Sheep In The Steep: Remarks Before The Northwestern Securities Regulation Institute - SEC Commissioner Hester M. Peirce, Washington D.C., Jan. 27, 2025

Thank you, Dixie [Johnson], for that introduction and thank you to the Northwestern Pritzker School of Law for hosting this conference. It is a particular honor to give the Alan B. Levenson Keynote Address. Thank you to everyone in the audience for being here this morning in southern California. Our hearts go out to people who have lost loved ones, homes, or livelihoods not too far away in the Los Angeles wildfires. I must begin with my disclaimer: my views are my own as a Commissioner and not necessarily those of the SEC or my fellow Commissioners.

California’s natural beauty has imprinted itself in my memory as it has in the minds and hearts of so many other visitors: breathtaking views from a hike in Yosemite, the saturated majesty of the California redwoods during a December downpour, the mountains ringing Palm Springs’s desert loveliness, and stunning Pacific panoramas. One of the state’s natural treasures that I would love to see on a future visit is the Sierra Nevada bighorn sheep, a very rare and impressive species of wild sheep. Living in the high altitudes of the Sierra Nevada mountains, these bighorn sheep encounter precarity every day as they navigate the treacherous alpine terrains of their habitat.[i] John Muir described them as “highest among the animal mountaineers of the Sierra.”[ii] Muir goes on to rhapsodize that the sheep “dwells secure amid the loftiest summits, leaping unscathed from crag to crag, up and down the fronts of giddy precipices, crossing foaming torrents and slopes of frozen snow, exposed to the wildest storms, yet maintaining a brave, warm life, and developing from generation to generation in perfect strength and beauty.”[iii]

Were I to have the privilege of seeing the bighorn sheep in their alpine athletics, I am sure my mind would turn to issues similar to those on the agenda for this conference. Specifically, I would see in the bighorn—making their way in a terrain that is steep, varied, and fraught with danger, including predators, avalanches, and disease—an animal analog to public companies navigating the hazardous regulatory, political, and societal landscape of today. Public companies, however, are less nimble and gracious than their creature counterparts in dealing with the rough topography, because it is not their native habitat. Public companies are confronting a symptom of a larger societal malady—importing politics and contentious social issues into everything we do. The SEC, so-called stakeholders, and the burgeoning industry of advisers, consultants, accountants, and attorneys peddling their costly wares to public companies, sometimes with the agreement of corporate executives, drag companies into social and political melees. Their efforts, an insidious form of rent-seeking, are often quite convincingly disguised in a cloak of ethics and morality. In my remarks today, I hope to offer a path toward more level, predictable terrain (for public companies, not for Sierra Nevada bighorns).

The first step on this path is reminding ourselves that both public companies and the SEC have limited missions. Public companies build products and services that they think other people need or want. If they succeed, they grow and thrive. If they fail, they go out of business. An incentive to serve other people well comes from the desire to maximize the company’s long-term financial value for the benefit of its owners—its shareholders.[iv] A singular focus on building corporate value for shareholders precludes companies from spending time and resources on matters that do not contribute to the company’s long-term value: no pet projects for executives, no non-financial targets to afford managers the freedom to claim success when the company is failing financially, no spending simply to silence the loud hawkers of the controversial issue du jour, no commandeering of the company’s resources to further one shareholder’s favorite cause. Public companies should be at the beck and call of shareholders qua shareholders, not the ever-growing, never-satisfied set of stakeholders that brazenly grasp at company resources to do something other than maximize the value of the company. Directors and executive officers serve shareholders and society best by keeping the companies they guide focused on maximizing long-term financial value.

The SEC also has a limited mission. One of the pillars of that mission is serving the investors who entrust their money to other people by facilitating the provision of disclosure necessary for investment decisions. As lecture namesake Alan Levenson explained more than a half century ago, the corporation has a “role as the trustee of other people’s money”; “the other people” are “the investors—who are the consumers of the securities industry”; and—“[i]f the Securities and Exchange Commission is to be viewed as a ‘consumer protection agency’”—investors are the consumers the SEC is charged with protecting.[v] Levenson goes on to explain that the protection comes in the form of getting “readily available and in the most understandable form, relevant, material corporate information at the least expense and burden to the issuer-registrant” into the hands of investors, while leaving decision-making to the investor.[vi] The SEC’s role is to ensure that investors have the information they need to channel funds to the companies that can put that money to the best use by delivering the products and services people demand.

If the first step in drawing companies away from societally contentious rocks and crags is simply to remind ourselves of the limited missions of public companies and the SEC, the second step is fending off efforts to commandeer the SEC’s disclosure regime. An effective disclosure regime for public companies is a tempting target for people who want information from companies for reasons other than deciding whether to invest. Attempts to co-opt the SEC’s disclosure program to serve non-investor constituencies is not new but has gained steam in recent years. Conflict minerals disclosure and CEO pay ratios are examples from Dodd-Frank. More recently, efforts to expand public company climate disclosure serve not only constituencies that seek to lower greenhouse gas emissions but also sellers of climate consulting services to increasingly over-encumbered public companies. Labor interests seek expanded human capital disclosures.[vii] Proponents of higher corporate taxes seek more granular disclosures of how much tax companies pay in each jurisdiction.[viii] If this trend continues, companies’ securities disclosures will bury information material to investors in an unwieldy catalog of responses to special interest groups’ demands. We all have special interests but endeavoring to stuff them all into securities filings undermines the reason we have such documents in the first place.[ix] The best course is for all of us to retreat to a place where materiality from the perspective of the reasonable investor is the sine qua non for disclosures. In this retreat, there is no shame. Materiality-based disclosure is one of the foundational strengths of the American securities regulatory regime. Although in some instances such disclosure may incidentally address the concerns of some special interest groups, important societal concerns are better addressed by political institutions and civil society.[x] Europe, where sustainability disclosure requirements are unmoored from materiality and companies are losing focus on corporate value maximization, offers us a cautionary tale.

