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An introduction to the symbiotic relationship between corporate america and the united states

In particular, I would like to thank Professors [Anat] Admati and [Joe] Grundfest for extending to me such a warm welcome. Before I go further, I must state that the views I express today are my own, and do not necessarily reflect those of my fellow Commissioners or the SEC staff.

Tonight, I want to talk to you about something that has been vigorously debated in recent years: What is, and what should be, the role of the corporate shareholder?

In the spirit of being in California, this debate could be summarized as follows: Are shareholders merely extras in the corporate movie? Or are they lead actors that need to be empowered so that they can successfully play their roles? However, as most people in this room know, it is actually much more complicated than that.

It is not, and should not be conceptualized as, a binary choice. When a company, its management, its shareholders, and its employees work together, companies tend to be more resilient and prosperous. In turn, this benefits companies, their corporate stakeholders, and the economy as a whole.

Corporations help grow our economy, provide well-paying jobs, and provide earnings to investors saving for retirement, college, or a new home. Many companies, whether small or large, are helping to drive our society forward, developing new technologies that are raising our living standards, improving our environment, and lengthening our life span.

Corporations hold some of our most precious assets, such as medical histories, consumer bank account information, addresses, and other sensitive information.

They also are central players in some of our most immediate problems, such as global warming. Corporations have shaped, and will continue to shape, our society, our identities, and our relationships with one other. Pretty heady stuff, to be sure, but extremely important. Not only from an academic point of view, but from a practical and policy point of view, as well.

  1. What is, and what should be, the role of the corporate shareholder? Could it result in a company putting on blinders that can affect its long-term bottom line?
  2. The bee-flower relationship is integral to our entire food chain, and our larger ecosystem.
  3. An interest example of how the "costs" of private activities are "socialized" that is, passed on the public as a whole is the study of automobiles and property taxes in Milwaukee. In turn, this benefits companies, their corporate stakeholders, and the economy as a whole.
  4. Many companies are also utilizing technology to better facilitate engagement with their shareholders. This new revolution comes with many benefits—speed, efficiency, and innovation, to name only a few.

One example of mutualism is the relationship between bees and flowers. Bees fly from flower to flower gathering nectar to make food. By flying from flower to flower, bees pollinate the plants on which they land. Bees get to eat, and the flowering plants get to reproduce. Bees help plants grow, thus supporting other animals, including us humans. The bee-flower relationship is integral to our entire food chain, and our larger ecosystem.

The relationship between a company and its shareholders is rooted in a similar form of mutualism. Shareholders invest their savings or capital in a company. The company then deploys the capital to fund its operations. This corporation-shareholder relationship is likewise part of a larger ecosystem. When all goes well, more employees and managers get hired, and the company produces more products or provides more services, all of which benefits the entire economy.

Unfortunately, the relationship between corporations and their shareholders may be moving away from its origins and becoming less mutualistic. This, I believe, may harm companies and their shareholders, as well as those who depend on the health of the corporation-shareholder relationship. So, how do we restore mutualism in the relationship upon which our corporate ecosystem is based? From the late-1700s to the mid-1800s, corporations started to flourish in the United States.

While this transition created certain efficiencies, [7] it also in many cases separated the ownership of the company from the management of the company. Instead of being in the midst of an industrial revolution, we are in the midst of a digital revolution.

This new revolution comes with many benefits—speed, efficiency, and innovation, to name only a few. Coupled with these benefits, however, an introduction to the symbiotic relationship between corporate america and the united states also some risks.

I think if we focus on the strengths of the American corporate form, we can successfully reimagine the corporation-shareholder relationship for the Digital Age. I would like to discuss a few examples of how, in modern corporate governance, the concept of mutualism can help us think through the path forward for corporations, their shareholders, and the larger corporate ecosystem. Cyberthreats As we all know, the digital transformation is providing both companies and shareholders with tremendous opportunities.

However, one of the biggest challenges facing corporations and their shareholders, their employees and consumers, and our economy as a whole, is cybersecurity. Unfortunately, corporate disclosures are far from robust and largely consist of boilerplate language that fails to provide meaningful information for investors.

Companies and their intermediaries tend to view cyberthreats as a technology problem instead of, more appropriately, a business risk.

  • Corporations and shareholders will both benefit from greater transparency and focus on the risks related to unintended data loss and the collateral consequences;
  • But they can only help if they are heard.

As we have seen time and time again, cybersecurity, and the related threats of unintentional loss of data, is a governance challenge for all of us, and it requires a change in culture and approach. Many shareholders seem to understand this and have been urging, and continue to urge, companies to engage.

Regulators are certainly not immune from facing these challenges. Once he was informed, Chairman Clayton immediately launched an investigation into the breach and has focused the Commission and the staff on improving our risk management framework. Companies, their managers, their boards, as well as their regulators, all need to do a better job in recognizing and addressing the significant risks that can result from the loss of data.

