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A few months ago, I wrote a post addressing the use of artificial intelligence in the boardroom.  While the focus of the post was using AI (or not) to draft minutes, I also asked (with apologies for quoting myself), “whether a robot equipped with AI can serve as a director.”  At the time, I thought the question was highly speculative if not absurd, so you can imagine my surprise when I came across this article, in which a CEO is quoted as saying that she’s open to the possibility of having a bot on her board.

As the author of the article writes, “[o]f course, the idea of having an AI board member opens up a host of thorny ethical issues. What would happen if the AI recommended a strategy that goes south? Or relies on biased data to make a decision?”  I agree, but it also would raise fundamental questions about corporate governance.  For example:

  • One of the cornerstones of governance is that directors can be personally liable for certain misconduct.  That rarely happens, but experience suggests that the risk of having to shell out big bucks for not minding the store is something directors think about.  Could a bot be subjected to personal liability?  How?
  • Would a bot comprehend – fully or at all – what “fiduciary duty” means, or be able to evaluate the complexities involved in determining the best interests of the corporation?  I’m sure that someday – maybe even very soon – they answer to both questions may be “yes,” but are we there yet?
  • Could a bot understand the distinction between the board’s ultimate role – that of oversight – versus managing (or micromanaging)? 
  • How would having a bot on the board impact that prized commodity, collegiality?  Could a bot take “no” for answer?  What would a board discussion be like if the bot insists that it is right despite contrary views from other directors?

And so on.

More basic technological concerns also come to mind.  We have all heard, and many of us have actually experienced, that AI makes mistakes – sometimes big ones.  I also assume that bots can be hacked; aside from enabling outsiders to listen in on board matters or get access to confidential or even privileged information, could a bot be reprogrammed to make decisions that harm the company to the benefit of an outside party?

The article appropriately (if humorously) notes that “given that the average director of an S&P 500 company made $336,352 in total compensation last year…, adding a bot to a board may be a better deal than you think.”  I’m not sure what the going price of a bot and the cost of maintaining it may be, and you can call me a luddite, but at least for now I’ll take human directors.

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The new, improved SEC was just beginning to show its stuff when the federal government shut down on October 1.  In the weeks before the shutdown, the SEC had, among other things, approved ExxonMobil’s innovative program enabling retail investors to provide standing voting instructions (see our E-Alert on the subject) and dropped its opposition to mandatory arbitration provisions in the charters of IPO companies.  SEC Chair Atkins commented on the unfortunate “kitchen sink” approach to risk factors disclosure.  And the SEC’s latest RegFlex agenda contained some hints of additional disclosure reforms to come.  But the item that seemed to have generated the biggest buzz was the possible elimination of the 10-Q quarterly report.

Soon after President Trump suggested that public companies should report semiannually rather than quarterly, SEC Chair Atkins stated that the suggestion would be fast-tracked, possibly resulting in a rule proposal by late 2025 or early 2026.  Unless the shutdown ends a lot sooner than seems likely, that timetable may be doomed.  However, there’s little reason to believe that the proposal will go away. 

On its face, transitioning from quarterly to semiannual reporting may not seem like a big deal.  After all, quarterly reporting has only been the norm in the U.S. since the 1970s, and semiannual reporting has been in place in the U.K., among other places, for a while.  But the switch is not as simple as it may seem.  Let’s consider the benefits and risks of going to semiannual reporting, some possible alternatives, and some related concerns.

Why Switch to Semiannual Reporting?

The easy answer is that eliminating quarterly reporting will reduce costs and other burdens, particularly for smaller companies with more limited resources.  However, the size of the reductions is hard to predict and will depend upon the outcome of the SEC process and companies’ practices if the requirement goes away.  It’s been noted that some companies may opt to provide detailed quarterly reports, if not full-blown 10-Qs, to keep investors satisfied (if not happy); others may continue to issue quarterly earnings releases, conduct conference calls, or take other actions to keep investors informed.  And while smaller companies would benefit from the reduced costs and burdens, some of these companies may be sufficiently desperate to attract interest that they may feel they have no choice but to continue to engage in some type(s) of quarterly disclosure.  In any event, any of these approaches will involve costs, including those arising from consultation with auditors and counsel.  So lower costs may result, but how much lower is an open question.

