On Monday, a SEC announced that John Coates has been allocated Acting Director of Corp Fin. He has been a John F. Cogan Professor of Law and Economics during Harvard University, where he also served as Vice Dean for Finance and Strategic Initiatives. If that name sounds familiar—even if we haven’t been one of his students—it competence be since he infrequently pops adult in Matt Levine’s column in Bloomberg as a author of “The Problem of Twelve,” that he describes as a “likelihood that in a nearby destiny roughly twelve people will have unsentimental energy over a infancy of U.S. open companies.” Beyond that, he has been a unequivocally active member of a SEC’s Investor Advisory Committee, and Committee recommendations he has authored competence give us some discernment on his viewpoint on issues.
In addition, Acting Chair Allison Lee has named Satyam Khanna to a new post as comparison routine confidant for meridian change and ESG, signaling, as we have discussed repeatedly, Lee’s continued thoroughness during a SEC on ESG issues, such as meridian and diversity. (See, e.g., this PubCo post and this PubCo post.)
In his paper, “The Problem of Twelve,” Coates argues that “[t]hree ongoing mega-trends are reshaping corporate governance: indexing, private equity, and globalization. These trends bluster to henceforth entangle business with a state and emanate organizations tranquil by a tiny series of people with unrivalled power.” With courtesy to index funds, for example, he contends that many analyses have overlooked
“a first-order consequence…that is, a wealthiest organizations in a world, with some-more income than many states—will shortly be clever in a hands of a dozen or fewer people. Conventional analyses have emphasized that a people who control index supports have diseased incentives to use that control….But required analyses incorrectly assume that index supports contingency make poignant expenditures to change companies and slight economies of scale in practice of power. They also slight a energy of control threats to discipline, and non-wealth application subsequent from power. Index supports increasingly possess a ‘median vote’ in corporate contests. That gives them an ability, even if contingent, to make essential decisions opposite many open companies. Unless law changes, a outcome of indexation will be to spin a judgment of ‘passive’ investing on a conduct and furnish a biggest thoroughness of mercantile control in a lifetimes. More fundamentally, a arise of indexing presents a sharp, general, domestic plea to corporate law. The awaiting of twelve people even potentially determining many of a economy poses a legitimacy and burden emanate of a initial order—one competence even call it a tiny ‘c’ inherent challenge.”
Coates observes that index supports practice change in 3 ways: first, they “form ‘policies’ per several kinds of decisions that a play and managers of their portfolio companies contingency make.” As they accommodate with member of other institutional shareholders, they “achieve poignant coordination over many if not all topics on that shareholders customarily vote.” The second channel of change is by rendezvous with their portfolio companies. The “third channel of influence—control contests, romantic campaigns, and mergers—[is] where a indexed supports have their biggest intensity for influence….Index supports are increasingly a pivotal votes in such contests,” generally “if a tip indexed supports take identical positions.” The “bottom line of this influence,” he continues, “is unequivocally opposite than what a reign ‘passive’ investment implies. Rather than blindly selecting bonds in their index and afterwards ignoring them, index account managers have and are increasingly regulating mixed channels to change open companies of all sizes and kinds. Their views on governance issues, their opinions of CEOs, their desires for change during sold companies, their response and evaluations of restructuring or recapitalization proposals from sidestep account activists—all of these matter greatly to a proceed a core institutions in a U.S. economy are operating.”
As Levine comments on Coates’s analysis: “The thing is, though, that if we find a ‘Problem of Twelve’ arrange of creepy and unsettling when practical to issues of corporate governance and profitability, isn’t it even weirder when practical to, like, a environment, or a amicable agreement for U.S. workers? …What if immeasurable open companies are a many effective area of domestic energy in a universe today, and what if Larry Fink is one of a many successful people during a lot of large open companies [see this PubCo post], and what if he decides to use his change and those companies’ energy to do things that would once have been a shortcoming of governments? What if Larry Fink has been inaugurated to a position of immeasurable domestic power, not by a out-of-date resource of people going to a polls and giving him their votes, though by a new, late-capitalist resource of people giving him their income to manage?” (See this PubCo post.)
Proxy plumbing. In 2019, a SEC’s Investor Advisory Committee voted to contention to a SEC revised recommendations, authored predominantly by Coates, that addressed “proxy plumbing”—the duds of troublesome problems compared with a infrastructure ancillary a substitute voting system. (See this PubCo post.) It is widely famous that a stream complement of share reign and intermediaries is a byzantine one that accreted over time and positively would not be a complement anyone would emanate if starting from scratch. There is also extended agreement that a current substitute plumbing system is inefficient, ambiguous and, all too often, inaccurate. As a recommendations observed, underneath a stream system, shareholders “cannot establish if their votes were expel as they intended; issuers can't fast establish a outcome of tighten votes; and a legitimacy of corporate elections, that count on accurate, reliable, and pure opinion counts, has been called into doubt.” For a many part, a recommendations would not have reinvented a substitute voting system, instead targeting improvements that were deliberate radically “low-hanging fruit.” However, there seemed to be a accord that eventually some-more would need to be done. The Committee endorsed that a SEC
- require end-to-end vote confirmations for end-users of a substitute system, potentially commencing with a commander involving a largest companies;
- require “all concerned in a complement to cooperate in reconciling vote-related information, on a unchanging schedule, including outward specific votes, to yield a basement for invariably uncovering and remediating flaws in a elementary ‘plumbing’ of a system”;
- conduct studies on share lending (to know a border to that share lending “contributes to errors, over-votes or under-votes, and either a outcome of share lending on voting entitlements is effectively disclosed to investors”) and on financier views on anonymity (to find out either so many investors unequivocally wish to be unknown “objecting profitable owners”—which effectively precludes proceed association contact—or either they select to be OBOs due to difficulty or incentives of intermediaries); and
- adopt a due ‘universal proxy’ rule, with a medium changes that would be indispensable to residence objections that have been lifted to that proposal. (See this PubCo post.)
