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The impact of COVID-19 on corporate reporting

As the novel coronavirus pandemic continues to expand across the globe, it is taking an unprecedented toll on businesses of all stripes. The outbreak coincides with companies’ annual general meeting (AGM) season and the accompanying legally mandated reporting, adding an additional layer of complexity as companies work to meet their obligations to shareholders under circumstances that challenge many aspects of the process.

Delayed meetings

The first impact is one of timing. Some companies are being forced to delay their annual meetings as they scramble to adjust to destabilizing conditions. The Securities and Exchange Commission (SEC) has issued (PDF) a 45-day extension to filing deadlines for legally mandated proxy statements for publicly traded companies. A proxy statement is a document the SEC requires companies to provide to shareholders so that they can make informed decisions about matters that will be addressed at the AGM.

Restaurant company Bloomin’ Brands — owner of such familiar chains as Outback Steakhouse and Carrabba’s Italian Grill — is holding its AGM a full month later this year than it did last year.

In order to comply with various social distancing guidelines and prohibitions on gatherings across the country, far more companies are holding virtual meetings than ever before.
In an April 16 filing with the SEC, Bloomin’ Brands provided a business update related to the pandemic, explaining its efforts to retain and pay staff even as its dining rooms across the country have been temporarily shuttered and its operations have focused on food delivery and take-out. The company’s CEO also has suspended his salary.

As the pandemic surfaces greater concerns surrounding employee retention, sick leave and pay policies, companies are likely to face much more scrutiny from investors on how they manage these issues.

Virtual meetings

In order to comply with various social distancing guidelines and prohibitions on gatherings across the country, far more companies are holding virtual meetings than ever before, according to the Sustainable Investments Institute.

While virtual meetings are not new, they were already controversial before the pandemic. The Council of Institutional Investors (CII) and various other shareholders publicly have opposed virtual-only meetings. While most of these shareholders recently have expressed their support for virtual meetings under the current circumstances, their original concerns remain.

Typically, large investors do not attend AGMs, opting to vote their shares in advance. Rather, AGMs present the opportunity for smaller, retail shareholders to hold management and boards to account in public and on the record. This in-person engagement is hard to replicate remotely.

For example, As You Sow CEO Andrew Behar told S&P Global that he believes a coffee-break conversation with a Monster Beverage board member at the company’s 2018 AGM drove its subsequent decision to study and report on slavery and human trafficking in its sugar cane supply chain.

Many shocks and disruptions companies are experiencing under the pandemic are quite similar to those that become increasingly likely as average global temperatures continue to rise.
Activist investors in recent years have privately expressed suspicion that companies have chosen virtual formats to spare their executives the discomfort of facing difficult questions from shareholders around their environmental, social and governance performance.

Certainly, that is not the impetus behind the current moves to remote meetings, but many hope that this shift does not become permanent.

Risk disclosure

Perhaps the greatest unknown arises around companies’ mandatory risk disclosures. The SEC requires publicly traded companies to report on material risks to their operations, including those associated with climate change.

While that may sound like a non sequitur, many shocks and disruptions companies are experiencing under the pandemic are quite similar to those that become increasingly likely as average global temperatures continue to rise. Moreover, the supply chain disruptions associated with this pandemic are not novel and are predictable consequences of various modern threats.

While the SEC repeatedly has issued guidance saying that companies should not use boilerplate language in their risk disclosures and should not discuss risks in hypothetical terms when those risks are already affecting operations, most companies over the years have done both when reporting on climate risks. In a March 4 press release, SEC Chairman Jay Clayton addressed this subject: 

We also remind all companies to provide investors with insight regarding their assessment of, and plans for addressing, material risks to their business and operations resulting from the coronavirus to the fullest extent practicable to keep investors and markets informed of material developments. How companies plan and respond to the events as they unfold can be material to an investment decision, and I urge companies to work with their audit committees and auditors to ensure that their financial reporting, auditing and review processes are as robust as practicable in light of the circumstances…

Consider the example of private prison operator GEO Group, which is holding its virtual AGM 12 days later this year than it did last year without mentioning the pandemic in its proxy statement. As prisons across the country become hotbeds for COVID-19 infections and jurisdictions release prisoners in an effort to reduce transmission, is a business model predicated on filling as many prison beds as possible under threat?

The company acknowledges in its most recent risk disclosure that "a decrease in occupancy levels could cause a decrease in revenues and profitability," without getting into specifics related to the current situation. GEO Group also makes a brief, hypothetical, boilerplate reference to global pandemic risk, without discussing how that risk could play out in its own operations. 

Whether companies will provide more detailed, data-based, scenario-driven risk disclosure following this pandemic remains an open, critical question for investors and stakeholders alike.

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