Disclosing Climate Change

The SEC requires reporting companies to report material risks and impacts of climate change on their businesses.  How are they doing?

Not so well, according the the Government Accountability Office report late last month.  The SEC does not get this information in an identifiable place within the disclosure regime, nor does all disclosure address similar factors, so that it is not easy to evaluate what disclosures are being made.  And it is wholly dependent on the subjective judgment of the companies as to what gets reported.

Climate disclosure shows up in descriptions of business, risk factors, MD&A and Legal Proceedings.  It may be considered in terms of physical risk or destruction, increased costs, interference of supply, loss of vital parts or components or agricultural products, loss of the entire subject of the business (growing grapefruits, for example), increased regulation and fines, long-term business trends, impact on customers or suppliers sensitive to environmental impact.

How important are such disclosures?  While many investors and investor groups cite increased focus on climate and the environment as important factors, the SEC’s own Advisory Committee reached no consensus and industry representatives said current disclosure standards are sufficient: a company knows when and if climate change presents a risk to its own business and if the risk is material, it must be disclosed.

It is not often that the increasingly complex web of SEC disclosure requirements is found wanting.  Since some senior SEC staff are in agreement with the GAO assessment, stay tuned for more disclosure regulation.  Will the tone in Washington hold off even more disclosure regs?  We shall see.

 

Killer Bees Return

Okay, another baseball post.  Spent five hours yesterday in 39 degree weather at Fenway Park for Red Sox opening day.  Freezing cold, with a brisk wind.  Looked like a football crowd, but Thursday was clear and bright, a break between the cold rain of Wednesday and today’s forecast of afternoon snow.

The Sox were losing 2-0 and in the bottom of the ninth but tied the game with hits by Betts, Benintendi and Bogaerts.  They won in the 14th with a hit from Bradley.  Sure there were other contributors (Ramirez was outstanding), and I have long been a critic of Bradley (how can you win the Series with a streaky .240 center fielder no matter how good his glove?), but the Four Bs are in fact the young core of the team for the future.  It is a pleasure to see them field and hit and run.

The Sox know how to put on a show and opening day was no different, with four fighter jets ripping across the sky at the end of the National Anthem, and with Big Papi (standing on the mound with Aly Raisman to yell “play ball”) ripping off his Sox jersey to reveal a shirt the read in big letters “Woman Power.”  How much fun is that!

Negatives: you need to be rich to see the Sox.  Parking in my lot is $45, in many places $60.  Beers $11 or more.  Clam chowder on a cold day, if you stand in line, is $8.75 (more in the stands) and not even a bag of Westminster soup crackers (watch them dump that soup into the cauldron from those pre-heated plastic bags; guess what it costs the concession stand to serve up a cupful [if it is one dollar including the container I would be shocked]).  Face price on a loge seat: $146 (I don’t know the price of a box seat as I only know millionaires and they cannot afford to sit there so I have no one to ask).

Hint to Sox management: don’t close all the food service places in the 8th inning, particularly when it is cold; an extra hour in April demands coffee, soup, hot chocolate, maybe chips or cookies.  People were leaving because between the cold and the lack of sustenance it just wasn’t such a great extra hour.

The inconvenient truth yesterday was not global warming but, rather, it’s late April arrival here in Boston.  But as the Manager pointed out to the press, playing baseball in cold weather is the team’s goal — it is chilly in October and November.

The Seven Percent Red Sox

The recent projection by ESPN’s newsletter service gives the Red Sox, the team with baseball’s highest payroll (and likely second highest seat price) only a 7% chance of winning the World Series.  (Yankees 9%; Astros and Indians 14% each, Dodgers 12%.)  And tied with the Nats for sixth place in overall team rating.  Why?

First, the analysis comes out of 100,000 simulated game combinations so there is no weight whatsoever placed on just how badly the Red Sox need to have this, given the number of key players in their contract years.  Nor how pumped are the Red Sox fans, suffering yet another ticket price increase in honor of failing last year. Imagine basing a projection on silly things like hitting and pitching skills, age, fatigue during season travels, and difficulty of schedule!

Second, the system does not seem to have any respect for Sox hitting, even with Ramirez and Holt healthy and Martinez in the batting order.  The Sox projected annual run difference (scored vs allowed) is only + 93, which when you consider what must be viewed as a pretty good Sox pitching staff means the computer doesn’t think the team is going to hit.  (Of the top seven teams, only the Sox are below +118 and four are at least 50% better.)

