: the "economic equivalent of a medically induced coma, in which some brain functions are temporarily shut down to give the patient a chance to heal."
With that in mind, the two officials advise that each company's "disclosures should reflect this state of affairs and outlook and, in particular, 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 well-being of its workforce and its customers, is progressing, and (3) how its operations and financial condition may change as all our efforts to fight COVID-19 progress. Historical information may be relatively less significant."
The Statement echoes themes that Clayton presented in his off-the-cuff remarks to the SEC's Investor Advisory Committee on April 2. In comments at the meeting, Clayton observed that investors are thirsting for information, noting in particular that the most valuable information relates to cash flows and operations in the current environment, especially with regard to the 30-day period of the economic shutdown undertaken to slow the spread of the virus. According to Clayton, investors want to know how management is planning to continue through those 30 days? And what if it is a longer period? How is management planning for more normalized outcomes as health concerns resolve? He expressed his hope that a framework would develop for more forward-looking information that is informed by advice from epidemiologists and other healthcare experts.
However, some companies may react much like one of the Committee members (an academic) commenting at the same meeting about the acute problem of assessing impairment of accounts receivable—under these conditions, he ventured, that determination will be a "total guess." (See this PubCo post.)
Drilling down, Clayton and Hinman stress that, this quarter, earnings statements and analyst calls will be far from normal—largely because historical information, which has typically "been among the most meaningful drivers of investment decisions," may not be quite so instructive this time. Rather, this quarter, investors and analysts are anxious to "know where companies stand today and, importantly, how they have adjusted, and expect to adjust in the future, their operational and financial affairs to most effectively work through the COVID-19 health crisis." Although they recognize that, under the current circumstances, providing comprehensive financial and operational reports will be a challenge, Clayton and Hinman, speaking for themselves, urge
"public companies, in their earnings releases and analyst calls, as well as in subsequent communications to the marketplace, to provide as much information as is practicable regarding their current operating status and their future operating plans under various COVID-19-related mitigation conditions. Detailed discussions of current liquidity positions and expected financial resource needs would be particularly helpful to our investors and markets. Beyond the income statement and the balance sheet effects, we recognize that COVID-19 may significantly impact operations, including as a result of company efforts to protect worker health and well-being and customer safety. The impact of company actions and policies in this area may be of material interest to investors, and we encourage disclosures that address that interest. In addition, companies and financial institutions may be receiving financial assistance under the CARES Act or other similar COVID-19 related federal and state programs. Such assistance may take various forms and is intended to mitigate COVID-19 effects for companies and their workers. If these or other types of financial assistance have materially affected, or are reasonably likely to have a material future effect upon, financial condition or results of operations, the affected companies should provide disclosure of the nature, amounts and effects of such assistance."
In particular, they they acknowledge that providing detailed forward-looking information about future operating conditions and resource needs may be especially difficult because current response strategies are tentative and the environment evolving; not much is known at this point about "a forward-looking health and welfare strategy"—for example, the duration of social-distancing guidelines—which will be a key driver of future operations and performance. That means that any estimates will inevitably be based on assumptions, many of which will be beyond the company's control. However, they believe that, with the passage of time, these strategies and timeframes will become known, and "making and refining these estimates should become less difficult." Although companies may be tempted to go full boilerplate on any forward-looking information, they urge companies to "make all reasonable efforts to convey meaningful information—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. In this regard, we encourage companies to consider the broad frameworks of some of the strategies that have been suggested, how following those strategies may affect their operations and whether that analysis would be of material interest to investors."
Finally, they advise, notwithstanding advice from many legal counsel cautioning companies to limit forward-looking disclosures to reduce legal risk and even though it seems likely that "actual financial and operational results may differ substantially from what would now appear to be reasonable estimates," they encourage companies to go for it and just take advantage of the safe harbors for forward-looking statements. "Given the uncertainty in our current business environment," they observe, they "would not expect to second guess good faith attempts to provide investors and other market participants appropriately framed forward-looking information." Clayton and Hinman believe that this forward-looking information will benefit investors, the company (as the market digests the information) and "substantially contribute to our nation's collective effort to fight and recover from COVID-19" as "the broad dissemination and exchange of firm-specific plans" to address COVID-19 will help in coordination efforts to fight the pandemic and give "the public a heightened level of confidence and understanding."