In suggesting the elimination of quarterly reports, President Trump predicted that dropping quarterly reporting will reduce so-called “short-termism,” but that seems speculative, at best.  Among other things, changing the short term from three to six months doesn’t seem like that big a deal in a world where five years is considered very long-term.  The President also said that switching to a semiannual reporting schedule would enable management to focus more on the business.  I suppose, but my experience suggests that the benefits will be marginal.

What Are the Downsides?

This is easy – dropping quarterly reports will reduce transparency.  Investors hunger for information, and eliminating quarterly reporting will reduce the amount of information that’s out there.  That’s why some companies are likely to continue to put out quarterly information, even if not as robust or as detailed as now appears in 10-Qs. 

Some pundits have predicted that reduced disclosure will lead to increased volatility and thereby make U.S. markets less attractive.  Based on what I’ve read, that doesn’t seem to have happened in the U.K.  Moreover, it’s hard to know whether the impact on transparency will be significant or minor – again, depending upon what the SEC does and whether and to what extent companies seek to satisfy investors’ demands for quarterly information beyond the minimum legal requirements.

One article suggested that the elimination of quarterly reports will cause some companies to postpone or try to hide adverse developments.  Perhaps true, but I suspect that those companies are already engaging in such behaviors, though I suppose that reduced reporting may make it easier for them to get away with it.

What Are the Alternatives?

This is where it may get very interesting.  SEC Chair Atkins has indicated that he’s not a fan of a “one-size-fits-all” approach; for example, he noted that many companies provide monthly reports to management, and “so maybe a company might find that monthly reporting…might lead to a lower cost of capital…”.  I doubt that, but his comment suggests that the SEC may permit companies to pick from a smorgasbord of disclosure alternatives, possibly depending upon their size and other factors. 

One approach could be to replace the three 10-Qs with one report covering the first six months.  But would that semiannual report be similar to a 10-Q or would it be some sort of “mini” 10-K?  (If that’s what emerges, companies may end up preferring 10-Qs.)  Other alternatives could be to retain the quarterly reporting requirement but to skinny down the 10-Q.  Another suggestion is to treat quarterly earnings releases as sufficient.  For many companies, the quarterly earnings release is pretty comprehensive, frequently including  some explanation of the factors behind the results, thus arguably qualifying as a “mini-MD&A”.  The Society for Corporate Governance commented favorably on this approach when the SEC proposed relief from quarterly reporting in 2018 (you can find its comment letter here).  Notably, the Society was opposed to treating such releases as “filed” (vs. “furnished”), but it remains to be seen whether the Atkins Commission will be stuck on the point. 

Some commentators have already suggested that the elimination of quarterly reporting would be accompanied by the addition of various triggers for 8-K reporting. 

The upshot of all this may be that advocates of semiannual reporting may end up wishing that they’d been more careful what they wished for.

Other Complications

Which brings us to the many collateral impacts that may flow from eliminating quarterly reporting.  These range from the mildly annoying, such as how 13D and 13G filers would determine their percentage ownership in the absence of 10-Qs to how Reg FD would apply in a semiannual reporting world. 

While Reg FD wasn’t as novel as some people seemed to think, the SEC interpreted it in ways that were counterintuitive or sometimes just plain silly.  For example, if a company provided guidance in its first quarter earnings call, merely confirming such guidance at some uncertain point during the second quarter (e.g., “we’re sticking with our guidance”) could be viewed as a violation of FD.  Agonizing over questions like this could offset the benefits of eliminating 10-Qs.  Another problem with FD is that the SEC has frequently used it to second-guess whether a factoid was material, notwithstanding the company’s reasoned determination that it was not. 