Breaches of security measures can result in theft, reputational harm, or the loss of intellectual property.

  • By flying from flower to flower, bees pollinate the plants on which they land;
  • Many shareholders seem to understand this and have been urging, and continue to urge, companies to engage;
  • Could it result in a company putting on blinders that can affect its long-term bottom line?

Simply put, the unintentional loss of data may have material effects on companies. Slowly, regulators around the globe are stepping up to the challenge of issuing data protection laws and regulations. The approach to these issues continues to evolve with the changing landscape. To be sure, some companies are focused on cyberthreats and recognize their potential economic threat.

But companies need to do more than simply recognize the problem. They need to heed the calls of their shareholders and treat cyberthreats as a business risk. Corporations and shareholders will both benefit from greater transparency and focus on the risks related to unintended data loss and the collateral consequences. Board Composition The composition of corporate boards provides another example of how the concept of mutualism is informative.

Boards can and should be a bridge to investors, but too often they are a wall. Board composition is vitally important as directors play a meaningful role in helping companies make productive investments and good decisions going forward. Gender diversity on boards provides a notable example.

This is not about making people feel good—it is about dollars and cents. Studies suggest that women may be better monitors of executives, a central function of boards of directors.

THE STATE AND THE ECONOMY

Shareholders, too, expect the companies they own to have diverse board membership. For example, State Street Global Advisors [30] and BlackRock [31] have adopted policies or guidance with respect to increasing gender diversity on boards, and indicated their willingness to use their voting power to effect change, if necessary. Yet, despite the documented benefit of diverse boards, many board members do not believe that board diversity enhances company performance.

Although we have come a long way since the 18th Century, we still have a long way to go. How can technology help this process? Can it be used to better connect a company and its board with its shareholders? How can a corporation capitalize on mutualism and benefit from the best ideas of its shareholders for the benefit of all? As owners of a company, shareholders actually care about corporate practices of all types and how they affect the bottom line—from strategic plans to employee relations to executive compensation, and much more.

Though the decision to engage institutional shareholders may simply be a matter of numbers, what are the long-term effects on the company of this sort of narrow shareholder engagement? Could it result in a company putting on blinders that can affect its long-term bottom line? I believe that we need to get back to a more mutualistic relationship in order to properly answer that question.

Dual-Class Capital Structures Another place where the concept of mutualism needs to be considered is in regard to dual-class capital structures, where certain shareholders are starting to be disenfranchised by design. As you know, in typical dual-class capital structures, corporate insiders receive common stock with multiple votes per share while public shareholders receive shares with one vote per share.

And we all have heard about Snap and its IPO of non-voting shares in 2017. Where is the symbiosis? Can investors afford not to invest in another Google, even if they do not agree with the share structure? What leverage do they have? While some say dual-class capital structures are designed to prevent a takeover or shareholder activism, they also may provide a means to evade management and board accountability. Structures where a minority of insiders lock out the interests and rights of the majority may also have collateral effects on our capital markets.

  1. In turn, this benefits companies, their corporate stakeholders, and the economy as a whole.
  2. Pretty heady stuff, to be sure, but extremely important.
  3. Dual-class capital structures, in effect, turn the mutualism underlying the corporation-shareholder relationship on its head.
  4. They may be harmful not just for those companies, their shareholders, and their employees, but for the economy as a whole.
  5. Unfortunately, corporate disclosures are far from robust and largely consist of boilerplate language that fails to provide meaningful information for investors.

They may be harmful not just for those companies, their shareholders, and their employees, but for the economy as a whole. Dual-class capital structures, in effect, turn the mutualism underlying the corporation-shareholder relationship on its head. How can we restore the mutualism that serves as the foundation for the corporation-shareholder relationship, and that has benefited companies, their shareholders, and the economy as whole since the 1700s?

Shareholder empowerment is key. As I have discussed tonight, the benefits of shareholder involvement are not abstract. Shareholders often fight for corporate values—such as diverse boards—that empirically have positive, direct effects on the corporate bottom line. They often do this well before managers or boards are willing to consider or implement such changes. Despite this, corporations appear to be searching for ways to ignore shareholders, even on a structural level.

Shareholder engagement is, I believe, a good first step in enhancing the corporation-shareholder relationship for the benefit of both. Despite the trends toward a less mutualistic relationship, there are some positive signs. For example, companies and their shareholders are increasingly sitting down at the same table these days. Many companies are also utilizing technology to better facilitate engagement with their shareholders.

From hosting virtual or live webcasts of their shareholder meetings, to using social media and mobile technology, companies are searching for new and better ways to actively engage their shareholders. Companies can also benefit from the engagement of retail investors. And, as I have said before, technology can also serve this purpose.

After all, more Americans are technology-literate than ever before. Perhaps, shareholders should be allowed to vote through social media or a mobile phone application, like in Estonia. Companies might be able to use distributed ledger or blockchain technology to identify and reach their shareholder bases more effectively.