Corporate-Shareholder Communications Initiative
Introduction
Economic recovery, racial equity, climate change and pandemic management have been named as top priorities for the Biden-Harris administration, and may well continue to be on the agenda for years to come. American business will be an essential part of the leadership team to help formulate strategy and increase the likelihood that these efforts will succeed.
Corporate buy-in has the potential to foster proactive change, with companies becoming partners and taking a leadership role to help achieve these priorities. Company shareholders - i.e., the owners of those companies - are likely to support management's and the board's efforts in this regard, many of whom have long been proponents of policies and practices that foster economic, racial and climate justice, often in connection with "ESG" (environmental, social and governance) investment strategies.
Companies and their owners are two elements of a single entity. However, the current regulatory structure inhibits a collaborative environment, turning should-be partners into adversaries. The Corporate-Shareholder Communications Initiative ("CSCI") is being launched to address the shortcomings of the current system.
As described below, current law lacks the "foundational" provisions needed to make the system work. Informal practices have developed to fill the void, but the result is highly inadequate. Lack of structure leaves participants floundering for ways to communicate. It has resulted in new interpretations of existing regulations every few years and has forced SEC staff into an informal role it was never intended to serve, and one that often yields discriminatory results.
The Problem
Companies and their shareholders have a common interest. However, current regulations fail both of them, as there is no established mechanism by which the parties may engage in meaningful dialogue with one another. Adequate disclosure is essential - and there are initiatives to expand the information conveyed to shareholders - but disclosure is a one-way communication. Instead, the shareholder proposal process is the sole formal mechanism by which shareholders and management may interact. That process is, by its nature, adversarial, and is inadequate as a means of substantive communication.
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Receiving a shareholder proposal puts companies on the defensive, pitting them against their shareholder-owners. It also puts the SEC in the untenable position of working against the interests of the shareholders it is charged with protecting by having staff decide the relative rights of the parties through the informal "no-action" process. No-action letters are not intended to serve as precedent, but they invariably do. The process also periodically leads to litigation. While the no-action process has a valid purpose, having SEC staff grant licenses to management to exclude access by shareholders is not one of them.
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Many investors successfully engage with their companies by reaching out directly to management. But even when they do engage, there is no uniform way to let all shareholders and other stakeholders know about their discussions, or to make known the company's positions on those matters.
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Other investors fail in their efforts to engage, as there is no requirement for companies to respond. Instead, the result is far too often contention, with shareholders left to undertake actions such as public campaigns to put pressure on a company. Lack of communication also results in a series of shareholder proposals during "proxy season," which rarely by themselves bring the matter to a conclusion. Everyone would be better served by having access to a proactive communications process that goes beyond disclosure and reporting requirements.
The Proposed Solution
With the Corporate-Shareholder Communications Initiative ("CSCI"), we propose to form a coalition to create the infrastructure that will support proactive and meaningful communications in an orderly but accessible manner. We will build a consortium of companies, institutional investors and other stakeholders to help define a workable platform, starting with the many that have managed successful resolution through direct dialogue. We will also engage regulators to expand the rules as appropriate, and work with legislators to amend the securities laws if that appears to be necessary.
The participants will recommend a structure for building the technical platform that will serve as the medium by which companies and shareholders will engage. The CSCI will also reach conclusions as to whether the platform should be hosted privately, by a quasi-governmental entity, or as a government program. Either way, we aim to work closely with the SEC, as well as with the White House as part of a cross-priority program working with the various strategic program groups. In that manner, the initiative will more likely succeed in imbedding the priorities into a baseline suite of corporate policies.