Earnings release process
- Board’s role (depends on the size and maturity of the company and management team). Smaller or newer companies will have the board to be involved more than a larger company would.
- A review of the financials is done by the audit committee, and then full board. There should be a review of the 10K/10Q and the associated updates to the disclosures before anything is said to anyone outside the company.
- The board may review the earnings press release, especially for a smaller company. This release should reflect the tone and content that was presented at the board meetings. Be careful about the CEO quote, it should not be overstating, or hyping, the reality of the results. Content should be meaningful, appropriate, and representative.
- The board should have guidance over the press release before it is issued. Guidance should reflect the working forecasts and be supported by internal documents. Typically, the board will review the press release to ensure they know what will be announced and that they technically agree with the content. Typically, the audit committee will review the script for the conference call.
- Your earnings release will lead with GAAP financials. It will then include non-GAAP financials and a reconciliation between the two. Be careful not to be misleading. Be realistically conservative if you quote operational metrics. Be consistent with the information you provide in each statement. Directors should listen to the call.
Earnings release in the COVID era
- COVID is affecting how companies are dealing with disclosures, specifically in updating risk factors and making projections of the financial impact on certain metrics.
- Include your legal counsel when drafting these disclosures.
- It is important to address liquidity/financing (potential limits to accessing funds). Some companies focus on operational issues as well.
- The key is to exercise caution – be cautious in your commentary and have a heightened awareness to risk. Be transparent with the factors affecting the company.
- Be careful about issuing a new metric because you are then setting yourself up to a precedent you will need to continue.
- Be mindful that the risks are widespread and not just financial. For example, risks could include employees, product development, sales, etc.
- Your company should distribute an analyst report, with a summary, and also follow-on call notes.
- If the IR person publishes some follow-on notes they can be helpful because there may have been 10-20 calls with various analysts and investors and you can try to get a sense of their tone or mood.
Public communication (e.g. press releases, investor conferences)
The board has little to no oversight of the investor conferences. If a company is overhyping a product, then that is at the management level.
- It is good for the board to occasionally review the pitches for investor conferences to ensure that management is presenting the business in the same way they present it in the board room.
- Typically the board does not review all press releases, unless there is a critical component.
- For Rule FD (fair disclosure), the board should provide the appropriate oversight, especially if there is an inexperienced CEO or CFO. The main issue is to ensure your public officers are well-trained and advised by internal counsel, as well as external counsel, so they will not stumble into a footfall that gets management into trouble.
- The board should also have access to any pitches or demonstrations that will be presented on “investor day.”
- For rule FD, if somebody has inadvertently over-disclosed to one analyst (and not analysts), management should disclose the information on an 8K as quickly as possible. Even though the company has four days in the normal course of business to file the 8K, you want to get it in the public domain as quickly as possible.
- For “investor days,” make sure management is fully vetted and trained on what they will communicate (including their body language).
Role of general counsel/corporate secretary
- This role varies by size of the company and expertise of the GC. If it’s a young company with a relatively junior general counsel who might have had limited experience, or has narrow experience, then the board may rely more on outside counsel, or parallel inside and outside counsel.
Role of outside counsel
- Until you are sure that your general counsel can give appropriate advice for routine issues, it is good to consult outside counsel — especially to review everything that goes to the public and the SEC.
- Seek advice from outside counsel anytime there is doubt about disclosures or unusual situations.
- It is important that the board have an independent relationship with outside counsel. Everyone on the board should know who outside counsel is because there could be an issue that arises from any one of the committees. Potential issues could include a conflict of interest where outside counsel can best guide.
- Outside counsel should be up to speed with what is going on with the company. At least once a year the lead partner in the law firm should attend a board meeting.
Question: What steps does your board take to review related-party transactions?
- Typically this falls within the audit committee charter. Usually the legal department asks that you complete a questionnaire each year. Some companies proactively gather this information quarterly rather than at the end of the year. Most boards have rules that require you to report any new employment or board relationships during the year.
- There should be a very high level of disclosure. If there is even the appearance of a conflict, the effective director should recuse him or herself, or the transaction should not happen. In extreme conflicts, that director should not be on the board.
- Board members serving on more than one board also have to consider the convergence of their companies’ businesses which may cause a conflict (are the business models starting to converge).
- Be mindful that an incorrect questionnaire that is included in your application for D&O insurance may be a reason for your insurance carrier to dispute a claim.
- Be mindful to disclose shared ownership of assets, common charities, etc.
Question: What is the role of the board when a company is going through bankruptcy?
- The board absolutely should have its own independent counsel. You might discuss this with the board of the chair.
- Creditors may try to sue the board derivatively, saying that the board harmed the company by breaching their fiduciary duty. However the board only has a fiduciary obligation to the shareholders, not the creditors. Be sure you have your own independent/outside counsel to represent you. The company’s counsel is not representing you (just the company).