On March 8, 2018, Tesla (NASDAQ:TSLA) announced that Eric Branderiz left the company. Who's that? The terse filing left many investors asking that same question and searching Google. For the record, he was the Chief Accounting Officer.
Executive Departure and Appointment Disclosure Requirements
Why do public companies file 8-Ks when top executives or directors depart the company?
It's not a trick question. In addition to the requirement to file periodic quarterly and annual reports, the SEC also requires public companies to file current reports on Form 8-K to disclose events from a specific, comprehensive list of events that are considered material. You can find that list here.
Looking at Item 5 on that list, which deals with corporate governance and management, we can see that section 5.02 deals with executive officer and director departures:
Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers
Who is covered under this item? Any senior executive officer, which, according to the SEC, is a high-level executive officer—such as the chief executive officer, president, chief financial officer, chief accounting officer or chief operating officer.
Interestingly enough, when a replacement is hired, the disclosure explicitly require companies go a step further:
“Required disclosures include (1) the name, age and position of the officer, (2) the date of the officer’s appointment, (3) a brief description of the material terms of any employment agreement, (4) related party transactions between the officer (and entities related to the officer) and the company, (5) family relationships between the officer and other executive officers and directors, and (6) the officer’s business experience during the last five years, including the name and principal business of any organization in which his principal employment was carried on”
So is the company required to disclose the title of the departing officer? That’s unclear.
What is clear, though, from looking at a sample of 32 of the 874 Form 8-Ks filed with a Section 5.02 disclosure containing the words “personal reasons” over the last four years, is that every single one of them included the title of the departing officer.
The larger universe of 874 8-Ks includes all such 5.02 disclosures that include the term “personal reasons”, including both the departures and appointments of officers and directors. The sample list of tested filings can be found in Table 1 below.
Table 1. Source: SEC Filings and Author's Notes
In a few limited instances, although the title of the departing officer was not included immediately following their name, the information was conveyed by stating a new executive had been appointed to the role. For example, “Murray Smith was appointed to fill the vacant executive officers’ positions of Chief Financial Officer, Treasurer and Secretary.”
Within the larger data set, I was able to find 13 specific instances where a Chief Accounting Officer left a public company for “personal reasons”. In each and every single instance, the title was reported in the 8-K. See Table 2.
Table 2. Source: SEC Filings and Author's Notes
In 8 of those instances, the company included language indicating the departure was not related to a disagreement with the company. I think it’s reasonable for Tesla to omit this language, although I wonder why they wouldn’t include it in this case?
The purpose of SEC filings is to help investors make informed investment decisions. By not including the title of departing officers (Tesla did the same thing when John McNeil left), Tesla's 8-K filings certainly run counter to the spirit of the disclosure requirements even if they meet the bare minimum requirements.
What's the takeaway for investors? If every single other company can include this simple and arguably most important detail, so can Tesla. Taken together with the company's other disclosure issues that I have documented (for example, here), the recent 8-Ks show that Tesla still has work to do on improving the quality of its filings. High quality disclosures help investors make informed decisions. A pattern of poor quality disclosures is a red flag because it signals vital information may be missing from the investment decision process.