How the SEC can promote economic justice beyond shareholders
The incoming Biden administration is about to make significant policy choices. One clear choice is to enact policy that creates more opportunity for economic success for more people across more of America.
Recent proposals for a more “accountable capitalism” center on establishing federal charters for U.S. corporations that would require companies to protect the interests of stakeholders beyond just their shareholders. Some of these proposals have called for the establishment of a new federal agency to oversee U.S. corporations in order to achieve that goal. These are important policy suggestions that should be seriously explored.
The good news is that there already is a U.S. agency that has the ability to ensure that U.S. corporations promote broader economic success and take greater responsibility for the communities in which they operate. That agency is the Securities and Exchange Commission. The SEC has the authority and the capacity to serve as a force for progress on a range of vital economic and other issues. The SEC can lead U.S. companies to enhance corporate governance and better serve the interests of all constituencies. That can be done in three important ways:
Disclosure guidance. The SEC should require U.S. companies to disclose in their periodic public filings the extent to which they are improving the quality of life for their employees, including by paying wages that can sustain a family, providing other employee benefits and maintaining work conditions that are safe and supportive. These disclosure requirements do not necessarily have to be prescriptive. They can start by requiring companies to address these issues directly (as many companies already do) and in plain English. Companies also should be required to disclose the extent to which employees are represented on their boards of directors and in other important decision-making groups within the corporation.
In addition, U.S. companies should be required to disclose the extent to which they are protecting the communities in which they operate. Just as company filings currently require management discussion and analysis of financial performance, risks and future plans, management should be required to address the extent to which corporate practices and policies impact the environment and the communities affected by a company’s products, services and operations. In addition, companies should report on the diversity (or lack of diversity) in leadership and other important roles within the company. Transparency matters.
Promote capital investment in corporate responsibility. The SEC should make it easier for investment capital to flow to companies that act responsibly. For example, companies with the largest market capitalization currently receive an automatic and windfall financial benefit from the massive inflow of investor money into index funds that mirror the S&P 500 and similar market indexes. The SEC should make it a priority to encourage the establishment of new index funds that emphasize corporate responsibility — such as a Corporate Responsibility 500 — so that investor funds can be directed more easily to companies that best serve their communities and their employees in addition to delivering successful financial performance for investors. A number of organizations are in the process of developing standards that help to identify these companies and evaluate their commitment to these important goals. Combining those efforts with SEC programs that promote fund formation and investor education can lead to real progress on these issues.
Effective regulatory policy and enforcement. The SEC must continue to be on the lookout for financial products, services and practices that present systemic risk to the U.S. economy. Financial firms should be rewarded for assisting in those efforts and penalized for failing to do so. Another financial crisis must be averted to protect our economy and our people. Those most vulnerable would again suffer the harshest consequences of further economic dislocation. Effective enforcement of the securities laws also is absolutely essential to protecting investors and preserving the integrity of the financial markets. The SEC must have a robust, professional enforcement program that inspires investor and public confidence.
The time is now for the SEC to pursue these goals, which will strengthen our country, enhance our markets, protect our communities, and provide greater and broader economic opportunity. The policy goals are right and true. Fortunately, the SEC has the authority and capacity to execute on this agenda swiftly.
Lorin L. Reisner is the former deputy director of the SEC Enforcement Division (2009-2011) and chief of the Criminal Division of the U.S. Attorney’s Office for the Southern District of New York (2012-2014).
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