Is Third-Party Securities Regulation Having Its Day?

Is Third-Party Securities Regulation Having Its Day?

Last year, BlackRock CEO Larry Fink famously fired a warning shot at public company CEOs. In a 2018 letter, he declared that BlackRock—with $6 trillion in assets under management—would take a long look at public companies’ social missions, not just their profitability.

“Society is demanding that companies, both public and private, serve a social purpose,” Fink said. “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” Only those with a worthy mission, Fink suggested, would get BlackRock’s investment dollars.

As the world’s largest investment firm, BlackRock was heard loud and clear. The New York Times openly wondered whether the firm’s flexing of its muscles in this new way would be remembered as a “watershed moment.” A year later, some have suggested the answer is no. That includes The Yes Men, a prankster group that released a fake version of Fink’s annual letter last month. It highlighted the fact that BlackRock has not divested from companies out of compliance with the Paris climate agreement, and implicitly criticized it for not doing so.

He hasn’t gone far enough for some, but in his real 2019 letter Fink recommitted to the idea that public companies should have a “purpose.” He indicated that in its investment decisions, BlackRock would be examining “your company’s approach to board diversity; corporate strategy and capital allocation; compensation that promotes long-termism; environmental risks and opportunities; and human capital management.” The policing of such environmental, social, and governance issues has historically been the domain of the SEC in the first instance and, absent that, shareholder proposals. But now, third-parties like BlackRock appear more influential than ever in dictating corporate policies.

Proxy Advisors

In some cases, proxy advisors such as Institutional Shareholder Services Inc. (ISS) and Glass Lewis are driving governance policies. Take last year’s amendments to the definition of a Smaller Reporting Company (SRC) by the SEC, for example. SRCs face less stringent reporting requirements, including the need to report compensation information for only their CEO and two most highly compensated executive officers. By expanding the universe of SRCs, the SEC effectively reduced executive compensation disclosure requirements for a broad swath of issuers.

Glass Lewis appeared to take a dim view of the change, stating that the firm would take decreased disclosure into its recommendations. Glass Lewis said it “may consider recommending against members of a compensation committee in instances where a reduction in disclosure substantially impacts shareholders’ ability to make an informed assessment of the company’s executive pay practices.”

Twin Disc Inc. is among the newly reclassified SRCs that has chosen to disclose more compensation information than the SEC now requires, rather than inviting closer scrutiny from Glass Lewis or other proxy advisors. “The company has not scaled its disclosures of financial and non-financial information in this Quarterly Report,” it said in a November 10-Q. Gas company RGC Resources Inc. is another new SRC that has nonetheless made disclosures “consistent with the prior year,” staying above the floor set by the SEC.

Institutional Investors

Fink’s letter influenced attitudes in the C-suite toward social responsibility and governance at a number of corporations. Last month, Steve MacMillan, the chairman and CEO of Medical technology company Hologic Inc., explicitly cited Fink’s statements in his company’s notice of its annual meeting of stockholders and proxy statement. Apparel company American Outdoor Brands Corp., meanwhile, engaged in a public back-and-forth with BlackRock over firearms safety.

BlackRock isn’t the only major institutional investor making waves over governance, though. As the agency charged with managing the pension and health benefits for California’s public employees and retirees, CalPERS started pushing in 2017 for greater diversity in corporate boards of directors.

CalPERS revealed last year that it voted against nearly 450 directors at more than 140 companies as a result of its call for more diversity. Simiso Nzima, investment director for corporate governance with CalPERS, said the “no” votes prompted some companies to discuss board diversity with the agency. Arrowhead Pharmaceuticals Inc. said last month that it had heard from “California-based public pension funds” about its board diversity, or lack thereof. The biopharmaceutical company indicated that it was redoubling its efforts to get diverse candidates in the mix for future board searches.

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