SEC Commissioner Stein On “Short-termism” and Corporate Boards

Two issues of continued importance to shareholders and the U.S. capital markets were recently discussed by SEC Commissioner Kara Stein. One the Commissioner called “short-termism” while the other focuses on the composition of corporate boards of directors. Commissioner Kara M. Stein, “Toward Healthy Companies and a Stronger Economy,” delivered at the U.S. Treasury Department’s Corporate Women in Finance Symposium (April 30, 2015)(here).

The first point raised by the Commissioner centered on “short-termism” and its impact on the capital markets. Recently, many commentators have addressed the question of short-termism in the context of corporate stock buybacks. A series of statistics presented by Commissioner Stein highlight the issue: “In 2004, companies announced plans to repurchase $230 billion in their own stock. Last year, total shareholder payouts (including $350 in dividends and $553 billion in buybacks) amounted to 95 percent of the companies’ profits, up from 88 percent and 72 percent the two years previous. Companies are on track this year to spend over 100 percent of their corporate earnings on total payouts. Over the last decade, 90 percent of the companies in the S&P 500 index bought back their own stock, using over $3.4 trillion to do so.”

While there may be many reasons for this phenomenon, including the tax code, quarterly earnings targets and monetary policy, the real question is the impact on capital formation, innovation, the growth of companies and job creation. To be sure, stock buybacks do increase EPS. That in turn could help compensation targets but “it would be troubling if companies were mortgaging their futures – and the futures of their employees and other stakeholders – just to meet short-term quarterly EPS targets” the Commissioner noted.

On the other hand, some dispute the notion that short term investment horizons conflict with longer-term performance, Commissioner Stein stated. In support of this point she cited a forthcoming paper by Lucian A. Bebchuk, Alon Brave and Wei Jiang titled “The Long-Term Effects of Hedge Fund Activism” which will be published in the Columbia Law Review, June 2015.

Commissioner Stein then shifted to her second topic, corporate governance, focusing on the question of board composition and specifically diversity. Diversity on the board helps avoid “groupthink” which is a priority when success is keyed to risk management. One survey found that gender diverse boards resulted in firms that had fewer instances of bribery, corruption, fraud and shareholder battles while other studies have concluded that boards with more women outperform those which are less diverse as measured by sales and return on equity. Yet statistics demonstrate that few boards are diverse, although qualifications should be the key issue, the Commissioner noted.

More shareholder involvement might lead to a change in board composition. This could occur if there was a universal proxy ballot. This is because at present “only shareholders who attend the meeting in person can vote for any individual nominated. However, shareholders who vote by proxy are generally limited to choosing from among either the management’s nominees or the shareholder-proponent nominees. They usually cannot pick and choose among the two,” according to the Commissioner (emphasis original).

In the end the key is to ensure that companies large and small continue to be strong and healthy in the future. This can be achieved by “bringing together thought leaders from many different parts of the government and the private sector . . .” Commissioner Stein stated.

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