Interestingly, there was a lot of contention about substitute plumbing, including a roundtable, during former SEC Chair Jay Clayton’s reign (see, e.g., this PubCo post), though not many movement taken. Was a problem too overwhelming? Will Coates now find to pierce these changes forward?
Shareholder proposals/proxy advisors. In 2020, a Investor Advisory Committee voted to contention to a SEC a recommendation, again authored predominantly by Coates, regarding SEC order proposals on substitute advisory firms and shareholder proposals. The recommendation was rarely vicious of both proposals as doubtful to reliably grasp a SEC’s possess settled goals, and eventually suggested a SEC to rethink and republish a proposals and recur a associated superintendence it had issued. (Apparently, Coates’s initial breeze of a recommendations was a bit some-more oppressive than a chronicle approved, as he indicated to a Committee that a stream chronicle reflected estimable revisions, including stealing a word “failure” throughout.) The recommendation contended that a proposals were roughly fatuous but addressing in together some-more elementary substitute plumbing issues (as a Committee had formerly recommended, as discussed above) and that a SEC had not sufficient identified a underlying problems that were dictated to be remedied, supposing a sufficient cost/benefit research or discussed reasonable alternatives that competence have been proposed. The recommendation also deliberate a SEC’s offer per shareholder proposals to be unsound in unwell to plead a value of shareholder proposals, including trends in auspicious opinion formula (which had augmenting over time). Nor did a offer sufficient investigate a forms of proposals that would be released underneath a revised thresholds and a value of those offer to shareholders. In addition, a recommendation argued that a offer did not sufficient cruise a impact of a due changes on smaller shareholders or intensity unintended consequences. And again, a recommendation was vicious of a SEC’s disaster to plead alternatives. While Coates did not intent to a idea of augmenting a eligibility thresholds, he suspicion a SEC should have been some-more incremental in a proceed and afterwards complicated a impact before lifting a thresholds incrementally again.
The Coalition for Sensible Safeguards identified a new shareholder offer order and a new substitute confidant order as intensity possibilities for movement underneath a Congressional Review Act, that provides that recently finalized manners competence be jettisoned by a elementary infancy opinion in Congress and a Presidential signature. Both of these rulemakings were a theme of clever dissents from a Democratic SEC Commissioners. And as discussed in this PubCo post, a SEC’s Investor Advocate also endorsed annulment of both of these rulemakings. (See this PubCo post.) Will Congress yield an event for Coates to correct these rulemakings—or maybe pitch them altogether?
Human capital. The tellurian collateral avowal rulemaking is a opposite story. In 2019, a Committee voted to recommend that a SEC cruise commanding tellurian collateral government avowal mandate as a partial of a Disclosure Effectiveness Review and avowal modernization project. The recommendation was once again drafted by Coates. However, a recommendation was utterly flexible, indicating that a avowal mandate competence be singular to a many basic, quite principles-based disclosure, seeking companies to “detail their HCM policies and strategies for rival advantage and criticism on their swell in assembly their corporate objectives.” Alternatively, a mandate could be some-more prescriptive, mandating use of specific metrics, some of that companies competence already use to magnitude a success of their HCM strategies and investments. For example, a recommendation suggested that Reg S-K, Item 101, could be stretched to need some-more information about a relapse of workers into full-time, part-time and fortuitous categories, as good as pivotal opening indicators, such as rates of turnover, inner sinecure and promotion, safety, training, farrago and customary consult measures of workman satisfaction. Discussion of germane association policies on these topics competence be included. Item 101 also requests information about rival conditions, that could be interpreted to request to “productivity and rival advantages of a issuer’s worker population, relations to competitors and accessible pools of labor.” Through a SEC criticism process, a staff could find to bleed information about a education, knowledge and training of a workforce. In addition, substitute avowal could residence how tellurian collateral is being “incentivized and managed” by augmenting executive comp avowal with summaries of element information about broader workforce remuneration and incentives, such as factors deliberate in compensate and graduation decisions and organizational structures associated to HCM.
As it incited out, in adopting a tellurian collateral avowal requirement, a SEC went particularly principles-based. However, Clayton remarked that, while a SEC is not prescribing “specific, firm metrics,” underneath a principles-based approach, he did “expect to see suggestive qualitative and quantitative disclosure, including, as appropriate, avowal of metrics that companies indeed use in handling their affairs.” (See this PubCo post.) Presumably, Corp Fin, underneath Coates’s direction, will be reviewing a disclosures to consider a turn of correspondence and maybe providing superintendence to assistance strength out a principles-based requirement.