On October 4, Penn’s Institute for Law and Economics (ILE) hosted a conversation on the present and future of corporate governance between Jay Clayton L’93, Chairman of the U.S. Securities and Exchange Commission (SEC), and the Honorable Leo E. Strine, Jr. L’88, Chief Justice of the Delaware Supreme Court. The event, “Orienting Corporate Governance to Generate Sustainable Growth: A Cooperative Discussion on Common Ground and Forging a Path Forward,” was held in the Fitts Auditorium.
Ted Ruger, Dean and Bernard G. Segal Professor of Law, made introductory remarks. Noting that the event took place during the Toll Public Interest Center’s Public Interest Week, Ruger emphasized that Justice Strine and Chairman Clayton, both alumni of Penn Law, were prime examples of the myriad pathways lawyers can take into public service during their careers.
Strine and Clayton “embody the highest sense of ideals that we’re trying to promote to all of our students this week, which is that all lawyers, whether they make their careers primarily in the public or private sector, should do a term in public service — giving back to the nation, or the state, or the world,” said Ruger. “It’s something that we’re really proud of when we see our alumni do that.”
Throughout the discussion, which was moderated by Lawrence Hamermesh, Executive Director of the ILE, Clayton and Strine addressed a range of subjects related to corporate governance, from shareholder voting on executive compensation to corporate disclosure requirements to “proxy plumbing,” which is the system of communication between companies and investors using proxy statements and proxy voting. Both Clayton and Strine noted that they spoke only about their own views, and not as institutional representatives of the SEC or Delaware Supreme Court, respectively.
Clayton emphasized that changes to corporate law and the structure of companies have altered the regulatory landscape in recent years. “The reality of governance today at public companies is fundamentally different from 15 years ago, and it’s a combination of factors,” he said, among them the lack of staggered boards, increased federal oversight of governance, and a change in the amount of shareholder engagement.
Both Clayton and Strine noted in particular the shift away from ownership of public company shares by individual, or “retail,” investors toward ownership by institutions like mutual funds.
“The fact is that the stockholders are not human beings now, they’re huge institutions,” said Strine. “The ordinary investor doesn’t get to own public company stocks — they own their 401k.” He applauded the SEC for recognizing this change in its regulatory agenda.
The discussion frequently turned to the role of regulations, particularly disclosure requirements, in pushing companies toward increased social responsibility.
“I would like to see more robust disclosure around how [companies] treat your workforce, what are the incentives you give your workforce, and frankly, the gain-sharing between ‘haves’ at the top and your workforce,” said Strine. He also advocated for increased corporate disclosures around flexible categories such as “environmental responsibility, legal compliance, [and] ethical compliance,” which would allow citizens and regulators to use the information to plan responses to corporate conduct.
Clayton pushed back against the notion of looking to increased corporate disclosures to advance issues outside the realm of corporate governance. “If what we’re trying to do is effect change in the way workers are treated, if that’s our goal, is the way to do it through a corporate disclosure system? Or is it through some other means?” he asked.
Strine acknowledged Clayton’s point, noting that some of the “sideways pressure” on corporate law to address issues like labor and climate change comes from the breakdown of existing institutions that are intended to tackle those problems more directly, such as the National Labor Relations Board and the Environmental Protection Agency.
“You can imagine why people may wish to have companies disclose more directly information about what they’re doing when you can’t trust the regulator to be faithful to its mandate,” said Strine.
As the discussion addressed the inequalities between retail investors and institutional investors, and between high-level corporate investors and managers and their employees, Clayton also pointed out a more global imbalance between the United States and other countries.
“We have 62 of the world’s hundred largest companies and we have 4.4 percent of the world’s population. We rarely talk about the competitive pressures that come from the fact that that is not sustainable,” said Clayton. Describing this as another “have” versus “have not” situation, Clayton argued that such global dynamics influence boardroom decisions just as much as the domestic issues that Strine had raised.
Nevertheless, Clayton argued, regulation of corporate governance in the United States continues to be effective because of the focus on enforcement of the existing laws, in which the SEC plays a crucial role. Comparing the United States to systems he has observed in other countries, Clayton offered high praise for its corporate regulatory regime.
“It’s the gold standard by orders of magnitude when it comes to market function, disclosure to investors, the tangible quality of the numbers, [and] the auditing and accounting,” he said. “We have our problems, but compared to other places, it’s not even close.”