September 29, 2022
Partner, Cravath, Swaine & Moore LLP
Executive Vice President, Center for Capital Markets Competitiveness (CCMC), U.S. Chamber of Commerce, Executive Vice President, Center for Technology Engagement (C_TEC), U.S. Chamber of Commerce, Executive Vice President, Global Innovation Policy Center (GIPC), U.S. Chamber of Commerce, Senior Advisor to the President and CEO, U.S. Chamber of Commerce
According to Tom Quaadman, EVP of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce, the U.S. Security and Exchange Commission (SEC)’s rulemaking agenda in 2022 is four times larger than it was during the Dodd-Frank implementation phase, with many rules impacting the business community.
During a discussion at the U.S. Chamber’s Center for Capital Markets Competitiveness (CCMC), former Commissioner Elad Roisman, Partner at Cravath, Swaine & Moore LLP, spoke on the state of play around the SEC’s disclosure proposals and the implications of regulatory changes to corporate governance.
Companies Should Implement a Principles-Based Approach to Corporate Governance
Roisman said the principles-based approach “stands the test of time” without creating line-item requirements.
“When you have a line item requirement … it's almost the commission saying it's defacto material when it not necessarily is,” he said. “It's a one-size-fits-all approach … [which is] a problem.”
“If we just take human capital disclosure in itself … the studies have found, and at least in my experience, companies were able to really tell their stor[ies] from their unique perspective[s],” Roisman continued. “And it led to, not boilerplate discussions, [but] very nuanced explanations to investors about what they do.”
“If there was a line item disclosure requirement, I don't think it would necessarily be able to capture that,” he said.
Additionally, he continued, studies have shown that different human capital measures vary per company and per industry.
“So, while they're important to many companies, the importance they place on for each particular company is different,” he said. “I get a little worried if you create line item requirements because I don't think you'll necessarily get that sort of fulsome disclosure for investors.”
Assessing Materiality Is an Important Step in the Disclosure Regime
Loosely quoting Supreme Court Justice Third Good Marshall, Roisman defined materiality as having “a substantial likelihood that a reasonable investor would consider that information important when they make a voting or investing decision.”
“Materiality is the bedrock of the disclosure regime,” Roisman said. “It’s the foundation that all company disclosure has predicated on.”
“I think the key piece is it's a tie to a financial interest because there's a myriad of reasons why people may want information from companies,” he continued. “I think one of the things that have been raised about the proposed rule is that it may deviate from that traditional materiality standard of disclosure.”
Roisman added that many have questioned whether these rule requirements are aimed at broader societal issues or investment issues, as well as whether the commission is the right entity to tackle them.
The Shareholder Proposal Process Has Changed Over the Years, with Many Questioning the New Baseline
In 2020, “there was really a conscious effort to ensure there was an alignment between the shareholder proposal thresholds and re-proposal thresholds and the cost to companies and other shareholders,” said Roisman.
“If the commission decides to further limit the ability of companies to exclude shareholder proposals, the likely result will be more shareholder proposals,” he continued. “And frankly, this will lead to, in some cases, companies spending more time and money … on proposals that frankly will never succeed.”
Roisman added that the market has changed substantially over the past year.
“We still don't really know what the baseline is,” he said. “If people were concerned that there were too many shareholder proposals being excluded, then this year should give them pause to think that that's not the case.”
“It's a moving target,” Roisman continued. “I think this is a problem people have raised with some of these rulemakings: they often overlap, [and] trying to understand the baseline of how the marketplace is going to work is difficult when you have all these proposals out there.”
“The reality of the situation is if you're a company, the likelihood of you being able to exclude a proposal is probably less than it was before,” Roisman said.