In a world where most observers are focused on broad macroeconomic indicators — interest rates, retail sales, movements in the financial markets and so on — corporate governance often gets short shrift.
But the cumulative effect of uncounted governance decisions can be tremendously important. Are boards — and the corporate officers who report to them — focused long-term gains or short-term goals? Are systems in place to allow effective communication between investors and the management and boards of the companies in which they share an interest? Do shareholders have effective mechanisms to ensure that their voices are heard and their opinions are considered? Do boards respond in a thoughtful and comprehensive manner? And is the disclosure that companies provide to shareholders and potential investors sufficient — especially in terms of risk management?
This commentary is an excerpt of SEC Chairman Mary Schapiro’s remarks at the Transatlantic Corporate Governance Dialogue.
In short, are shareholders and boards, along with management, sufficiently engaged to ensure a quality of corporate governance commensurate with the demands of managing a public company?
When the answer to this question is, “yes,” we believe that economies broadly benefit as well-run companies flourish and grow, and that investors in particular benefit from quality information and insight into management’s priorities, allowing investors to balance risks and to allocate their capital accordingly.
Effective engagement is a strong positive. But, in attempting to foster effective engagement we face a challenge: the definition of “effective engagement” is imprecise. In fact, the definition of effective engagement can vary significantly from company to company, as investors and boards interact in very different ways, but achieve similarly positive financial results and equally satisfying relationships between shareholders and boards.
There is no exact formula. I do, believe, however, that engagement lies at the crossroads of communication and responsiveness. And that, as a regulator, my goal should be not to detail the type of communication or the level of responsiveness, but to put in place structures that encourage governance practices characterized by these attributes.
Accurate disclosure of material financial information is, of course, a first principle of this type of regulation. And here, we do not shy away from detailed disclosure requirements.
But engagement is more than disclosure. Shareholders should have a voice and a straightforward and transparent process for engaging with companies on issues that are important to them. Shareholders and boards should have clear conversations about how the company is governed — and why and how decisions are made. As a general rule, interested, aware and active shareholders are good for public companies, and I believe that more shareholder engagement is better.
But here, detailed prescriptions are more difficult to write.
And so, as regulators, we do not see our role as quantifying “appropriate” levels of engagement or laying out precise steps to reaching it. The SEC is not interested in determining the communications strategies of individual companies.
What we are interested in is breaking down barriers that may prevent effective engagement, impact investor confidence and, ultimately, diminish financial performance to the detriment of shareholders.
As a regulator and as a former board member, I believe that it is vital that shareholders and board members become more engaged in the shared pursuit of high quality governance. And, as chairman of the U.S. Securities and Exchange Commission, I have made crafting a regulatory framework that facilitates effective engagement a priority.
As you already know, we are moving toward a framework in which investors have better information, qualitatively and quantitatively, and more effective ways of expressing their reaction to the information that is disclosed.