Final indignity: of the top seven teams, the Sox are given the lowest likelihood (66%) of even making the play-offs.  Which Red Sox fan receiving this post can relate to that projection, we of the Nation believing that once we wipe up the AL we will give the Dodgers the contest of their lives in the Series?  Indeed, of those seven teams, we are projected with the fewest wins, 92!  Wait a minute here– that is one win LESS than last year, which by all accounts was terrible, with Price off the reservation, Petey injured, Betts and Benintendi and Bogaerts hitting lousy, no Martinez, Wright injured, Holt injured, our Cy Young winner leading the majors in losses, and Backey Jadley Ruin-ya in center field being his .240 self.

Can’t wait for opening day this Thursday.  Hope the snow melts by then….

Digital Revolution: Do or Die

Digital data, its analysis and its use, is revolutionizing businesses of all types.  According to an expert panel convened today by the New England Chapter of National Association of Corporate Directors, either you digitize or die.

What is it?  It is the use of data to create competitive advantage by making internal operations efficient, by making sure you are producing the right kind of thing or service, and by removing the “friction” from the relationship between the company and its ultimate consumer/customer.  It is how you connect your operations internally.  It is how you figure out what the marketplace wants from you and tells you if you are in the wrong business or are not giving your buyer the optimal total service experience.  It is promptly applying newest technologies to your business strategy.  It is automating what you do.  It is protecting the security of your, and your customer’s, information.

Who is doing this? Apple Pay, Uber, Disney, Pinterest, Amazon.  Who has failed by not doing this?  Travel agents ceding market to on-line booking; box retailers; Blockbuster, Polaroid, Circuit City.  Data analysis needs to change two things to make your business survive: how you work inside to save cost and identify your deliverable, and how you present to your customers in a way that reduces friction by eliminating extra steps and to the greatest extent eliminates the entities that intermediate between company and customer.

What are the risks of implementation?  Abuse of data (current Facebook problems are only the most recent) may lead to curtailing use rather than protecting proper use (Congress wants to investigate, per today’s Boston Globe), lack of Board of Director understanding, fear of taking a short-term profits hit while you take the time to absorb the costs and failures of embracing the robust use of data.

Millennials may help us, says NACD’s Directorship Magazine.  They bring flexibility, embracing change, continuing training to bear.  They also bring necessary confusion, challenge of preconceptions, and changing work environments and hours and the “gig” economy;  all these things are part of redefining how work will be done in the future, something that boards of directors also must come to embrace.  Boards better make their matrix of needed skills and make sure the right mix of people is leading their business of the future.

Investment Clubs: The Next Madoff?

Different versions of Groucho Marx’ famous remark that he would not be a member of any club that would accept people such as himself, reprised by Woody Allen, came to mind when I read today the SEC’s quasi-absurd news release warning investors about the regulation of investment clubs.

The Commission, as guardian of free markets, warns that a club in some cases may be a mutual fund (too many members and it is open to people who are not active in making joint investment decisions), may be selling securities (if every member does not actively participate), and may have someone who needs to register as an investment adviser (if a member is paid to investigate investments).  Seems the anti-fraud provisions of securities laws also may apply.

I am not sure I want to be around a securities regulator that is spending time in warning my fellow citizens about investment clubs.  Every issue of the Wall Street Journal, every day’s press release from the SEC itself, covers major frauds, lies, the material abuse of investors both retail and professional.  I just don’t see the wildfire spread of dangerous investment clubs putting America at risk. In several decades of SEC legal advice to clients, I can remember exactly one inquiry about investment clubs; my response was along the lines of ” forget about it, our government has important matters to deal with.”

Speaking of Groucho Marx (sort of), I always loved his remarks about Wall Street (Groucho was almost destroyed in the crash of ’29): “I made a killing on Wall Street.  I shot my broker.  And not a moment too soon.  He was about to commit suicide.”

Maybe he should have joined an investment club.

Gender Pay Requirements/Massachusetts Law

Mirror Mirror on the wall, Who’s the fairest of them all?

Starting this July 1, virtually all Massachusetts employers regardless of size must provide gender-based equal pay for equal work (regardless of disparity of titles) for almost everyone: full-time, part-time, seasonal, per diem– it doesn’t matter.

But the law, as explained by recent Attorney General guidance, provides a complete defense against claims for any employer which conducts a good-faith and reasonable self -evaluation of its pay practices within three years prior to any claim.  The purpose must be to uncover and remedy any pay disparities.  Sounds simple, but remember that if you find but do not remedy inequality then you have documented your own liability, and the report also may end up in the hands of  lawyers for employees or government investigators.

The good faith of any self-evaluation is by definition subjective.  Perhaps one way to get over that issue is to have the job done by a recognized outside party.  Larger employers may find that cost to be well worth it.  Whether such a look in one’s mirror will result in better insurance rates for employment discrimination coverage is not clear to me — but it should. It is something to ask your insurance company.

