This week, SEC Commissioner Hester Peirce delivered the keynote address at the Northwestern Securities Regulation Institute in San Diego. Her theme: that public companies are “confronting a symptom of a larger societal malady—importing politics and contentious social issues into everything we do.” According to Peirce, the “SEC, so-called stakeholders, and the burgeoning industry of advisers, consultants, accountants, and attorneys peddling their costly wares to public companies, sometimes with the agreement of corporate executives, drag companies into social and political melees. Their efforts, an insidious form of rent-seeking, are often quite convincingly disguised in a cloak of ethics and morality.” In her remarks, she proposed seven steps toward regaining what, in her view, was the “path back to normal.” A harbinger of what is to come in the next four years?
Peirce’s first recommended step was recognizing that “both public companies and the SEC have limited missions.” Public companies “build products and services,” with a focus on “maximiz[ing] the company’s long-term financial value for the benefit of its owners—its shareholders.” This focus, she contended, “precludes companies from spending time and resources on matters that do not contribute to the company’s long-term value: no pet projects for executives, no non-financial targets to afford managers the freedom to claim success when the company is failing financially, no spending simply to silence the loud hawkers of the controversial issue du jour, no commandeering of the company’s resources to further one shareholder’s favorite cause. Public companies should be at the beck and call of shareholders qua shareholders, not the ever-growing, never-satisfied set of stakeholders that brazenly grasp at company resources to do something other than maximize the value of the company.”
Likewise, Peirce emphasized the SEC’s “limited mission. One of the pillars of that mission is serving the investors who entrust their money to other people by facilitating the provision of disclosure necessary for investment decisions….The SEC’s role is to ensure that investors have the information they need to channel funds to the companies that can put that money to the best use by delivering the products and services people demand.”
Second, Peirce contended, is the need to “fend[] off efforts to commandeer the SEC’s disclosure regime.” Recently, efforts to “co-opt” the SEC’s disclosure authority have “gained steam” with disclosure requirements about conflict minerals disclosure, climate and CEO pay ratios. According to Peirce, efforts to
“expand public company climate disclosure serve not only constituencies that seek to lower greenhouse gas emissions but also sellers of climate consulting services to increasingly over-encumbered public companies. Labor interests seek expanded human capital disclosures. Proponents of higher corporate taxes seek more granular disclosures of how much tax companies pay in each jurisdiction. If this trend continues, companies’ securities disclosures will bury information material to investors in an unwieldy catalog of responses to special interest groups’ demands. We all have special interests but endeavoring to stuff them all into securities filings undermines the reason we have such documents in the first place.”
Instead, she asserted, we should “retreat to a place where materiality from the perspective of the reasonable investor is the sine qua non for disclosures. In this retreat, there is no shame.” She offers as a cautionary tale the case of “Europe, where sustainability disclosure requirements are unmoored from materiality and companies are losing focus on corporate value maximization.” In her view, “important societal concerns are better addressed by political institutions and civil society.”
Third, Peirce advocated ceasing the pressure on “asset managers to push public companies into contentious social and political issues. In that regard, she cited the 2003 requirement that investment companies “disclose to the public a record of how they voted proxies relating to portfolio securities. The Commission doubled down on this requirement in 2022. Now funds have to disclose votes by category, such as ‘environment or climate.’” Although these disclosure requirements allow fund investors to monitor fund voting, she contends that they “also make asset managers sitting ducks for pressure campaigns from social and political activists and scrutiny by ESG rating providers.”
And let’s not forget shareholder proposals, step four on her list. The SEC should do “a better job protecting investors from having their resources diverted to deal with shareholder proposals that are not aimed at maximizing corporate value. Historically, shareholder proposals were focused on governance topics that had a direct relationship to the financial prospects of a company,” but, in “the past decade, the number of shareholder proposals related to environmental and social issues has risen steadily,” diverting resources and management attention. (Acting Chair Uyeda has suggested a move to private ordering for shareholder proposals. See this PubCo post.) Peirce suggests “re-examin[ing] the ownership thresholds in Rule 14a-8 and other available tools to ensure that a proponent has some meaningful economic stake or investment interest in a company,” and “tak[ing] a fresh look at how Rule 14a-8’s consideration of social significance under two bases of exclusion has affected the number, type, and excludability of shareholder proposals.”
As a fifth step, Peirce suggested that the SEC should “refrain from using enforcement actions to override managerial decision-making.” In this context, she was referring to the use by the SEC of enforcement to potentially “become a subtle mechanism for the Commission to insinuate itself into corporate management.” Examples she cited here were the SEC’s “aggressively broad interpretation of Exchange Act Section 13(b)(2)(B)’s internal accounting controls provision” and broad use of Rule 13a-15(a), “disclosure controls and procedures,” especially in the absence of any charges against the company for misleading disclosures. (Charging a 10b-5 violation, she notes, would have required a finding of scienter.) “By requiring companies to establish disclosure controls for information that is not important for disclosure purposes,” she argues, “the Commission ‘seeks to nudge companies to manage themselves according to the metrics the SEC finds interesting at the moment.’…Restoring the internal accounting controls and disclosure controls and procedures requirements to their important, but limited intended purposes is a change in the right direction to rein in the scope of enforcement actions.” (See this PubCo post, this PubCo post, this PubCo post, this PubCo post, this PubCo post and this PubCo post.)
Sixth, Peirce urged Corp Fin and the Office of the Chief Accountant to provide more guidance to companies, both on timing in connection with offerings and “on difficult questions about the application of new and existing rules. This engagement should be dynamic and interactive, not formulaic. Commission staff time is well spent on these fundamental functions of a disclosure regulator, which in recent years have languished due to other Commission priorities.”
Finally, Peirce advocated that we avoid “invit[ing] our political disagreements into every corner of our lives” and “weaponizing the financial system or financial regulators….Capital markets should function in a way that is agnostic to the party in power.” To that end, she said, we need to “affirm the belief that our capital markets are designed to serve all Americans, regardless of their political ideology.” Recognizing that elections have consequences, and that the “direction of our policy agenda will change” under the new administration, she counseled that “[t]hose excited by the possibilities of a new day on the securities regulatory world—and I include myself in those ranks—should work hard to ensure that the capital markets do not become a playground for politics of any stripe.”