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.
SEC proposes to modernize descriptions of business, legal proceedings and risk factors (UPDATED)
At the end of last week, the SEC voted, without an open meeting, to propose amendments to modernize the descriptions of business, legal proceedings and risk factors in Reg S-K. The proposal is another component of the SEC’s “Disclosure Effectiveness Initiative.” In crafting the proposal, the SEC took into account comments received on the 2016 Concept Release on disclosure simplification and modernization (see this PubCo post), as well as Corp Fin staff experience in review of disclosures. The changes to the rules were proposed “in light of the many changes that have occurred in our capital markets and the domestic and global economy in the more than 30 years since their adoption, including changes in the mix of businesses that participate in our public markets, changes in the way businesses operate, which may affect the relevance of current disclosure requirements, changes in technology (in particular the availability of information), and changes such as inflation that have occurred simply with the passage of time.” There is a 60-day comment period.
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.
SEC proposes amendments to modernize Reg S-K descriptions of business, legal proceedings and risk factors
Although the SEC cancelled the scheduled open meeting (again), it still went ahead and voted to propose amendments to modernize the descriptions of business, legal proceedings and risk factors in Reg S-K. The proposal is another component of the “Disclosure Effectiveness Initiative.” As described in the press release, to enable each business to focus on the matters that are material to that business, the proposed amendments take a more principles-based approach to the business and risk factors disclosure requirements. With regard to legal proceedings, the proposal would “continue the current prescriptive approach because that requirement depends less on the specific characteristics of registrants.” There is a 60-day comment period.
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?
Secret sauce, sausages and cookie jars…
No, it’s not an episode of Top Chef, but it is about “cooking the books.” And those are just some of the ingredients and tools used by Brixmor Property Group, a publicly traded REIT, and four of its executives to do the cooking: manipulation of a key non-GAAP financial measure, according to this SEC complaint and order and, even more to the point, this SDNY criminal indictment of the executives. As alleged, management sought to create the impression that a static pool of its existing properties showed steady and predictable income growth across a number of quarters. In contrast, however, Brixmor’s actual income growth rate was “volatile and frequently fell above or below the company’s publically issued guidance range” for the period. So, according to the order, the company architected the desired illusion—touted as its “secret sauce”—by engaging in some “sausage-making” with regular hits to the “cookie jar.” While it doesn’t sound very appetizing, it did create the desired deception—until, of course, it didn’t. The lesson is that manipulation of a non-GAAP measure, together with violations of GAAP, to mislead the public can be trouble—and perhaps even criminal. Although cases of accounting fraud may not be as common as they once were, this case should serve as a reminder that the SEC and the Justice Department are still on the lookout for it.
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?
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