SEC Commissioner Pushes Back on Governments Mandating Stakeholder, ESG Focus by Corporate Boards and Managers

September 28, 2018

In remarks to the Center for Corporate Reporting and Governance, Securities and Exchange Commissioner, Hester Peirce cautioned against “government attempts to remake corporations for the benefit of so-called stakeholders,” noting directors “have a fiduciary duty to their shareholders to maximize the value of the corporation” and that what is best for one shareholder “may not be best for each and every shareholder.”

Ms. Peirce opened her remarks by citing California’s recent legislation that would require companies based in the state to have a certain number of female board members.  She first addressed the popular term “stakeholder,” which is used frequently today in discussions about corporate purpose.

“The term stakeholder is popular because it is so elastic,” began Peirce, explaining that, in the corporate context, the term is used to “refocus corporate decision-makers on constituencies other than their shareholders.”

Should stakeholders be entitled to a say on how a company conducts its business, Peirce asked?  Her answer: “No.”  The question of what stakeholders might be impacted is “a different question from whether the company must consider [a stakeholder’s] interests—separate and apart from the company’s own interests—as part of any decision-making,” according to Peirce.  However, she did note that “Employees, creditors, suppliers, customers, communities, and regulators feature prominently in the thoughts of corporate boards and managers,” and they “have avenues for making their voices heard.”

In a discussion of the California bill, Peirce notes that “companies looking out for their long-term value already have strong incentives to take that evidence [that female board members enhance value] under consideration along with all the other factors that may affect the company’s long-term value.”

“No clear standards.”  Turning to ESG (Environmental, Social & Governance), Peirce urged caution on the use of ESG factors, noting “many of these factors are not susceptible to standards that would be comparable across companies.”  Additionally, Peirce reflected on the “degree of subjectivity in the setting and application of [ESG] standards” and that regulators do not have “the requisite expertise to assess how well companies adhere to ESG standards.”

Emerging debate:  Peirce’s remarks serve as a direct counter to Senator Elizabeth Warren’s (D-MA) bill, which would federalize corporate governance standards and require corporate consideration of broader stakeholder benefit.