Corporate boardrooms need policy ‘rules of the road’

Roll Call

Decisions made in corporate boardrooms can have serious implications for the economy, everyday investors and Americans’ livelihoods.

And those decisions now increasingly extend to issues such as immigration, gun control, and human rights — topics that have traditionally been the domain of government — as reluctant corporate executives and directors face new pressures from their investors, employees and customers.

This developing trend seems unlikely to change anytime soon, and has stirred debate over the proper role of a corporation in addressing political questions. That’s made the role of the government in regulating public corporations and setting the rules of corporate governance all the more critical.

The Securities and Exchange Commission finds itself with a full plate of issues this year that reflect the evolving role of businesses in society.

Last fall, the SEC hosted a roundtable to reanalyze the proxy process used by shareholders to engage with a company and make sure management is responsive to their concerns. The roundtable featured diverse perspectives on several vital issues such as rules for submitting shareholder proposals and the regulation of proxy advisory firms that recommend how to vote on such proposals.

Based on these discussions, important decisions about possible regulatory changes to the proxy process now await the SEC and Congress.

Another issue the commission and other policymakers will have to grapple with soon is the use of environmental, social and governance, or ESG, criteria in making investment and business decisions. Investors often use such criteria as complements to traditional business and financial metrics. Regulation has yet to address the rising use of ESG criteria, which tend to touch on public policy issues, such as climate change.

There have been growing calls to require public companies to disclose more ESG information in their financial statements. A big question is whether disclosure will be an industry-led approach or a mandate from the SEC or Congress.

The fiduciary rules surrounding ESG investing are also on the table. Last year, the Department of Labor issued new fiduciary guidelines for many retirement accounts on the use of ESG criteria when making investments. Public pension funds, which are not covered by those guidelines, are not immune to these discussions. A recent hotly contested election for a California Public Employees’ Retirement System board seat saw the victorious challenger raise questions about ESG investing and the fund’s fiduciary responsibilities.

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These issues have important implications, both for corporations and society. As policymakers take them on, there are a few key principles they should keep in mind before making major changes.

First, be evidence-based. While anecdotes and theoretical arguments can be useful, empirical studies will help make sure policies are grounded in reality and changes have the intended effects.

Second, seek diverse viewpoints. The comment letters submitted to the SEC on the proxy process have come from various constituencies with important, sometimes contrary, perspectives. These give policymakers a more holistic understanding of the issues at stake.

Third, push for compromise and bipartisanship. Debates in Washington too frequently become hyperpolarized and create an “us versus them” zero-sum mentality. But public policy is not a zero-sum game, and durable policy solutions often require buy-in from both political parties.

The SEC review of the proxy voting process seems to have followed these principles, and we hope that continues as policymakers tackle similar important issues. The Bipartisan Policy Center and American Council for Capital Formation are committed to working together to provide a forum for the fact-based, diverse and bipartisan conversation that is needed for fair and effective changes in corporate governance.

Politics is seeping into corporate boardrooms, and that trend is not going away. Regulators must make sure corporate governance policies are ready for it.

John Soroushian is a senior policy analyst at the Bipartisan Policy Center.

Timothy Doyle is the vice president of policy and general counsel at the American Council for Capital Formation.