Finally, companies and investors alike should be concerned that 10-Q relief today could be reversed tomorrow.  It’s no secret that, particularly in recent years, the SEC has reversed rules and policies following a change of administration.  For example, rules and policies relating to shareholder proposals adopted under the leadership of Gary Gensler were almost immediately reversed when President Trump took office in January 2025.  If the “Atkins Commission” eliminates quarterly reporting, who’s to say that a future Commission won’t reinstate it?  Aside from staffing implications, these reversals can greatly affect disclosure controls and procedures, which were the basis for several major actions brought by the Enforcement Division during the Biden administration.  Ongoing regulatory whipsawing doesn’t seem like a good thing for business.

_________

Intellectually and otherwise, it will be interesting to see what path the SEC takes on this matter.  For now, all we can do is “watch this space” and cross our fingers.

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In corporate governance, as in so many other areas, artificial intelligence is all the rage.  If you read just about anything relating to corporate boards, you’re almost certain to learn that boards are scratching their collective heads to figure out where and how their companies can use AI, how they can best govern the use of AI, and all sorts of related topics.  However, while boards may be talking about AI – and possibly even doing something about it – it appears that few, if any, people are talking about the possible use of AI in the boardroom itself. 

Maybe this is understandable; after all, boards are rightly concerned about risks and are not known as hotbeds of innovation.  However, it’s still surprising that the last major technological innovation impacting boardrooms was the introduction of board portals, which have been around for roughly 20 years.

I suspect that AI will eventually work its way into the boardroom; I can imagine that in a few years AI may routinely enable directors to tweak assumptions underlying management forecasts, check financial statements for compliance with GAAP and SEC rules, and so on.  That will pose a variety of legal and policy questions, such as whether directors can avoid responsibility for bad decisions by claiming reliance upon AI and whether a robot equipped with AI can serve as a director. 

For the time being, however, I’d like to focus on a narrower question that is beginning to be asked in the nerdy community of corporate secretaries: Can (and should) AI be relied upon to draft board and committee minutes?  Some clients have actually asked me similar questions in the hope that they may be able to lighten their workloads by laying off the tedious task of drafting minutes onto the AI programs with which their phones, tablets, and laptops are now equipped. 

Continue Reading A ROBOT IN THE BOARDROOM? Using AI to Draft Minutes
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There has been no lack of news since the President was re-inaugurated in January.  However, until very recently, little of the news seemed to be coming from the SEC.  Perhaps that is because the new SEC Chair, Paul Atkins, was not sworn in until April 21 (happy birthday to me) or for some other reason, but in any case things now seem to be moving a bit.

One area of movement is cryptocurrency.  In contrast to Gary Gensler, who seems to have believed that crypto was evil incarnate, Chair Atkins is reputed to think that it’s not so bad, or maybe even that it’s fine.  Although I can’t write about SEC initiatives without mentioning crypto, I don’t understand it, and I suspect that many other people don’t either (including many who claim to get it), so I’ll leave it to Chair Atkins and others to figure it out.

But I do understand two areas where the SEC has started to move, and those are the areas I’d like to comment on.

Executive Compensation

First and foremost is executive compensation disclosure.   The SEC held an executive compensation roundtable on June 26, and the buzz is that Chair Atkins and his Republican colleagues aren’t very happy with the existing disclosure regime, likening it to a Frankenstein monster (an apt analogy, IMO).  I have mixed feelings on the subject; on the one hand, executive compensation is where the governance rubber meets the road, and consequently should be the subject of good disclosure.  On the other hand, I’ve drafted and/or read many proxy statements over the years, and it’s a gross understatement to say that most compensation disclosure is impenetrable and unhelpful.  The situation has not been helped by SEC interpretations and comments that have caused the Compensation Discussion and Analysis to become bloated and uninformative, sometimes focusing on trivial matters at the expense of more important ones.  (And yet…. One of my pet peeves is that many companies continue to get away with reporting that time-vested equity grants are “performance-based,” when the only “performance” is that the recipient is still breathing; however, the SEC doesn’t seem to think this is a problem.)

