The Law and Other Anomalies

The SEC supervises brokers and investment advisers and people in those professions know that periodic compliance visits can get very granular.  We all also know that the SEC is deeply interested in protecting the investing public.

Latest SEC move: at end of August, the Commission levied hundreds of thousands of dollars of fines against brokerages and advisory firms based on failure to maintain cyber security over customer data. Client emails were hacked though on the cloud.  The Commission also has complained against at least one firm where there was no hack but a failure to maintain robust data security.

Although rules covering cyber for brokers and advisers are old and general, they do require written policies (SEC) and periodic review (Advisers Act).  Clearly the SEC has broad general supervisory powers, so it is clear that they do not think there is a need for more rule-making as part of its enforcement tool kit.

On the second anniversary of the signing by many major corporations of the Business Roundtable Statement calling on business to operate for the benefit of all stakeholders, the Harvard Governance Program accuses corporate America of, in effect, intending to con the American public.

The Roundtable Statement admonishes companies to work to benefit not only shareholders but also customers, employees, suppliers and communities.  After a survey of over 130 signatory companies, the Harvard Program concludes that “signatory companies did not intend or expect their endorsement to be followed by changes in how they treat stakeholders.”  Details of study results follow.

Signatory CEOs did not bring the signing to their boards, evidence of lack of serious intent.

Almost 100 signatories updated their governance guidelines and failed to elevate status of stakeholders other than shareholders.

Forty shareholder proxy proposals were presented to various companies based on the Statement and every one of them was opposed by managements.

Corporate by-laws continue to emphasize shareholder return.

About 85% of proxy statements do not even mention joining the Statement.

Director compensation remains tied to shareholder return and typically is paid in company stock.  No comp program links director compensation with other stakeholder interests.

The Program’s report ascribes all sorts of cynical motives to what it seemingly considers to be management duplicity.  Putting aside the accuracy of such accusations, it is hard to parse the results of the Program’s report with the professed growing corporate focus on ESG, DEI, climate change, etc.  The Harvard study was headed by Professor Lucien Bebchuk, long a sharp critic of corporate management, who expressed suspicion at the beginning of the favorable press surrounding the Roundtable pronouncement based in part on lack of Board involvement.

Last Friday the SEC approved changes to the NASDAQ Rules designed to push NASDAQ-listed companies down the DEI path to more diverse boards of directors.  (Sorry about the headline above, by the way; I could not resist.)

The Rule changes are simple: companies must disclose self-identified gender, racial and LGBTQ+ board data, and to explain why, if true, a given company does not have at least two “Diverse” board members (meaning at least one female and one minority or LGBTQ+ person).  The Rules also make available a complimentary recruiting service to assist members with hiring compliance.

Two aspects of this action are interesting.

Although the intent of the Rule is admirable, how did the SEC parse approval within the context of the Commission’s obligation to monitor rules of SROs (self-regulatory organizations, such as exchanges) as part of regulating securities market operations.?  Without express statutory mandate, the Commission reverted to a list of consistent, if not specific, analogies: prevent fraud, prevent manipulation, promote just trade, perfect a free and open market, protect investors and the public interest, encourage equitable fees for members and  issuer companies and investors. Such tenuous bases indicate the degree to which the SEC over the years has broadly interpreted its regulatory mandate within the content of social trends and pressure.

Second, without negative implication, I am intrigued with the conflation and designation of desired board member categories; the designation assumes sufficient management value and contribution from only two members off a robust list of those societal populations under greatest mistreatment, an assumption which  must be questionable.  Indeed, a better argument could be made, by asking why every category is not in fact included, as each category is disadvantaged but in different ways for different reasons.  Is it assumed that each woman, together with a given member from a very diverse list of other disadvantaged populations, will inject sufficient sensitivity as to be beneficial in board management.  Perhaps pressing for a greater number of new board members was thought to be a bridge too far?

Since I adopt the view that the desire for the perfect should not prevent achieving the good, I have no quarrel with the SEC from a policy standpoint.  But it is interesting that we reached this point based on unclear statutory authority and with a very generalized assumption about human behavior.