In addition to guarding public company disclosures, as a third step, we need to stop pressuring asset managers to push public companies into contentious social and political issues. In 2003, the Commission required investment companies to disclose to the public a record of how they voted proxies relating to portfolio securities.[xi] The Commission doubled down on this requirement in 2022. Now funds have to disclose votes by category, such as “environment or climate,” “human rights or human capital/workforce,” and “diversity, equity, and inclusion.”[xii] Funds also have to disclose the number of shares voted and the number of shares loaned but not recalled and, therefore, not voted by a fund.[xiii] These disclosure requirements, while enabling fund shareholders to monitor fund voting, also make asset managers sitting ducks for pressure campaigns from social and political activists[xiv] and scrutiny by ESG rating providers.[xv] Fiduciary duty to the fund should be the only guiding principle for asset managers in deciding whether and how to exercise a vote, but this public disclosure requirement elevates voting and exposes it to scrutiny by third parties in a way that could interfere with the proper exercise of fiduciary duty. Relatedly, the Commission has failed to ensure that asset managers think through whether active engagement with companies comports with fiduciary duty to funds that do not have an active investment objective.

A fourth step in bringing companies back onto neutral territory is doing a better job protecting investors from having their resources diverted to deal with shareholder proposals that are not aimed at maximizing corporate value. Historically, shareholder proposals were focused on governance topics that had a direct relationship to the financial prospects of a company. These included measures such as the removal of classified boards, the adoption of poison pills, and the subsequent removal of those poison pills.[xvi] In the past decade, the number of shareholder proposals related to environmental and social issues has risen steadily.[xvii] The increased volume of pro- and anti-environmental and social proposals should not be mistaken for popularity among voting shareholders.[xviii] Sorting through the bluster is no small cost for companies, a point that my colleague Acting Chairman Uyeda has addressed well.[xix] Not only does each shareholder proposal impose a significant monetary cost, but it also imposes a much larger opportunity cost as management and the board of directors divert their attention away from the day to day business of maximizing corporate value to deal with the often picayune issues at the heart of shareholder proposals. When one shareholder makes a proposal, all shareholders incur the costs borne by the company.

To protect investors from these expensive corporate diversions, we should re-examine the ownership thresholds in Rule 14a-8 and other available tools to ensure that a proponent has some meaningful economic stake or investment interest in a company. A proponent with such a commitment is more likely to submit a proposal that is actually in the interest of the company. We also should take a fresh look at how Rule 14a-8’s consideration of social significance under two bases of exclusion has affected the number, type, and excludability of shareholder proposals. As a practical matter, questions outside of securities issues are necessarily outside of the staff’s expertise. As a logistical matter, arbitrating between companies and proponents is a tremendous drain on staff resources. As a constitutional matter, making decisions on highly contentious social and political matters outside of our securities laws usurps Congress.

A fifth way to shepherd public companies back to their more suitable flatland habitat would be for the SEC to refrain from using enforcement actions to override managerial decision-making. These actions may seem benign and unassailable at first glance—tighter corporate controls are good, right? But, if replicated, they will become a subtle mechanism for the Commission to insinuate itself into corporate management. Some might well argue that this has already occurred. For example, the Commission has taken an aggressively broad interpretation of Exchange Act Section 13(b)(2)(B)’s internal accounting controls provision.[xx] As Acting Chairman Uyeda and I noted in a dissent to one case, “The Commission’s attempts to convert an internal accounting controls provision into an ever-unfolding utility tool that magically converts every corporate activity into something the Commission regulates are inappropriate extensions of the agency’s authority.”[xxi] In another recent example of management through enforcement, the Commission used Rule 13a-15(a), which requires companies to have “disclosure controls and procedures,” to punish a company for “lacking controls and procedures . . . to collect or analyze employee complaints of workplace misconduct” given that it disclosed a risk factor “related to its workforce and how its ability to attract, retain, and motivate skilled personnel might materially impact its business.”[xxii] The Commission did not charge the company with making misleading disclosures. By requiring companies to establish disclosure controls for information that is not important for disclosure purposes, the Commission “seeks to nudge companies to manage themselves according to the metrics the SEC finds interesting at the moment.”[xxiii] As one law firm explained, this enforcement action “may signal continued and increased SEC effort to use internal controls requirements to address workplace activity not commonly associated with the business and financial performance at the heart of SEC disclosure rules.”[xxiv] Restoring the internal accounting controls and disclosure controls and procedures requirements to their important, but limited intended purposes is a change in the right direction to rein in the scope of enforcement actions.

A sixth step in bringing companies back to normal is for the Commission staff in our Division of Corporation Finance and Office of the Chief Accountant to re-double efforts to provide guidance to companies about the many disclosure issues that arise in the normal course of business. In the registration statement review process, staff should communicate early and often so new and seasoned issuers alike can have increased confidence in offering timelines. Of course, engagement on timing alone is not enough. The Commission also should encourage the expert staff to engage with public companies and their lawyers and accountants on difficult questions about the application of new and existing rules. This engagement should be dynamic and interactive, not formulaic. Commission staff time is well spent on these fundamental functions of a disclosure regulator, which in recent years have languished due to other Commission priorities.

A seventh step toward ensuring that comp