If you really want to understand America, you could travel our highways. You could watch our movies, read our newspapers, or talk to people in diners. But one certain way to put your finger on the pulse of the country, we’ve learned, is to check the 10-K risk factors cited by public companies.
It may not be the folksiest approach to the issue, or the most expected. But a search of 10-K risk factors on the Intelligize platform shows that the issues worrying public companies in 2019 have a strong overlap with the issues worrying the country as a whole. We began our analysis by searching for the 100 most commonly cited risk factors in 10-K filings over the past twelve months. The results of that search—at least at the very top—did not yield any great surprises. The top five risk factors were:
- Failure to compete effectively (4,624 mentions)
- Dependence on employees (4,454 mentions)
- Business (miscellaneous) (4,434 mentions)
- Cybersecurity, data privacy, and informational technology (4,180 mentions)
- Operational disruptions (3,631 mentions)
This group features one catch-all category, three perennial business concerns, and one risk factor (cybersecurity) that is quickly becoming one.
The more interesting results came when we identified the risk factors that experienced the greatest increase within those top 100 mentions over the last year. They are:
- International trade restrictions and protectionism (802 mentions)
- Employee misconduct (653 mentions)
- Anti-corruption law (653 mentions)
Suddenly, it felt like we were holding a mirror up to society. Let’s break down each of the top-three results:
International trade restrictions and protectionism (up 68%): From the inaugural address forward, the current administration has articulated a protectionist “America First” agenda that has roiled the body politic in any number of ways. The much-discussed border wall has inflamed passions and generated debate, but another flash point has been the White House’s trade war with China. The “biggest trade war in modern history,” according to the New York Times, has affected everyone from Harley-Davidson workers to farmers to information technology companies to U.S. consumers. The widespread impact of the trade war, along with the unpredictability from 1600 Pennsylvania, explain why this was the fastest riser of the year by far.
Employee misconduct (up 19%): In March, we discussed a rise in employee misconduct disclosures in another context: M&A due diligence. We said this: “Where in the past, company representations regarding sexual harassment or misconduct were nearly unheard of, the #MeToo movement’s role in finally holding prominent executives, celebrities and other public figures accountable for inappropriate behavior has triggered a considerable increase in sexual harassment and misconduct disclosures – most prominently during the last half of 2018. Of the more than 1,200 2017 M&A transactions analyzed by Intelligize, only one included a representation relating to allegations or settlements of sexual harassment or misconduct. Fast forward just one year and approximately the same number of 2018 transactions yielded 45 such representations.”
It’s apparent that the #MeToo movement has had a similarly dramatic effect on 10-K risk factor disclosures.
Anti-corruption law (up 17%): International corruption is a popular subject of discussion these days, particularly in the House of Representatives’ impeachment proceedings. Politics aside, the Department of Justice and SEC have been collaborating to a much greater degree on anti-corruption cases with foreign governments, which has ramped up enforcement and impacted multinational companies with operations around the world. Also, many issuers were concerned over the last year with changes to CFIUS, the Committee on Foreign Investment in the United States. With the Foreign Investment Risk Review Modernization Act of 2018 (aka FIRMMA), they got at least a measure of clarity.
The end of the year is a great time to take stock of the risk factors that troubled public companies, and the population at large, over the last twelve months. And we didn’t even have to visit a single barbershop to do it.