It’s way too early to make predictions, but the areas of focus at the roundtable included both the “Pay versus Performance” and CEO Pay Ratio disclosures.  The SEC more or less ignored the congressional mandate for PVP disclosures for a while, but when the Gensler regime took it up, it did so with a vengeance, and the rules it conjured up went far beyond what anyone thought they should be.  CEO pay ratio disclosures appeared to be little more than a very complicated shame game.  And, with some exceptions, actual investors (as opposed to the SEC’s imaginary ones) don’t seem to have paid much attention to either set of disclosures.

I haven’t digested all of the reports of the roundtable discussions, but so far I haven’t seen anything suggesting that CD&A reform was discussed. Hopefully it will be, because I just don’t understand why a 30-page (or longer) CD&A is necessary or tolerated. 

The road ahead may be bumpy.  Some of the disclosures that we love to hate were mandated by legislation, and it may be difficult for the new, reform-minded SEC to cut back on the excesses perpetrated by previous commissions.  Also, there will always be some investors who will claim that they need to have such-and-such information to properly evaluate the appropriateness of executive pay at a given company. That said, let’s hope that the SEC effects some improvements.

Scaled Disclosure

While it hasn’t gotten as much publicity as executive compensation, the SEC has also been thinking about fixing its questionable approach to scaled disclosure.  For one thing, the dollar thresholds for determining whether a company is a “Smaller Reporting Company” are woefully out of date.  And many of us have long questioned why the sole metric that determines SRC status is public float.

I went back to the 2007 proposing release and was disappointed to see that the SEC’s rationale was pretty lame, for lack of a better word.  Specifically, public float was selected as the basis for determining SRC status

“… because we… have several rules using the $75 million public float metric to distinguish smaller companies. In addition to the use of this public float metric in the definition of accelerated filer, the $75 million public float requirement is used to determine expanded eligibility in Form S–3 and Form F–3.  Further, issuers are required to provide their public float on the cover page of their Exchange Act annual reports.”

If this sounds similar to the parental “because I said so,” it gets worse when the release “explains” (using the term very loosely) why a revenue test was not considered:

“Our proposed definition of ‘‘smaller reporting company’’ does not include a revenue test for most companies. While our current definition of ‘small business issuer’ includes a revenue standard, the classification of an issuer as a large accelerated filer, an accelerated filer, or… a non-accelerated filer does not involve a revenue standard. We chose not to propose a revenue standard to qualify for ‘smaller reporting company’ status for most companies to provide greater simplicity, consistency, and certainty.”

In other words, “we chose not to use a revenue standard because we chose not to use a revenue standard.”  (Please excuse the sarcasm, but it seems appropriate in the circumstances.)

The good news is that the SEC has reached out to my favorite professional organization, the Society for Corporate Governance (and possibly others), for thoughts and observations, and the Society has submitted a very well written and thoughtful letter and a related appendix in response.

So far so good.  However, even if the SEC accepts the Society’s recommendations (as I hope it does), the companies that would qualify as SRCs range in size from nano- or micro-caps to companies of a substantial size.  As a result, compliance with requirements applicable to SRCs generally may be relatively easy for companies at the larger end of the range but very challenging for those at the smaller end of the range.  We have seen this time and again in the past, perhaps most clearly in the climate disclosure rules that have, thankfully, ridden off into the sunset, but the problem will unquestionably arise again and again in the future. 

The current and proposed standards raise another concern that I believe to be greater, at least in the long run, than compliance by companies that are already publicly held.   Specifically, they will continue to deter companies seeking to raise capital from going to the public markets.  The number of companies that have gone public has diminished significantly over time, and the SEC and others have expressed concern with this development.  However, treating all SRCs alike from the regulatory perspective will, in my view, perpetuate this problem.  Personally, while I’m a staunch supporter of accessing the public markets, I tend to tell clients and prospective clients who want to go public that they should think long and hard before they do so.  And several have gone ahead, only to tell me years later that they wish they’d paid more attention to my warnings.

