SEC Takes On Short- Vs. Long-termism Dilemma

By Eve Tahmincioglu             May 21, 2019

Securities & Exchange Commission Chairman Jay Clayton talks to Directors & Boards about bolstering long-term thinking, ESG, quarterly reporting, and disclosure.

This week, the Securities & Exchange Commission (SEC) Chairman Jay Clayton announced he has directed the agency to hold a roundtable this summer to delve into the impact of short-termism.

While a date and agenda for the event have yet to be finalized, Clayton tells Directors & Boards that the event will “explore whether short-termism should be a concern and, if so, what are its causes and what can and should be done from a regulatory perspective in response.”

The topics of short- vs. long-termism; environmental, social and governance; and disclosures are the focus of an in-depth interview with Clayton that will appear in the upcoming issue of Directors & Boards.

Here’s an excerpt:

Q. Short-termism is seen as a major factor undermining corporations and the greater community today, and it’s something you’ve been vocal about. How do you see short-termism impacting what you’ve said is the SEC’s mission to protect investors; maintain fair, orderly and efficient markets; and facilitate capital formation?

A. If by short-termism you mean companies, in response to market and other pressures, pursuing short-term objectives to the detriment of long-term performance, it bothers me. It principally bothers me because that type of short-term perspective generally is inconsistent with the investment objectives of our Main Street investors. In addition, if our public capital markets are overly short-term focused, that perspective may undermine capital formation in our public markets.

Q. Some critics have argued that the SEC has been dropping the ball when it comes to disclosure mandates needed for information that could impact a company longer term, especially ESG disclosure. You’ve been quoted as saying that ESG disclosure by publicly traded companies should not be required. Do you still believe this is the case and why?

A. As an overarching principle, I believe our disclosure rules and guidance, and our issuers, should focus on the information that a reasonable investor needs to make informed investment and voting decisions. This perspective often is referred to as the “materiality” based approach to disclosure regulation. This has been the commission’s perspective for 84 years and it has served our investors and markets very well. Keeping that perspective in mind is critical to our mission. More specifically, and turning to your ESG question, we need to keep in mind that not all ESG matters are created equal — in fact, they are quite different and are different in multiple ways.

Q. What is the SEC doing under your leadership to combat short-termism and boost long-term thinking in corporate America?

A. We recently announced that our staff will hold a roundtable this summer that will seek to explore whether short-termism should be a concern and, if so, what are its causes and what can and should be done from a regulatory perspective in response. We also intend to facilitate conversations on whether there are market-based initiatives and regulatory changes that could ensure an appropriate balance between short-term and long-term perspectives in our public capital markets.

The SEC’s summer roundtable will address many of these issues. Clayton says they will include:

• The role, if any, that short-termism plays in the declining number of public companies. In particular, examining how the pressure on public companies to take a short-term focus in our markets may discourage private companies from going public could provide valuable insight into how to make our public markets more attractive and increase investment options for Main Street investors.

• Our ability to reduce burdens for companies while facilitating better disclosure for long-term Main Street investors. For example, I am interested in exploring whether the information typically included by companies in earnings releases could be allowed to satisfy certain quarterly reporting obligations and whether there are ways that quarterly disclosures could be streamlined. This is particularly the case in the first fiscal quarter when the quarterly report often comes closely on the heels of the annual report.

• The potential for certain categories of reporting companies, such as smaller reporting companies, to be given flexibility to determine the frequency of their periodic reporting.

• Market practices that could be oriented to encourage longer-term thinking and investment at public companies. For example, it would be informative to explore the extent to which certain activist practices, such as “empty voting” (e.g., acquiring voting rights over shares but having little or no economic interest in the shares), are factors that drive short-term focus.

If you’re interested in attending the SEC roundtable contact SEC staff at roundtable@sec.gov.