March 6, 2019
Yesterday Securities and Exchange Commission (SEC) Commissioner Hester Peirce reminded an audience of institutional investors that their duty is to maximize shareholder returns. She implored them not to be sidetracked by fads in corporate governance that distract them from this mission – namely, mandating distracting Environmental, Social, and Governance disclosures.
Commissioner Peirce was speaking at a conference organized by the Council of Institutional Investors (CII). CII manages $4 trillion in assets through pension funds, foundations and endowments and members of CII manage a collective $35 trillion. Her speech titled “Festivus, Fortnite, and Focus” touched on many of the same themes discussed at the SEC’s roundtable on the proxy process last November, including the lack of shareholder proposal submission thresholds and the fiduciary duty of asset managers.
Again and again, Commissioner Peirce returned to a central theme in her remarks: assets manager have a fiduciary duty to investors, while the SEC has a duty to protect these investors and help more companies go public.. She worries that certain processes as they stand today prevent this. “Many investors these days seem focused on non-investment matters at the expense of concentration on a sound allocation of resources to their highest and best use,” she explains.
One such process is the procedure for shareholder proposal submissions. Presently, rule 14a-8 of the Securities Exchange Act enables any shareholder owning a relatively small amount of shares to place his or her own proposal in the company’s proxy material, unless the company successfully makes the case that they can exclude the proposal under one of the 13 exemptions the rule allows. Many of these proposals often waste company’s valuable time and resources and negatively affect shareholder returns, Commissioner Peirce asserts, and facilitates minority rule:
I see a clear need for reform in this area. The current thresholds permit, indeed encourage, a handful of shareholders to put forward proposals that incur considerable costs borne by all shareholders. Shareholders are able to submit losing proposals over and over again. In recent years, many of these proposals are not even related to core corporate governance issues, but instead promote a tiny group of shareholders’ personal political and social preferences. (emphasis added)
But it isn’t just the company that has to expend resources to deal with unreasonable shareholder proposals – the SEC is impacted as well :
The opportunity cost of our staff’s having to deal with these proposals is enormous. The staff must review and respond to company requests to reject numerous proposals that have no chance of succeeding were they put to a vote. The time staff spend on such activities must necessarily detract from time they could otherwise spend on more useful endeavors, such as rulemaking and reviewing disclosures, both of which provide more benefit to a greater number of investors. (emphasis added)
On top of the shareholder submission thresholds, Commissioner Peirce expressed concern over the preoccupation with subjects outside of the SEC’s mission – and how these requested changes could be unduly burdensome for companies:
Real dollars are being poured into adhering to an amorphous and shifting set of virtue markers. I do not want the SEC to become an enabler of this shift in focus. The pressure, however, to get on the bandwagon and drag others with us is pretty intense. We are being asked more and more to shift securities disclosure to focus more on matters that do not go to an assessment of how effectively companies are putting investor money to work. Indeed, in some instances, we are being asked to make it harder for companies to use their resources effectively. (emphasis added)
These virtue markers change; the fiduciary duty that asset managers owe shareholders does not. Moreover, ESG metrics are poorly defined – if at all, Commissioner Peirce says, and do not belong in disclosure requirements:
The U.S. securities laws already provide for material disclosures. Explicit consideration of ESG factors must therefore require something more than what is already contemplated by our laws and by our long-standing definition of “materiality.” Issuers already spend considerable amounts of money complying with existing disclosure requirements. Requiring disclosures aimed at items identified by organizations that are not accountable to investors unproductively distracts issuers. (emphasis added)
What’s more, repeated emphasis on ESG distracts from SEC’s stated job, Commissioner Peirce pointed out, stating, “When the SEC is asked to concentrate on issues other than protecting investors, facilitating capital formation, and fostering fair, orderly, and efficient markets, our focus shifts away from our mission.”
Commissioner Peirce’s remarks make it clear that the SEC is moving toward reform on crucial topics and doing its best to avoid resource-consuming distractions. In addition to the points Commissioner Peirce laid out in her speech, Chairman Jay Clayton has made it clear that proxy system reform is not just a point of discussion: it is a top priority. The Main Street Investors Coalition expects to see momentum for reform continue to swell as proxy season gets underway.