Racial and Ethnic Diversity in Non-Profits

While women have achieved board membership equality in non-profit corporations (48% nationwide), racial and ethnic minorities have not moved the needle over the last twenty years, according to a presentation by Board Source (advisers to non-profits) held in Boston last Friday.  That membership wallows around the 5% mark, or less.

Although it was recommended that board membership should approximately reflect the racial and ethnic makeup of the local community, particularly if the non-profit faces the public at large and is not in effect dealing with a limited cohort, and although two-thirds of all boards expressed displeasure at the lack of their own diversity, Board Source was pessimistic that things would change in the near term.  Why?

Because less than 20% of such boards listed diversity as either a strong or moderate goal in their articulated shopping lists for new board members.  No speculation was offered for why boards are slow to address their own perceived need.  Could be that old habits die hard;  or just don’t die at all?  To suggest that a reset is in order is to labor the obvious.

David S. Wyman Dead at 89

Professor David S. Wyman was a local guy, born in Weymouth and raised in Newton.  He was educated around here, also, at BU and Harvard.  He worked around here, at UMass.

Dr. Wyman is remembered today not only through the memories of family and friends, but also through his work.  His research and writings did not belong to Massachusetts, however; his efforts resonated in Washington DC and indeed around the world.  Among his books: The Abandonment of the Jews, a work tracing the epic failure of the United States to focus efforts on saving the Jews of Europe during the Second World War.  He carried on the fight later in life, and his sending his book to Vice President George H.W. Bush in 1985 directly led to the US air rescue of abandoned Jewish refugees in Ethiopia.

Grandson of Protestant ministers, Wyman spoke of the tears he shed in his research; in his own words, he “had been brought up with the belief that at the heart of Christianity is the precept that, when people need help, you should provide it.”

His work exploring the political and cultural dynamics of the American failure to come to the aid of the Jews, and its implications for our national and personal reactions to current injustice and prejudice, are presented to us today through the Wyman Institute for Holocaust Studies, based in Washington.  My lawfirm is pro bono counsel to the Institute.  If you have an interest in its work, feel free to contact me for more information.

Wyman died around here, also.  Professor David S. Wyman passed away yesterday at his home in Amherst, Massachusetts.  “May his memory be for a blessing.”

 

The International SEC

Last week’s news carried an SEC press release recounting charges filed against a Florida stock promoter accused of fraud on investors.  Details were unremarkable, and for purposes of this post unnecessary.  At the end of the release, as is typical, the SEC identifies the regulators behind the investigation.  Normally there are a few names of people and agencies.  In this case, proving that there is nowhere to hide in this world if you think you are too clever to be caught, here are the agencies cited as participating in that enforcement effort: SEC; US Attorneys in Alabama, New Jersey, New York, Virginia; US Department of Justice; FBI; US Postal Service; Homeland Security; Alabama Securities Commission; FINRA; Alberta Securities Commission; British Columbia Securities Division, Cayman Islands Monetary Authority; and regulatory commissions or agencies in Cyprus, Dubai, Guernsey, Hong Kong, Mauritius, Newfoundland, Singapore, Switzerland, UAE and the UK.

This effort is both impressive and reassuring, but if you would like an unsettling counterpoint: why was the SEC unable to bring Bernie Madoff to ground for decades as he sat in the middle of New York doing everything in one place — even after receiving repeated tips and after visiting his office?

Public Director Role in Cyber Risk

SEC Guidance to companies has been revised to further emphasize need for more robust public company disclosure of cyber risks and costs, although many public companies now do have extensive if predictable disclosure sections.  And, in fact, directors need to have been on Mars to miss the clear implications of Equifax and Yahoo.

The National Association of Corporate Directors proposed, in its last Weekend Reader sent to members, some granular specifics which bear emphasis: directors need to make certain that the executive team regularly examines incident response and prompt disclosure policies where shareholder value may be materially impacted; boards should insist on immediate notification of incidents to make sure that directors and management do not trade securities on that information; management must be directed to establish a risk identification regime including identity of risks absolutely to be avoided and those to be accepted; and, staffing for mitigation needs to be identified and budgeted.  Boards need to explore which risks should also be insured against.

One might think this is all basic board blocking and tackling, but with so many public failures having occurred, perhaps not.  It also suggests that cyber needs to be on the agenda, at least for reiteration, for each board meeting, with an occasional deep dive.

Seems to me a board committee specific to cyber, or a specific delegation to a separate Enterprise Risk Management Committee, makes sense for many boards as a minimum to avoid a Caremark-style claim against directors for total disregard of the duty to supervise.