October 16, 2018
Last week, Securities and Exchange Commission (SEC) Chairman Jay Clayton sat down with John Harwood of CNBC at the Bipartisan Policy Center to discuss a panoply of issues facing the Commission. Chairman Clayton reiterated his desire to ensure that SEC actions benefit the interests of retail and Main Street investors’ ability to participate in America’s public markets. Clayton’s commitment to the interests of Main Street investors came shortly after the release the SEC’s strategic plan, which lists “focus on the long-term interests of our Main Street investors” as the number one goal for the Commission.
Chief among Chairman Clayton’s concerns is the decline in the number of publicly held companies in the United States and the rise of privately held companies, which leaves retail investors with less opportunity to share in the growth of such companies:
“When retail investors participate in our markets, how broad a spectrum of investments do they have? I think that spectrum has been getting relatively smaller. Because we have fewer public companies, companies are waiting much longer in their life cycle to go public, which by definition means that retail investors have less access to the market as a whole. And I fear, less access to companies that are well-established, but still growing.”
When questioned about whether public companies are too driven to meet short-term goals because of quarterly earnings reports, Chairman Clayton mentioned that there are many factors that drive short-termism, but spoke of pressure from minority shareholders:
“We have a completely different governance mechanism today than we did fifteen years ago. Fifteen years ago, the ability of a minority stockholder to directly and quickly influence a board of directors and therefore the direction of the company was quite low. Today, as a result of a series of regulatory changes, market changes, the ability of a minority stockholder to substantially and quickly influence the direction of a company is high. That’s a big change.”
Clayton’s statement about minority “activist” shareholders’ ability to commandeer a board of directors is also a trend recently identified by the U.S. Chamber of Commerce as a barrier for public companies:
“Companies also find themselves under increasing pressure from activist investors, often times over immaterial matters that distract management from carrying out their core duties and that impose significant costs on shareholders. Many of these campaigns are bolstered by the influence of proxy advisory firms, which continue to wield enormous influence over corporate governance.”
The outsized influence and support of proxy advisory firms in activist shareholder resolutions, which have not been shown to increase the value of the targeted companies, is why the Chamber recommended that the SEC conduct additional oversight of proxy advisory firms. The Chamber believes that greater oversight in this area will make going and staying public more attractive for companies.
Clayton also spoke about the upcoming SEC roundtable on the proxy process, where the SEC will have an opportunity to consider strengthening oversight of proxy advisory firms:
“We are going to look at the proxy ecosystem. The participation of retail investors. The importance of proxy advisory firms. The plumbing, the thresholds, all of this to say is the way we are regulating shareholder engagement appropriate? Are we getting it right? I think it is time to do that. I applaud our division of corporation finance for looking into it. We should have a discussion about the ecosystem. I look forward to it.”
As Chairman Clayton works toward protecting the interests of Main Street investors and improving the attractiveness of public markets, he should also consider how reigning in the outsized and conflicted influence of proxy advisory firms would help unleash America’s public companies and make public markets more attractive.