Donald Trump tilts balance of power from investors to CEOs
His call to scrap quarterly reports comes as Securities and Exchange Commission mulls curbing shareholder lawsuits
DONALD Trump’s administration was shifting the balance of power from shareholders to company bosses even before the president on Monday (Sep 15) called for quarterly earnings statements to be ditched.
In a little-noticed announcement last week, the Securities and Exchange Commission (SEC) said it would consider ways for companies to limit the risk of shareholder lawsuits, paving the way for disputes to be heard privately, rather than in the spotlight of the court system.
Days later, the president called for the SEC to drop rules that have been in place for decades – specifically those that require most public US companies to disclose their financials once every three months.
The proposals come on top of an SEC decision on Monday that handed oil major ExxonMobil a powerful new tool to harvest shareholder votes in favour of management, limiting the power of activist investors.
The moves, part of Trump’s broad agenda to slash regulations, could reduce transparency and erode the advantages that have drawn investors into the world’s biggest and deepest capital markets, say some shareholder advocates.
John Coffee, professor at Columbia Law School, said: “The US has long been known for its lower cost of capital, and I think that is down to its higher level of transparency and the ability of shareholders to go to court for remedies.”
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The SEC will on Wednesday consider whether to allow companies to go public if their articles of incorporation include mandatory arbitration of securities law claims, according to an agenda posted on the regulator’s website last week. That could move disputes out of the courtroom.
The SEC also this month posted a “unified agenda of regulatory and deregulatory actions” that it plans to pursue, which include reforms of the rules for shareholder proposals, designed to “reduce compliance burdens” for companies, and a “rationalisation of disclosure practices”.
Amanda Fischer, policy director at Better Markets, a non-profit that works to restore layers of protection between hardworking Americans on Main Street and Wall Street’s riskiest activities, said: “Decades of shareholder rights are under threat due to a multipronged legal and regulatory assault driven by corporate management and their champions in the White House and at the SEC.”
“The administration is more focused on protecting corporate management than empowering the actual owners of corporations – shareholders,” said Fischer, a former chief of staff to Gary Gensler, who chaired the SEC under Joe Biden’s administration.
Investor groups and advisers to corporate America said they expected the SEC to search broadly for disclosure rules to cut, and that it would consider reducing reporting burdens on smaller companies in particular.
Paul Atkins, who was sworn in as SEC chair in April, has signalled he would seek changes to the Gensler-era expansion of executive compensation disclosures, which earlier this year he called a “Frankenstein patchwork of rules”.
His other early actions have included scrapping the SEC’s proposed climate-disclosure rules. He also recently told Financial Times that he planned to take a different approach to enforcement, giving businesses notice of any technical violations before regulators “bash down their door”.
The SEC told FT it would prioritise consideration of Trump’s plan to reduce the frequency of corporate earnings statements from every three months to every six – an idea the president had also floated in his first term.
“At President Trump’s request, chairman Atkins and the SEC are prioritising this proposal to further eliminate unnecessary regulatory burdens on companies,” a spokesperson said.
The president sparked a lively debate with his proposal, which he said “will save money and allow managers to focus on properly running their companies”.
Some prominent investors disagreed, as did the leading group representing institutional shareholders.
“It’s fair to criticise investors for their short-termism,” said Carson Block, head of Muddy Waters, the prominent short seller. “However, reducing reporting frequency diminishes transparency any way you cut it.”
He added the move would specifically disadvantage smaller investors because larger entities have vast troves of alternative data, “such as credit card purchase data, which would provide them even more of an edge in a semi-annual reporting market”.
Jeff Mahoney, general counsel at the Council of Institutional Investors, said “the requirement to file quarterly financial reports is a key element of the timely and accurate information that underpins the quality and efficiency of the US capital markets”.
But Rob Arnott, founder of asset management group Research Affiliates, said he backed the president’s desire to foster longer-term thinking at public companies.
“Having to file so many reports is unhelpful, particularly for small companies,” he said. “One concern may be that investors miss out on red flags. Pardon me, but a lot of people miss out on red flags even with quarterly reports.”
Republican moves to roll back disclosure rules are not limited to the Trump administration. In the House of Representatives, the appropriations committee proposed withholding funding for the US accounting standards setter unless it withdraws rules requiring businesses to reveal the amount of tax they pay in specific countries.
Corporate advisers cheered Monday’s SEC decision to allow Exxon to introduce a new system for shareholder elections that would automatically vote retail investors’ shares in line with management recommendations, if they opt in.
The system, expected to be copied by other large companies, creates a block of shares that can be voted in favour of management if they come under assault by activist investors demanding a board shake-up.
“I think this is very creative teamwork between the issuer side and the regulatory side,” said Marc Trevino, co-head of Sullivan & Cromwell’s corporate governance practice, which often defends companies against activists. Considering allowing companies to force shareholder disputes into arbitration was in the same vein, he said.
“This SEC has indicated it is prepared to be creative, and I bet you will see more steps like this from the commission.” FINANCIAL TIMES
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