Corporate Social Policy and the SEC

Along with Laura J. Shaffer, Director of Shareholder Activities for the Nathan Cummings Foundation, I have prepared an op-ed on shareholder proposals requesting improved disclosure on major corporate social policy issues, including environmental risk and health care costs. The op-ed runs as follows:

Last year, nearly 40% of the shares of Standard Pacific Corporation, one of the nation’s largest builders of homes, supported a request for disclosure relating to the company’s approach to energy efficiency. The company’s response? This issue is none of your business.

Standard Pacific claimed, and the Securities and Exchange Commission’s Division of Corporation Finance agreed, that energy efficiency considerations are so central to the business of building homes that shareholders have no right to ask about them.

Even as leading American corporations are beginning to speak out about the urgent need to address climate change, there continue to be a number of companies that, with the connivance of the SEC’s Division of Corporation Finance, are denying investors the right to ask about their companies’ plans for addressing key topics relevant to the issue. This includes any plans they may have to increase the energy efficiency of their operations and products, something which many agree is a key component of any solution to the climate challenge.

Climate change is not the only area in which the SEC has allowed companies to stifle shareholder requests for information relating to significant social policy issues. For years, the SEC’s Division of Corporation Finance has concluded that any and all topics relating to health care coverage in this country are off limits to investors. Health care coverage relates to benefits, they claim, and so constitutes ordinary business, not a significant social policy issue.

Like climate change, the rising costs of health care in this country are increasingly recognized by major American corporations, including Wal-Mart, as a social policy issue with significant implications for both the well being of the American public and a company’s bottom line. The U.S. Chamber of Commerce and the National Association of Manufacturers, among others, have concluded that the high cost of health care in this country negatively impacts American corporations’ ability to compete in global markets. Coverage is essential for worker productivity and wellbeing, but companies need to be thinking about how to ensure coverage while addressing the competitive implications of the current system, which is eating into corporate profits and impacting investors’ returns.

In spite of this, and the increasing amount of legislative activity in this area, earlier this year the Division of Corporation Finance once again found that a company’s response to rising health care costs and associated public policy issues did not constitute an acceptable area for shareholder inquiry. Shareholder resolutions asking about the issue were barred from consideration at half a dozen major U.S. corporations.

This would not, perhaps, be so bad if the SEC did a better job of enforcing its existing disclosure rules. But repeated requests from major institutional investors that the SEC enforce existing disclosure requirements on underreported material risks have failed to elicit much action.

The SEC’s own guidelines for Management’s Discussion and Analysis of Financial Conditions and Results of Operations (MD&A) stipulate that “Specific known trends, events or uncertainties that are reasonably likely to have a material effect on a company’s financial condition or operating performance must be discussed in the MD&A.” Yet disclosure relating to issues such as climate risk continues to be spotty at best.

When investors are kept in the dark about issues which could have very real implications for the long-term profitability of the companies they own, it begins to look suspiciously like the SEC is protecting the interests of myopic corporate managements rather than serving the investors it is supposed to protect. This impression is furthered by decisions such as the recent ruling allowing Standard Pacific to omit from its proxy a proposal that was supported by more than one-third of shares voted last year.

The SEC’s website claims that, “By far the best way for investors to protect the money they put into securities is to do research and ask questions.” Clearly, this message failed to make it to the Division of Corporation Finance. Shareholders, the legitimate owners of public corporations, have a right to inquire about their companies’ plans to address significant social policy issues with the potential to have enormous impacts on a company’s long-term profitability. The SEC, long charged with protecting investors, is doing exactly the opposite.