Friday, May 01, 2015

Stein Hopes to Explore Problems with Short-Termism, Lack of Board Diversity

By Amanda Maine, J.D.

SEC Commissioner Kara M. Stein shared her thoughts on “short-termism” and the composition of boards of directors at the Treasury Department’s Corporate Women in Finance Symposium. Both of these issues should be explored as part of a larger policy framework, she said.

Short-termism. Stein noted that debate exists about whether short-term pressures from investors and from markets in general compel companies to look narrowly at the short term, including being overly focused on quarterly earnings targets. In particular, she observed that companies are using their cash resources to buy back shares at record numbers, resources that could have been used to invest in longer-term projects. Stein finds it “troubling” that using these buybacks, which have the effect of increasing a company’s Earnings Per Share by reducing the number of outstanding shares, could potentially have the effect of mortgaging the future of companies, their employees, and other stakeholders at the expense of making short-term EPS targets.

Stein acknowledged that other researchers have disputed the idea that short-term targets are at odds with longer-term performance. However, she advised that it is an issue that should be discussed and that the SEC and other federal regulators have a role to play in examining behavior that affects long-term outcomes for American businesses.

Boardroom diversity. Stein also observed that some research has found that having more inclusive boards of directors can benefit a company, including helping boards avoid groupthink. Studies have also shown that boards with above-average levels of gender diversity had fewer instances of bribery, corruption, and other negative corporate occurrences, she said. If diversity in board rooms helps companies, why aren’t boards of directors more diverse, Stein wondered.

Stein suggested that one way to increase boardroom diversity is to increase shareholder engagement. She noted that shareholders who vote by proxy are generally limited either to management or shareholder-proponent board nominees, while those who attend annual meetings in person can vote for any individual nominated. Perhaps a universal proxy ballot could repair this incongruity while providing a better choice for all shareholders, with the possible added benefit of gaining a more diverse board. She encouraged the audience to be part of the ongoing conversation with the SEC and companies to meet shared goals of strengthening the economy and promoting innovation.