A while back – March 2017, to be exact – I posted a piece entitled “Beware when the legislature is in session”, citing a 19th Century New York Surrogate’s statement that “no man’s life, liberty or property are safe while the legislature is in session.”
It may be time to amend that statement, for Washington seems to be at it regardless of whether the legislature is in session. A very rough count suggests that there are more than 20 pending bills dealing with securities laws, our capital markets, corporate governance and related matters. And that does not include other initiatives, such as the President’s August 17 tweet that he had directed the SEC to study whether public companies should report their results on a semi-annual, rather than a quarterly, basis.
Problems with the Approach
I’m not saying that all of the ideas being floated are awful, or even bad. (One good thing is that our legislators seem to have decided that trying to give every statute a name that can serve as a nifty acronym isn’t worth the effort.) In fact, some of the ideas merit consideration. However (you knew there would be a “however”), I have problems with the way in which these bills deal with the topics in question. (I have problems with some of the ideas, as well, but more on that later.)
- First, in my experience, far too many legislators do not understand what our securities laws are all about, and some do not want to understand or do not care. I will not cite particular instances of this, but I’ve been surprised several times with the level of ignorance or worse (i.e., cynicism) demonstrated by legislators and their staffs about the matters their proposals address. At the risk of hearing you say “duh”, this does not lead to good legislation.
- Second, these bills represent a slapdash approach when what is needed is a comprehensive, holistic one. Even the best of the pending bills and proposals is a band-aid that will create another complication in an already overcrowded field of increasingly counterintuitive and/or contradictory regulations, interpretations, and court decisions.
Problems with the Proposals
As promised (threatened), I also have concerns about a number of the proposals being bruited about, but for the moment I’ll focus on two of them – eliminating quarterly reporting and Senator Warren’s “Accountable Capitalism Act”.
Eliminating Quarterly Reporting. I don’t want to dismiss out-of-hand the Tweeter-in-Chief’s suggestion that the SEC should do away with quarterly reports; after all, many people who’ve given it a great deal more thought have suggested something similar. However, this approach would be like mandating that an overly long document should be fixed by deleting every other word; it will be shorter, but it won’t make sense. What’s needed here is to figure out whether the disclosures currently called for in quarterly reports are really necessary, whether there are things that are not being disclosed in those reports that should be, and to take the results and make them scalable based upon company size (or some other logical basis). We also need to acknowledge that investors will not accept significant reductions in disclosure, and that there are unfortunately far too many examples of inadequate disclosures that justify their views.
Senator Warren’s Latest Proposal. Just a couple of days before the tweet, Senator Warren introduced the “Accountable Capitalism Act”. The bill would require companies with more than $1 billion in revenue to obtain a federal charter in order to force them to act in the interests of all stakeholders, rather than only stockholders. I’m not a big fan of the Senator (you can find my views of some other positions of Senator Warren here and here), and in this bill she’s done nothing to redeem herself in my eyes. Some of the other provisions of this ACA (poor choice of acronym, if you ask me) would:
- give workers the right to elect at least 40% of the board;
- restrict the sale of company shares by directors and officers; and
- prohibit companies from making any political expenditures without 75% board and shareholder approval.
The bill would also permit the federal government to revoke a corporation’s charter for repeated and egregious illegal conduct.
It’s been noted by a number of people that migrating from a shareholder-centric to a stakeholder-centric corporate governance model would be a good thing. I agree, at least in part. However, this migration is already taking place for many reasons, including investor efforts and companies’ realizations that stakeholder-centric behavior can lead to improved performance. So why create a whole new level of federal corporate law and the bureaucracy that would go with it? Does she think that boards would be better if 40% of them were elected by workers? Has this proven true in Europe and other jurisdictions where worker-elected directors are common? Does she understand that there are already many legal and market factors that make officers and directors very reluctant to sell shares of their company’s stock? (Now for some cynicism on my part — I think she knows full well that it’s impossible for most companies to get a 75% favorable stockholder vote on anything, but by “permitting” companies to make political expenditures if they secure that level of approval, she can claim that she’s not prohibiting them.)
The upcoming mid-term elections may change some things, but pardon me for another bit of cynicism – in this area, as in so many, the more things change, the more they will stay the same.