Mutualism: Reimagining the Role of
Shareholders in Modern Corporate Governance
Posted by Kara M. Stein, U.S. Securities
and Exchange Commission, on Thursday, February 15, 2018
Kara M. Stein is a Commissioner at the U.S. Securities and
Exchange Commission. The following post is based on Commissioner
Stein’s recent remarks at Stanford University, available here.
The views expressed in the post are those of Commissioner Stein
and do not necessarily reflect those of the Securities and
Exchange Commission, the other Commissioners, or the Staff.
Tonight [Feb. 13, 2018], 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. Rather, I would posit that the entire
corporate ecosystem’s success actually rests on effective communication and
collaboration between corporations and their shareholders. 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 influence and impact our society in a multitude of ways.
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.
shaped, and will continue to shape, our society, our identities, and our
relationships with one other. This week’s series seeks to promote a discussion
of the interrelationship and interdependency between corporations and our
society. 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
So, I thought I would
start off our discussion tonight by talking a bit about the science of
“mutualism.” For those of you not familiar with the concept, mutualism is a
symbiotic relationship between individuals of different species in which both
benefit from the association. 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.
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 allows the corporation and its
shareholders’ investments to grow. 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.
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
So, how do we restore
mutualism in the relationship upon which our corporate ecosystem is based?
Mutualism and the Corporation-Shareholder
I recently remarked
upon the history of the American corporate form, and I would like to start my
talk tonight there, as well. Don’t worry, I won’t go as far back as the Dutch
East India Company and its participanten, or the tulip bulb
market. Rather, I will quickly touch upon the history of the
corporation-shareholder relationship in the United States to inform the rest of
From the late-1700s to
the mid-1800s, corporations started to flourish in the United States. American
companies typically operated within a single state or community. The
shareholders of a corporation were often members of the same community in which
the corporation was located. As a result, they were able to engage and monitor
the company’s business affairs in a more direct manner than we currently see
today. A corporation also met with its shareholders more frequently, whether in
the form of shareholders’ meeting or otherwise.
Beginning in the
mid-1800s, however, companies started growing larger and the corporate form
changed. Companies began hiring managers—who often had no ownership interest in
the companies—to run their affairs. While this transition created certain
efficiencies, it also in many cases separated the ownership of the company from
the management of the company. This had the effect of reducing shareholders’
ability to directly influence the company’s business.
Mutualism and the Corporation-Shareholder
Relationship in Recent Years
A lot has happened
since the mid-1800s, and we are now at a tipping point. 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, are 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
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.
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. As we have learned, cyberattacks can
affect millions of people at once and potentially compromise our most sensitive
Shareholders have been
out front advocating for more information on company practices relating to
cybersecurity. The number of shareholder proposals regarding cybersecurity has
increased in recent years. But good information remains scarce. Unfortunately,
corporate disclosures are far from robust and largely consist of boilerplate
language that fails to provide meaningful information for investors.
While companies and
shareholders agree that cybersecurity is one of the most prominent corporate
issues of our time, it is unclear why companies are not doing more to implement
robust cybersecurity frameworks and to provide meaningful disclosures regarding
the risks of data loss.
Companies and their
intermediaries tend to view cyberthreats as a technology problem instead of,
more appropriately, a business risk. 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.
certainly not immune from facing these challenges. In August 2017, I learned for
the first time that the Commission’s official record system was breached in
2016, and that this breach may have provided the basis for illicit gains through
trading. Clearly, the Commission’s enterprise risk management processes failed
to adequately address appropriate escalation protocols. 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.
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. 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. For example, the European Union’s General Data Protection Regulation
is set to go into effect in May 2018. China has begun enforcing regulations
concerning “critical information infrastructure.” Last March, the New York
Department of Financial Services required that regulated firms name a chief
information security officer (or CISO). These CISOs must provide an annual
report on cybersecurity to the firm’s board. Last year, a bipartisan bill was
introduced in the Senate to require publicly traded companies to disclose
whether any members of their board have cybersecurity expertise.
We at the Commission
have not yet adequately pressed forward. While the Commission’s staff has
released disclosure guidance for public companies to consider when dealing with
cyberrisks and breaches, the Commission can and should do more. I believe the
Commission should consider rules to require disclosure of a firm’s
enterprise-wide consideration of cyberrisks. I also believe that we should
develop rules to ensure that market intermediaries, including broker-dealers and
investment advisers, develop and implement policies and procedures to protect
investors’ personal information.
The security and
integrity of a corporation’s assets, like the SEC’s, is a great responsibility.
As I said earlier, cybersecurity has been viewed by many as simply an “IT”
problem, hoisted on the shoulders of a company’s chief information officer. Too
often, this has led to a failure to integrate cybersecurity into a firm’s
enterprise risk management framework. 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.
