Regulatory Policy

SEC to Shareholders: Your Votes Don’t Count

(Jonathan Ernst/Reuters)
The SEC must remain an independent regulator that protects the long-term interests of all shareholders rather than an environmental watchdog.

COVID-19 has resulted in a flood of new investors participating in the marketplace. For many of them, upcoming shareholder meetings may be the first time they can vote their shares. But shareholders should be worried. Biden’s new SEC chairman, Gary Gensler, will advance reforms that will overrule the shareholder-voting process and pull businesses further to the left.

Biden’s Securities and Exchange Commission is preparing to move away from its traditional role as an independent financial regulator toward becoming an activist agency that seeks to regulate disclosures of companies’ climate policies and environmental and social governance issues. Essentially, the financial regulator will determine which environmental metrics are materially important for public companies to disclose to investors. Mandated disclosure runs counter to the democratic process of shareholder voting and would invalidate the wishes of shareholders who have consistently opposed similar shareholder proposals.

Although ESG (environmental, social, and corporate governance) is still a somewhat poorly defined term, it has become a catchall for boardrooms and federal regulators who emphasize “conscious” or “stakeholder” capitalism. The “social responsibilities of business” are nothing new, but businesses are moving away from Milton Friedman’s view that management teams should put the interests of shareholders first to a model that they should run for the benefit of various “stakeholders” including communities, employees, customers, and, oh yes, shareholders.

Allison Herren Lee, the former acting chair at the SEC until Gensler, was confirmed by the Senate and remains an SEC commissioner. Lee recently gave a speech at the Center of American Progress outlining ideas that were designed to advance a progressive agenda through future SEC rulemaking. These included expanding the current disclosure framework, forcing companies to disclose their political donations, and providing racial-diversity metrics within a larger ESG structure.

Commissioner Lee claimed that the SEC derives its authority for ESG rulemaking from a 2010 guidance document issued by the Obama-era SEC that encourages companies to disclose climate metrics in their annual reports. The 2010 guidance is not a formalized rule and has never been enforced, but it is likely to serve as a starting point for future rulemaking and mandates.

Lee laid the groundwork for Gensler’s tenure during her eleven weeks as acting chair when she established a 22-person task force to scrutinize public-company filings and proactively identify “ESG-related misconduct.”

The disclosure standard, outlined in Section 4(a)(5) of the Securities Act of 1933, states that investors must be informed of all matters materially important to the business. Further SEC efforts may be duplicative and expensive to administer. Roughly 90 percent of companies in the S&P 500 already publish annual sustainability reports that discuss the specific ESG issues that they judge relevant to their shareholders.

If investors consider ESG initiatives significant, they can influence management through the shareholder-proposal and voting process at annual meetings. Previously, under chair Jay Clayton, the SEC amended shareholder-proposal and voting rules to allow for businesses to exclude proposals from the consideration that have routinely failed to garner minimum requirements of support. Oftentimes, these proposals are related to ESG and political disclosures, which may reduce financial and operational performance or fail to enhance the long-term value of the business.

In 2019, ESG disclosure initiatives that made it to shareholder ballots garnered about 27 percent of shareholder support on average. But Congress and political activists can weaponize these disclosures in ways designed to shame and induce boycotts of American businesses. Commissioners Hester M Peirce and Elad L. Roisman have expressed their concern that these policies can shift depending on which party is in control of the executive branch and could be used to target companies for their political views.

Monitoring climate disclosure, board diversity, and political donations expand the commission’s mission and have little to do with protecting investors from market fraud.

ESG-focused financial rulemaking will accelerate under Gary Gensler’s chairmanship. Gensler served as the chairman of the Commodity Futures Trading Commission between 2009 and 2014 and played a leading role in President Obama’s financial reforms following the enactment of the Dodd-Frank Act. In his nomination hearing before the Senate Banking Committee, Gensler voiced his support for climate-risk and corporate political-spending disclosure and emphasized both as a high priority for him as chairman.

Shareholders can already address their ESG and climate concerns with management through the shareholder proposal process. A standardized ESG-disclosure requirement represents a one-size-fits-none solution that fails to benefit investors. Efforts to overturn the previous administration’s shareholder-voting procedures will restrict shareholder choice and render the voting process largely moot. The SEC must remain an independent regulator that protects the long-term interests of all shareholders rather than an environmental watchdog.


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