I have reason to believe that the SEC’s reforms in this area will not be limited to those suggested in the Society’s letter, but it’s still early days.

Fingers crossed!

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It’s early days, but I’m pleased to report that the optimism I expressed about the SEC in the aftermath of the 2024 election may have been warranted.  At a minimum, the actions taken by the SEC since January 20 demonstrate support for the issuer community, an interest in pursuing the traditional goals of the SEC, and a willingness to help those of us who advise clients with respect to SEC rules and the many interpretations of those rules.

What the Commissioners Are Saying

First, on January 27, Commissioner Hester Peirce spoke before the Northwestern Securities Regulation Institute.  Her remarks were witty (as always) and, for the most part, spot on, to the point that I considered copying them here.  (I haven’t, though I have copied some of her choice remarks below.)  I do take issue with a few of her remarks (also as always), including her view that a corporation’s singular focus should be on building value for shareholders; it seems to me that it is not possible to build value without focusing on other constituencies such as customers, suppliers, and – yes – even the community at large.  Those matters aside, Ms. Peirce made the following good points, among others:

Continue Reading So Far, So Good
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Image by Erich Röthlisberger from Pixabay

For the benefit of new subscribers, every January I depart from my usual screeds about the SEC and corporate governance and indulge in the slightly less nerdy exercise of telling you about my favorite books of the year gone by.  As regular readers know, unlike the New York Times and other publications, my favorite books are those I read in 2024, regardless of their publication dates.

Having mentioned the Times, I have to say that the more I read its book reviews and “10 Best” lists, the less I relate to them.  I have a theory as to the reasons for that, but I’ll spare you. That said, if you’ve read the 2024 10 Best list in the “Gray Lady,” you’ll see that it has little in common with mine. 

Finally, I decided this year that I won’t be bound by the number 10, largely because I usually find myself agonizing over which books to cut, and it’s just not worth it.  So this year’s list contains more than 10 books, and my favorites are not evenly divided between fiction and non-fiction.

Here goes. 

Continue Reading Bob’s Best Books of 2024
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For those of us who are unhappy or worse about the outcome of the 2024 presidential election, fearing (among other things) that we are about to enter a modern incarnation of the dark ages, I respectfully suggest that the time has come to light a candle rather than curse the darkness.

The candle is rather limited and simple: whatever else may happen during the next Trump administration, there’s a fair chance that those of us who practice securities law will find the SEC a lot more pleasant (or less unpleasant) to deal with.

Continue Reading Lighting a Candle
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You may have noticed that the SEC has been very quiet on the rulemaking front in recent weeks.  It comes as no surprise, as action on a number of items on the SEC’s Regulatory Flexibility Agenda had been moved from late 2024 to early 2025.  (The cynic in me wonders whether the scheduling changes resulted from concerns that accusations of over-regulation would impact the 2024 election cycle, but – for now, at least – I’ll leave that to others.)

However, the SEC has definitely not been idle.  Quite the contrary.  In fact, recent weeks have seen what strikes me as an inordinate number of announcements of enforcement actions.  Some of these actions are relatively “standard” – insider trading, recordkeeping violations, securities fraud, whistleblower protection violations (discussed in our recent e-alert), and so on. But others are somewhat unusual. For example:

Continue Reading Law and Order: SEC
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For many years, I have urged companies to consider going beyond the bare minimum disclosures required by SEC rules – in appropriate circumstances, of course.  In my experience, providing more disclosure than what is specified in the rules can generate positive feedback or even praise from investors and other stakeholders.  And, in fact, many companies do go beyond the rules.  For example:

  • Does your proxy statement include photos of your board members?  The rules don’t require that, but it can certainly help to create the impression – hopefully valid – that your directors are actual human beings and can also demonstrate your board’s diversity.
  • How about including a proxy statement summary that points out your company’s strong governance practices or demonstrates that it really does pay for performance?  Again, the rules don’t require a summary. However, given the incredibly limited amount of time that most investors spend reading your proxy statement, a summary can prove very helpful – and can generate support for your nominees and the board’s position on shareholder proposals and other voting matters.
  • Do you explain the roles of your board and its committees in overseeing areas such as sustainability or diversity?  Again, not required, but in my experience those disclosures can convey that your board is on top of its responsibilities.

