In her recent remarks: "My Beef with Stakeholders: Remarks at the 17th Annual SEC Conference, Center for Corporate Reporting and Governance," SEC Commissioner Peirce used the California board gender quota bill (most recently reported on here) as a springboard to articulate her opposition to a broader stakeholder approach to governance that would require boards to consider non-shareholder stakeholder (e.g., employees, suppliers, communities) interests - separately from the company's interests - as part of their decision-making, and entitle those stakeholders to weigh in on how the company conducts its business.
Noting that companies already are required and/or strongly motivated to consider other stakeholder views in order to succeed and in connection with the board's duty to maximize shareholder value, she explained how the public interest is best served by maintaining our current collective shareholder-oriented approach, and how expanding the board's remit to encompass or prioritize other diverse stakeholder interests would muddle board decision-making, create share price uncertainties and related reduced valuations (to reflect an "uncertainty discount"), and ultimately harm company and shareholder value.
Peirce also spoke out against mandating that companies adhere to particular ESG criteria (commenting: "the 'S' in ESG could just as well stand for 'stakeholder'"), expressing that although individual investors should be free to invest in companies whose practices are aligned with their views in lieu of prioritizing financial returns, companies shouldn't be forced to compromise long-term value to fulfill ESG goals that are by their nature based on subjective, non-standard criteria that may or may not be associated with higher returns:
Thus we arrive at the next problem with using ESG factors: there are no clear standards. Even if we were to accept-and I do not-that it is desirable to use funds held by large investors as a means of fueling social change, it is not clear that the factors managers now consider actually have the intended effects. In many instances, ESG reporting has been presented as though it were comparable to financial reporting, but it is not. While financial reporting benefits from uniform standards developed over centuries, many ESG factors rely on research that is far from settled. Counting the number of female directors may tell you something about how well a company is run. Or it may simply tell you that the company has more female directors. There are studies going both ways. In most cases, the companies themselves are ill-equipped to make these determinations. Does a company that brews beer really have the expertise to assess what energy source would be the best for the environment?
A bit closer to home for me, neither do regulators have the requisite expertise to assess how well companies adhere to ESG standards and properly disclose whether their practices conform to those standards. We have a tough enough time with non-GAAP metrics.
In addition to the absence of clear reporting standards, Peirce cited examples to illustrate the subjective nature of ESG standard-setting, application and corporate "compliance" - again emphasizing that investors' rights to pursue particular ESG investment strategies should not equate to mandating broader stakeholder-oriented, rather than shareholder-focused, corporate governance.