SEC’s Peirce criticizes California board-diversity bill

Sep 27, 2018
Commissioner concerned by focus on outside stakeholders in governance reforms

A member of the SEC has criticized efforts to boost the number of women on the boards of Californian companies via legislation, arguing that it is an example of a focus by governments on non-shareholders.

Stakeholder is certainly in the top 10 list of words that get bandied about Washington… [The term] is so popular precisely because it is so elastic,’ commissioner Hester Peirce says in a recent speech. ‘In the corporate context, however, that elasticity has some troubling implications. It is used to refocus corporate decision-makers on constituencies other than their shareholders. In the stakeholder-centric view of the world, a corporation and its directors owe a duty not just to shareholders, but to a broader group of stakeholders.’

If signed into law by governor Jerry Brown, the bill (SB-826) would require Californian companies and non-Californian public companies with headquarters in the state to have a minimum of one woman on their board of directors by the end of 2019. It would raise this minimum to two female directors if the company has five directors, or to three female directors if the company has six or more directors, by the end of 2021.

‘More women directors serving on boards of directors of publicly held corporations will boost the California economy, improve opportunities for women in the workplace and protect California taxpayers, shareholders, and retirees,’ the bill’s authors state.

Peirce notes this language, and that the bill cites evidence supporting the argument that companies with women on their boards perform better. ‘My point is not to dispute the evidence, but to suggest that companies looking out for their long-term value already have strong incentives to take that evidence under consideration along with all the other factors that may affect the company’s long-term value,’ she says.

The California legislation effectively forces companies it covers to consider all women as stakeholders, which is ‘a big group,’ the commissioner says.

‘Once we introduce the idea that a company must act in the interest of some subset of its stakeholders and condition the grant of a charter on its proper treatment of those deemed stakeholders, policymakers might be tempted to get this or that favored group included in the stakeholder definition,’ she adds. ‘Opening such a wide door introduces uncertainty and political influence into corporate operations.’

US corporate law is based on the notion that boards owe their main duty to the shareholders collectively, not to ‘an amorphous group of stakeholders. There is no compelling reason to overturn centuries of settled law, and there are many reasons not to,’ according to Peirce.

She notes that the issue of women on boards falls under the ESG umbrella, about which she expresses skepticism. ‘Many advocates of using ESG criteria cite data [supporting] the claim that companies that implement ESG-friendly policies outperform those that do not,’ she says. ‘Testing this hypothesis is tough since, although discussed as one set of criteria, in fact, ESG factors typically evaluate an eye-popping array of corporate behavior…

‘In considering what may contribute to a company’s success, pointing to gender diversity, concern for the environment and avoidance of sin products is so scattershot as to be useless. These factors simply have nothing to do with one another.’

One of the key arguments behind ESG investing is that it is ethical and good, but ethics and goodness are subject to interpretation, Peirce says: ‘In fact, while some ESG factors – such as some of those associated with the G part – track with conventional notions of good business, many seem to be included in the ESG rubric because they hew to what a select group of stakeholders believe to be good or moral behavior.’

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