Category: Corporate Governance
It’s been eons since the SEC last did this—brought a Reg FD enforcement action, that is
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. 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.
Investors want more standardized sustainability disclosures
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.
What happened at the meeting of the SEC’s Small Business Capital Formation Committee?
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.
Taxpayer challenge to California’s board gender diversity law
It was only a matter of time. As reported here on Bloomberg, three California taxpayers have filed a lawsuit, Crest v. Alex Padilla, in California state court seeking to prevent implementation and enforcement of SB 826, California’s Board gender diversity legislation. This appears to be the first litigation filed to challenge the new law. Framed as a “taxpayer suit,” the litigation seeks to enjoin Alex Padilla, the California Secretary of State, from expending taxpayer funds and taxpayer-financed resources to enforce or implement the law, alleging that the law’s mandate is an unconstitutional gender-based quota and violates the California constitution.
Will the issue of firearms safety be reignited for the next proxy season?
As you know, topics related to corporate social responsibility have ascended to the forefront for many stakeholders, and CSR is sometimes viewed to comprise issues related to firearms safety. With the renewed national debate on gun safety, and in light of apparent continued government gridlock, will investors, customers, employees and other stakeholders turn to companies to “do something”? Will they begin to apply more pressure to companies involved with firearms, including retailers and banks, to reexamine their relationships with the gun industry? For the 2019 proxy season (unlike 2018), we did not find any shareholder proposals directly addressing gun safety (although some did indirectly) that were submitted for shareholder votes. Will current events reignite the topic of gun safety as a subject for shareholder proposals in 2020?
Proxy season takeaways from PJT CamberView
In this article, the authors, from advisor PJT CamberView, talk about their takeaways from the 2019 proxy season, which they expect to see as part of the conversation in the fall.
LTSE proposes listing standards to support long-term value creation
As evidenced by Corp Fin’s most recent Roundtable, short-termism is a major concern of SEC officials, both in terms of its potential impact on Main Street investors—who are investing for the long term to fund their retirements and other long-term needs—and its potential to deter companies with a long-term focus from becoming public companies, instead driving them to seek funding in the private markets, where short-termism is less of a factor. (See e.g., this PubCo post and this PubCo post.) As SEC Chair Jay Clayton commented during the Roundtable, with so many companies delaying their IPOs or avoiding them altogether, at the end of the day, he was concerned that, in 10 years, the general public would not be able to participate in 70% of the economy because those companies would be privately held. (See this PubCo post.) Will the Long-Term Stock Exchange, a novel concept for a stock exchange that was approved by the SEC in May (see this PubCo post), come to the rescue?
Board gender diversity reaches a new milestone
As reported by the WSJ, a new milestone has finally been reached for board gender diversity: there are no longer any companies in the S&P 500 with all-male boards!
Reaching just that one milestone has not exactly been expeditious. According to the WSJ, one in eight S&P 500 boards was all male in 2012. In 2019, women hold 27% of all S&P 500 board seats, up from 17% in 2012—certainly an improvement, but still far from anyone’s idea of gender parity. Progress seems to be even slower among companies in the Russell 3000 where, the WSJ reports, as of the first quarter of 2019, 376 companies still had all-male boards (19.3% women overall), reflecting a decrease from 457 in the fourth quarter of 2018 (18.5% women).
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