July 1, 2020

Tangible “Corporate Purpose”: Investor Views

Amidst the pandemic, the “corporate purpose” debate continues – a few say it’s even intensified, given some companies’ need to prioritize long-term viability & employee well-being over dividend payments or other capital allocation decisions that would benefit shareholders. A recent Wachtell Lipton memo defines “purpose” as:

The purpose of a corporation is to conduct a lawful, ethical, profitable and sustainable business in order to create value over the long-term, which requires consideration of the stakeholders that are critical to its success (shareholders, employees, customers, suppliers, creditors and communities), as determined by the corporation and the board of directors using its business judgment and with regular engagement with shareholders, who are essential partners in supporting the corporation’s pursuit of this mission.

In response to Wachtell’s positions, Skadden published this memo – which argues that shareholder primacy is still the name of the game. And practically speaking, companies’ ability to accommodate non-shareholder stakeholders is likely to turn on shareholder preferences.

That’s why this recent SquareWell Partners survey – of investors who collectively manage over $22 trillion in assets – is a worthwhile read. It covers whether “corporate purpose” is relevant to investors, who they believe should be responsible for delivering it, how it should be measured and how investors intend to hold companies responsible for putting it into practice. Here are a few key takeaways (also see this Harvard Law School blog):

1. 93% of shareholders believe that purpose is a necessary grounding for a successful long-term strategy

2. Nearly half of the participating investors suggested that they expect the company’s purpose to be in line with the UN Sustainable Development Goals

3. 86% expect firms to report on the delivery of purpose – with 75% emphasizing the need for KPIs

4. Most investors suggest that the company’s purpose has a dedicated section within their annual report (or equivalent document) closely followed by a formal statement from the board addressing the company’s purpose

5. Investors will look to see if there is consistent disclosure regarding the implementation of the purpose, stakeholder concerns, employee turnover, etc. to evaluate whether the company’s purpose is effective

6. Only one-third of participating investors expect to have a vote on a company’s purpose but almost two-thirds are engaging with companies on the topic

7. Whilst a quarter of the participating investors suggested that they will not oppose any agenda items if they are not satisfied with a company’s purpose, investors will most likely target the election of board members (including the board chair), discharge (where possible), etc.

Proxy Advisors & Shareholder Proposals: SEC’s Investor Advocate Still Wants a Proposal “Do-Over”

Way back in January, Lynn blogged on our “Proxy Season Blog” that the SEC’s Investor Advisory Committee recommended to the Commission that it revise and re-propose its rules on proxy advisors & shareholder proposal submission thresholds. Earlier this week, the SEC’s “Office of the Investor Advocate” – which is a member of the Investor Advisory Committee – reiterated that recommendation in its “Report on Objectives for Fiscal Year 2021.”

The Investor Advocate’s report on objectives is due by June 30th each year and relates to the government fiscal year that begins October 1st. It goes directly to Congress without any review or comment by the Commission or Staff. The report has this to say about proxy plumbing:

Much of the concern expressed by investors has centered on the economic analysis in the rulemakings. For example, the SEC’s Investor Advisory Committee submitted a recommendation to the Commission that it revise and repropose the rules, citing a number of ways in which the proposing releases failed to meet the SEC’s published guidance for conducting economic analyses.

The recommendation also noted that there are well-known problems with respect to so-called “proxy plumbing,” or the processes by which shares are voted and counted, and suggested that the Commission should prioritize efforts to address those concerns. In other words, before addressing concerns of the business community about the advice investors seek, the Commission should ensure that investors’ votes are actually counted.

In addition, the Investor Advocate includes in its 2021 policy agenda “corporate disclosure and investor protection in registered & exempt offerings” – calling for:

– Improved “human capital management” disclosure, possibly going beyond the “principles-based” approach that the Commission proposed last August

– Attention to “machine readable” disclosures outside of financials – noting that prior “disclosure effectiveness” changes have catered to investors who are manually accessing & analyzing info, but more & more investors are now using digital processes

– Consideration of whether the expansion of registration exemptions undermines public markets and ignores the value of registered offerings & public disclosure

The report also includes a special 3-page overview of the impact of Covid-19 on investors – highlighting eroding confidence of individual investors in stocks & mutual funds as beneficial long-term investments.

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Liz Dunshee