Yesterday morning, at a telephonic meeting of the SEC’s Investor Advisory Committee, the Committee voted to adopt revised recommendations addressing “proxy plumbing”—the panoply of problems associated with the infrastructure supporting the proxy voting system. (See this PubCo post.) The recommendations were originally presented at a meeting of the Committee in late July, but the Committee elected to study the proposal further and offer revisions before voting. The changes are fairly nuanced, now also including some minority views. For the most part, the recommendations would not “reinvent” the proxy voting system, instead targeting improvements that are considered essentially “low-hanging fruit.” However, there appeared to be a consensus that eventually more would need to be done. The recommendations were adopted by a majority of the Committee with two dissents. Will the SEC pay attention?
In a post last month, I noted that, notwithstanding the growth in the number of shareholder proposals related to corporate social responsibility, for the 2019 proxy season (unlike 2018), we did not find any shareholder proposals that were submitted for shareholder votes directly addressing gun safety (although some did indirectly). I wondered out loud whether, in light of current events and the renewed national debate on gun safety—not to mention the gridlock leaving government incapable of doing anything—investors, customers, employees and other stakeholders might turn to companies to “do something.” Would they begin to apply more pressure to companies involved with firearms, including retailers and banks, to reexamine their relationships with the gun industry? It turns out that at least one of them has. Will others follow?
Reg FD prohibits selective disclosure of material, nonpublic information by public companies (or by its senior officials or specified other employees) to securities market professionals and shareholders reasonably likely to trade on the information. If a public company does make a disclosure of that kind, the company is required under Reg FD to disclose the information to the public. Information is considered “material” if there is “a substantial likelihood that a reasonable investor would consider the information important in making an investment decision or if the information would significantly alter the total mix of available information.” And that’s where the thorny part comes in. The test for materiality is a subjective one, based on the facts and circumstances. But judgments about materiality of disclosures are often complicated and muddy and frequently made in real time.
Two SEC commissioners: Is the Reg S-K modernization proposal too principles-based? And why no climate change disclosure?
Yesterday, Commissioners Robert Jackson and Allison Lee published a joint statement to encourage public comment about two aspects of the proposal to modernize Reg S-K (see this PubCo post), released on August 8, about which they had some, uh, reservations. They both indicated their support for release of the proposal, particularly its focus on adding “human capital” as a disclosure topic, but—and it’s a significant “but”— they took issue with the proposal’s “shift toward a principles-based approach to disclosure and the absence of the topic of climate risk.”
Business Roundtable says so long to shareholder primacy—commits to deliver value to all stakeholders
In a press release issued today, the Business Roundtable announced the adoption of a new Statement on the Purpose of a Corporation, signed by 181 well-known, high-powered CEOs. What’s newsworthy here is that the Statement “moves away from shareholder primacy” as a guiding principle and outlines in its place a “modern standard for corporate responsibility” that makes a commitment to all stakeholders. Yup, that Business Roundtable. According to the press release, the Business Roundtable has had a long-standing practice of issuing Principles of Corporate Governance. Since 1997, those Principles have advocated the theory of “shareholder primacy—that corporations exist principally to serve shareholders” — and relegated the interests of any other stakeholders to positions that were strictly “derivative of the duty to stockholders.” The new Statement supersedes previous statements and “more accurately reflects [the Business Roundtable’s] commitment to a free market economy that serves all Americans. This statement represents only one element of Business Roundtable’s work to ensure more inclusive prosperity, and we are continuing to challenge ourselves to do more.” Fasten your seatbelts, disciples of Milton Friedman; it’s going to be a bumpy night.
According to this recent study from consulting firm McKinsey, investors want to see a different kind of sustainability reporting. The authors observe that, in light of mounting evidence “that the financial performance of companies corresponds to how well they contend with environmental, social, governance (ESG), and other non-financial matters, more investors are seeking to determine whether executives are running their businesses with such issues in mind.” Although there has been an increase in sustainability reporting, McKinsey’s survey revealed that investors believe that “they cannot readily use companies’ sustainability disclosures to inform investment decisions and advice accurately.” Why not? Because, unlike regular SEC-mandated financial disclosures, ESG disclosures don’t conform to a common set of standards—in fact, they may well conform to any of a dozen major reporting frameworks and many more standards, selected at the discretion of the company. That leaves investors to try to sort things out before they can make any side-by-side comparisons—if that’s even possible. According to McKinsey, investors would really like to see some type of legal mandate around sustainability reporting. The rub is that, ironically, it’s the SEC that isn’t on board with that idea—at least, not yet.
At yesterday’s meeting of the SEC’s Small Business Capital Formation Committee, the Committee discussed three topics: the SEC’s Harmonization Concept Release, the proposal to amend financial disclosure requirements relating to acquisitions and dispositions of businesses, and the proposal to amend the accelerated and large accelerated filer definitions. SEC Chair Jay Clayton emphasized that his goal was to find the right balance between making sure that investors receive the information they need and eliminating unnecessary costs and burdens. Several of the presentations to the Committee can be found here.