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ANALYSIS: Will Investors Get the Disclosures They Need in 2020?

Nov. 4, 2019, 11:13 AM

Corporate disclosures and investor access to information will be frequent topics of discussion in 2020. Questions will revolve around how often issuers should provide public disclosure of financial information, what form that disclosure should take, and what matters merit increased attention in the new decade.

Quarterly Reporting Costs and Short-Termism

In August 2018, President Trump tweeted that one business leader told him, “Stop quarterly reporting & go to a six month system.” The tweet, which reflects a long-running debate among market participants, prompted the SEC to issue a release for comment on the costs and benefits of quarterly reporting. Not surprisingly, institutional and other investors see quarterly reporting as a necessary source of important information, while issuers describe Form 10-Q preparation as costly and burdensome.

We can expect more questions and objections as to whether less reporting would have a significant impact on corporate long-term planning. Also, look for a discussion on the import of periodic earnings guidance, and expect a cost discussion to emphasize that companies are already gathering much of the information used in a 10-Q for internal consumption. Internal data would require significant polishing to be ready for release, but issuers are not starting from scratch every three months.

In the end, quarterly reporting will likely survive, with a few tweaks to make the process more palatable for issuers while maintaining investor protections.

Regulation S-K Disclosures—A ‘Principled’ Approach?

Regulation S-K is the integrated central repository for the SEC’s non-financial statement disclosure requirements. Market participants will hear much about Regulation S-K in 2020, as the SEC has proposed significant revisions to the required business description, legal proceedings, and risk factor disclosures. Expect much of the discussion in 2020 to center around the business description and risk factor proposals, because the changes to these requirements emphasize a principles-based approach rather than reliance on prescriptive rules.

Risk factor disclosures will draw particular attention next year, in light of high-profile cases such as WeWork’s failed IPO, with 30-plus pages of risk factor disclosures, and Facebook’s $100 million settlement resulting from its failure to disclose known risks of misuse of user data.

Is a principles-based approach appropriate, however? SEC Commissioners Jackson and Lee raised this issue in their response to the proposal. The commissioners stated that a principles-based approach gives company executives discretion over what they tell investors, and can produce inconsistent information that investors cannot easily compare.

Climate Change Disclosures

Two environmental matters will continue to attract significant attention. In the joint statement referenced above, Commissioners Jackson and Lee lamented that the Regulation S-K proposal did not seek comment on whether to include the climate change risks in the business description section. According to the commissioners, “investors of all kinds view the risk as an important factor in their decision-making process.” The SEC last addressed climate change disclosures specifically in 2010 when it issued guidance.

Sustainability and Other ESG Matters

Institutional investors and other market participants are increasingly seeking enhanced sustainability disclosures. Disclosure practices are evolving, as these investors consider environmental and sustainability factors in their investment allocation decisions. Groups such as the Sustainability Accounting Standards Board and the Global Reporting Initiative are providing disclosure guidance on these issues, and many companies are getting out ahead of the regulators. The SEC currently has no uniform disclosure rules for ESG issues. Discussions will focus on how companies integrate environmental, social, governance (ESG) matters into their business models, and on the proper balance between regulatory prescriptions and market-driven solutions for environmental disclosures.

The “S” in ESG will also receive attention from the Commission next year. The SEC proposed changes to its Regulation S-K disclosure requirements concerning human capital resources, including any human capital measures or objectives that management focuses on in managing the business, to the extent such disclosures would be material to understanding the company’s business. The proposal reflects input from the Commission’s Investor Advisory Committee. The committee noted that “today’s companies are increasingly dependent on their workforces as a source of value creation.” In 1975, 83% of the S&P 500’s market value came from tangible assets. In 2015, that 83% figure came from intangible assets.

Read about other trends our analysts are following as part of our Bloomberg Law 2020 series.

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