SEC Commissioners Weigh-In on Corporate Governance and AI Disclosures
Commentary by Steven Lofchie
In separate remarks before the SEC Investor Advisory Committee ("Committee"), SEC Chair Paul Atkins and Commissioners Hester Peirce and Caroline Crenshaw offered divergent views on the future of corporate governance, shareholder engagement, and the regulatory approach to artificial intelligence.
Chair Atkins and Commissioner Peirce advocated for a regulatory framework that prioritizes the attractiveness of U.S. public markets and resists prescriptive mandates. Chair Atkins stated that a top priority is making public company status an "attractive proposition" by returning to core fundamentals. He insisted that "the SEC’s role is not to resist the market’s transition to on-chain capital markets, nor to force it into legacy definitions, nor to push innovators offshore. Rather, it is to allow market participants to operate and innovate subject to clear guardrails that protect the public, ensuring that U.S. markets remain the most dynamic, transparent, and trusted in the world."
Commissioner Peirce criticized the overuse of shareholder proposals, arguing that while shareholders have a right to a "soapbox," they do not have the right to force others to pay for it. She supported limiting SEA Rule 14a-8 ("Shareholder proposals") eligibility to shareholders whose interests align with the corporation’s financial returns and endorsed the Commission’s recent policy statement acknowledging that mandatory arbitration provisions are permissible. Commissioner Peirce also voiced support for mechanisms that facilitate "standing proxy voting instructions," suggesting they could reduce costs associated with achieving a quorum.
Commissioner Crenshaw criticized these developments, characterizing them as a "seismic shift" in the corporate governance landscape occurring without notice-and-comment rulemaking or economic analysis. She listed several recent actions—including the rescission of Staff Legal Bulletin 14L ("Shareholder Proposals"), the allowance of mandatory arbitration clauses, and changes to no-action relief processes—as evidence of a deregulation effort that lopsidedly benefits management. Commissioner Crenshaw argued that these changes reduce accountability and deprive investors of avenues for redress, noting that the cumulative impact of these policy shifts has not been measured. She specifically challenged the reliance on "speculations of certain Delaware practitioners" to exclude proxy proposals and the issuance of guidance that chills investor communications.
Regarding artificial intelligence, the Commissioners debated the necessity of specific disclosure requirements. Chair Atkins argued against adopting prescriptive rules for every "new thing," asserting that existing principles-based rules regarding materiality are sufficient to inform investors of AI’s impact on financial results and business models. Commissioner Peirce questioned the Committee’s draft recommendation for standardized AI disclosures, suggesting that "uneven" disclosures reflect the reality that AI adoption varies significantly across industries. She warned against requirements that might "nudge" corporate behavior, such as mandating board oversight of AI where it may be superfluous and advised against the SEC attempting to define the limits of emerging technologies. Conversely, Commissioner Crenshaw praised the Committee’s recommendation on AI disclosures as a helpful step toward improving market transparency.
Commentary
Commissioner Crenshaw describes the SEC's actions as favoring management over shareholders. Another way of describing the SEC's actions is that they favor shareholders over political actors.
It is not a victory for shareholders when political activists holding an immaterial number of shares in a company are able to force proxy votes on matters that are not economically material to the company. Such actions are not really intended to be a victory for the shareholders; they are intended to achieve a non-economic or uneconomic goal, perhaps by creating a threat of damage to corporate marketing or reputation. One can reasonably argue that such political efforts should be protected by SEC regulation. But any defense of them must acknowledge that their purpose is to use proxy votes as a means to achieve political (or ethical) ends, not financial ones. An argument that they are intended to benefit shareholders simply misses the reality of their purpose.
A good illustration of this is the shareholder activism of People for the Ethical Treatment of Animals ("PETA"), which is a reasonably frequent participant in proxy battles. People may be sympathetic to PETA's goal of protecting animals. But PETA is not a "shareholder" organization; it is not fighting for shareholders against management. PETA's website boasts of its successes, but these are not successes in raising shareholder value; they are successes in furthering PETA's goals with respect to the treatment of animals. Accordingly, if Commissioner Crenshaw wants to make the case for the SEC's facilitation of proxy battles over political/ethical issues, she may want to start with the true motivations of these activists rather than suggesting that they preserve some balance between managers and shareholders.