However, at the risk of stating the obvious, any voluntary disclosures have to meet the same standards as required disclosures.  In other words, they must be accurate and complete and must not omit information that would make the disclosure incorrect or misleading. This was most recently brought home in a case involving Keurig Dr Pepper Inc.

The facts of the case, as recited in the SEC Order in the case, include that:

  • The company had conducted consumer research in 2016 indicating that, for some consumers, environmental concerns were a significant factor in deciding whether to purchase a Keurig brewing system.
  • Following a change in the composition of its “pods,” the company conducted testing to determine whether the newly formulated pods could, in fact, be recycled.  Two major recycling companies participating in the test “conveyed significant negative feedback to Keurig regarding the commercial feasibility of…recycling of pods at that time.”
  • Despite that feedback, the company’s 10-Ks for 2019 and 2020 stated that “we have conducted extensive testing with municipal recycling facilities to validate that [pods] can be effectively recycled.”  However, the negative feedback was not also disclosed.
  • The 10-K for 2021 did not contain the disclosures cited above.

In finding the above statements in violation of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder, the SEC imposed a fine of $1,500,000, and the company entered into a cease and desist order.

The statements in Keurig’s 10-Ks were not required; the SEC Order suggests that they were included in order to appeal to the company’s environmentally conscious customers and, possibly investors.  However, the company seems to have overlooked that the rules applicable to required disclosure apply equally to voluntary disclosure.

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One of the things I learned as young securities lawyer was that securities offerings can be made only by prospectus.  Accordingly, one of the first things we did whenever we embarked on an IPO was to send a memo to our clients reminding them of the limitations imposed on communications under the securities laws and alerting them to the risks associated with gun-jumping.  (For the record, the term “gun-jumping” is sometimes referred to as “conditioning the market” for an offering, but in plain English it means hyping the offering.)

Unfortunately, some of our clients didn’t follow our advice, in some cases unintentionally and in other cases willfully or even due to arrogance.  (One client told me that the SEC couldn’t limit his First Amendment right to free speech, even though he’d been advised that commercial speech doesn’t necessarily get First Amendment protection.)  And while the principal remedy for gun-jumping – the imposition of a cooling-off period before the offering can be completed – may not seem severe, it can be a deal-killer.  In one case, the SEC imposed a cooling-off period because an interview with the issuer’s CEO generated a story in several major newspapers shortly before the offering was to be priced.  (Notably, the SEC did not cut the issuer any slack because the interview had been given several months earlier, before work on the offering had even begun.)  Of course, even in those good old days, timing was everything when it came to pricing, and the delay imposed by the SEC had to be extended by the issuer because the market had turned and the offering was no longer viable.  Given the volatility of today’s market, the consequences might be worse.

Over the years, people may have forgotten about gun-jumping, or assumed that it is no longer an issue.  Liberalization of some SEC rules associated with communications and terms such as “free writing prospectus” may have given the impression that there is no such thing as gun-jumping.  But it never went away, and as recently as 2020 an offering with which I was familiar nearly went awry due to gun-jumping concerns.

Then came this week’s news about a delay in the much-ballyhooed IPO of Pershing Square.  To my knowledge, the issuer has not explained the reason for the delay, but media reports have stated that it resulted from the facts that the issuer’s CEO sent an “internal communication” about the offering to investors in the issuer’s investment manager, and that the information contained in the communication was not included in the preliminary prospectus and may have been inconsistent with the preliminary prospectus.

Given the market interest in the deal well before the delay was implemented, it seems unlikely that the delay will seriously impact the timing or success of the offering.  However, the episode may serve as a reminder that old rules never die and may not even fade away.