Nick Mazing, Director of Research at Sentieo
In-person annual shareholder meetings have become the latest victims of the coronavirus outbreak and many more are likely to switch to remote formats. That’s according to Nick Mazing, Director of Research at Sentieo, a leading AI-enabled financial research and workflow platform that includes a comprehensive database of SEC filings. Mr. Mazing also noticed several other corporate governance-related trends in recent disclosures, such as the adoption of poison pills, work-from-home policies, and more. The full interview is below:
CorpGov: Poison pills are often frowned upon by the investment community but have appeared more often amid the coronavirus outbreak. What are you seeing?
Mr. Mazing: Yes, we are seeing an increase in poison pills as the market selloff has hit some sectors really hard. For example, in energy, Occidental Petroleum (OXY), an ongoing governance situation with Carl Icahn and Warren Buffett involved in different places in the capital structure, announced one on March 13, 2020, after a roughly 75% drop in its stock price on a YTD basis. Also in energy, Williams (WMB) adopted one on March 20th.
But these are just two of the more prominent examples. Restaurants are also hit very hard. We saw Dave and Buster’s (PLAY) adopt a poison pill on March 19. They were advised by Goldman Sachs and Paul Weiss.The stock price was down over 90% from its 52-week high. Food service distributors were hit hard along with restaurants, so The Chef Warehouse (CHEF) adopted a plan on March 23rd after their stock dropped around 90% during the selloff.
Given the precipitous drops in this one-in-a-century pandemic, there is an argument to be made that protecting long-term shareholders from a hostile takeover makes sense. Most, if not all, of these shareholder rights plans are of limited duration. In recent memory, we saw them used in extreme cases, like the Papa John’s (PZZA) founder PR scandal, and it did buy time for the new management to stabilize the situation.
CorpGov: How are companies looking at their labor force right now? Are views changing temporarily?
Mr. Mazing: This is a really, really tough situation. We are seeing zero revenue in major employment sectors (travel, food service, hospitality, education). We are also seeing small businesses really suffer because they do not have the same level of resources as larger firms: there is a J.P. Morgan chart showing that the average restaurant has a 16 day cash buffer. The average small business has only 27 days. Obviously, we need a swift and large stimulus that puts money in the pockets of the people during these extraordinary times. We saw the problems coming a little earlier: there was a massive spike in twitter mentions of “file unemployment” and search interest for unemployment benefits before it was headline news.
On the positive side, we have seen large companies really step up across the board. Some examples are Alphabet Inc. (Google) providing paid sick leave to temporary staff, contractors and vendors. Apple Inc. is offering its retail staff unlimited paid sick leave. Microsoft will continue to pay all hourly service workers. Starbucks Corporation, Walmart Inc. and other retail businesses have increased pay.
CorpGov: How are corporations handing remote communications? Will the changes stick?
Mr. Mazing: Remote work became the standard – for those who can – very fast. We wrote about the trend back on February 24th because we saw an increase in conference call transcripts mentioning working from home. This has continued, there are over 400 transcripts in March mentioning terms related to work from home, which is about 10x what we saw in March 2019.
But there is an interesting governance aspect to this too. Companies are skipping in-person shareholder meetings. For example, industrial distributor Fastenal announced that its April 25 meeting will be online-only. This is happening across industries and companies: The Boeing Company, The Sherwin Williams Company, Fifth Third Bancorp, and The Toronto-Dominion Bank have announced this change in the last few days.
We saw the same thing happen with a special meeting recently: The Habit Burger, which was acquired by YUM! Brands, Inc. a few days ago, switched its meeting to remote.
Given the reduction in travel capacity that will probably stay with us, this is likely going to be the new normal for a while.
CorpGov: What are you seeing in terms of executive compensation?
Executive compensation is always in the headlines this time of the year, and we have seen companies very proactively cut high-profile executives’ compensation. This is especially true in the hardest hit areas where business has gone to essentially zero.
For example, Marriott announced significant cuts in senior executive salaries, requiring temporary leaves and shorter workweek. We all saw the poignant video of their CEO Arne Sorenson. In another example, Wynn Resorts issued a press release on March 24th that the Board of Directors and its top executives have agreed to forego between 33% and 100% of their salaries for the remainder of 2020 in exchange for Wynn stock. We have seen reductions announced elsewhere too: Occidental Petroleum, The Buckle, and US Food Service.
CorpGov: There has apparently been concern from regulators about how companies share material non-public information. What is behind that worry?
Mr. Mazing: It’s a whole new ballgame with material non-public information (MNPI). Even the SEC issued specific guidance around MNPI on March 23rd reminding companies that maintaining market integrity and following corporate controls is important.
The issue is this: there is a lot more MNPI right now. We are seeing companies doing pre-announcement and withdrawing guidance every day. We are seeing companies suspending buybacks every day. We are seeing companies maxing out their credit lines.
In the hard-hit sectors, we are seeing mass closures (and we will be seeing re-openings, and updates on sales trends like we are seeing now out of China). This is all “new” MNPI that can have an outsized impact on the stock price given the recent volatility in the hard-hit sectors. As it is, without news, we are seeing daily 10-20-30% moves in the stock prices of restaurants and retailers.
Nick Mazing is the Head of Research at Sentieo, an AI-powered financial research platform. He has previously worked as a long-short equity portfolio manager focusing on consumer/retail, as an analyst at a family office, and as a consumer/retail investment banker at Lehman Brothers. Nick holds an MBA degree from Columbia Business School.