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. However, boards remain far from diverse or reflective
of shareholders’ views despite evidence pointing to the value of such diversity
in their composition.
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. Research has also shown
that companies with strong female leadership generated higher returns on equity
compared to those without. This may be because having a diverse board helps the
company better understand purchasing and usage decisions by its clients or
customers. Studies have found, after all, that women drive 70% to 80% of
purchasing in the United States. As I have remarked in the past, diverse boards
also appear to deter “groupthink” and help reduce instances of fraud, forms of
corruption, and shareholder contests. The Commission and regulators across the
globe have also echoed the importance of gender diversity on boards.
Despite all of this,
gender diversity on boards remains elusive. The percentage of women on boards is
currently at approximately 20%, an increase of only 5% since 2011. This is
striking when you consider that women make up 50.5% of the U.S. population and
approximately 47% of the U.S. labor force. Indeed, the United States lags behind
many advanced economies in terms of women’s representation on corporate boards.
More striking still, it
is not just academics and think tanks that support gender diversity on boards.
Shareholders, too, expect the companies they own to have diverse board
membership. For example, State Street Global Advisors and BlackRock 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
Yet, despite the
documented benefit of diverse boards, many board members do not believe that
board diversity enhances company performance. Further, more than half of
directors believe that their boards are already sufficiently diverse.
It is one thing for
boards to ignore scholarly research, but it is quite another for boards to
ignore their companies’ shareholders or owners. Especially when it can affect
everyone’s bottom line. 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?
Changes in the
corporation-shareholder relationship are perhaps most apparent when looking at
efforts to curtail shareholders’ information and rights. 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. So-called shareholder activism can provide a
necessary check on a company’s leaders. Or it can be a needless expense for a
company ultimately producing no benefit. Whatever your opinion, shareholder
activism seems to be here to stay, with 39% of directors believing that there
will be an increase in shareholder activism in 2018.
In recent years,
shareholder activism has prompted myriad responses from corporate boards and
management. Many simply try to fend off shareholders. Many engage with
shareholders, but because about 70% of the share ownership of U.S. companies is
from huge investors, that is where they focus. Thus, the entire battle is fought
for the opinions of a handful of executives at large asset managers.
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? Does engaging the view of only one group of shareholders
result in a form of short-termism? Could it result in a company putting on
blinders that can affect its long-term bottom line? Ultimately, how does this
sort of one-sided engagement affect the company’s position in the larger
In effect, is
shareholder activism a symptom of an underlying problem or part of the cure? 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
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. This structure allows these corporate insiders to control a majority
of the votes of the corporation even though they own a minority of its stock.
While dual-class capital structures have existed for many years, much has been
written about them recently. This may be in part because of an upsurge in
dual-class IPOs—from Google in 2004 to Manchester United in 2012. And we all
have heard about Snap and its IPO of non-voting shares in 2017.
Many, including myself,
see dual-class capital structures as inherently undemocratic, disconnecting the
interests of a company’s controlling shareholders from its other
shareholders. The disassociation of interests can grow over time when certain
shareholders, but not others, have the right to vote over fundamental corporate
matters—like board members. It is not surprising, then, that critics include
shareholder groups, asset managers, and stock indices. Or that they are
prohibited by some countries. Yet, we are still inexplicably letting dual-class
share structures persist.
Why does the appetite
for dual-class capital structures exist despite wide investor disapproval of
such structures? 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? What happens when the interests of a company’s
controlling shareholders continue to diverge from its other shareholders? Is
there a risk that a company’s controlling shareholders will acquire conflicts of
interest so large that the company cannot act in the best interests of all of
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. 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.
A Way Forward
While it is clear that
the relationship between a company and its shareholders is currently in flux, it
is less clear how we should move forward. 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
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.
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. Companies are also hiring advisors to help them engage directly and
consistently with their shareholders. This has allowed companies to have a
continuing dialogue with their shareholders.
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.
shareholder engagement has largely been geared toward those with the most voting
power. 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. Indeed, approximately 80% of
Americans had a social media profile in 2016. Perhaps, shareholders should be
allowed to vote through social media or a mobile phone application, like in
New and cutting-edge
technologies may help in other ways. Companies might be able to use distributed
ledger or blockchain technology to identify and reach their shareholder bases
more effectively. Currently, companies mainly communicate with shareholders
through broker or bank intermediaries, because the shares are held in the names
of these intermediaries rather than in the names of the beneficial owners. This
means that, in some cases, companies do not actually know who their shareholders
are. While this complex construct may have been necessary in the 1970s, current
technology could enable companies to directly communicate with shareholders
without the need for intermediaries.
The Commission can do
more, too. While we have issued rules that shape the means by which a company
communicates with its shareholders, we should continue to be ready to help
fortify the corporation-shareholder relationship as we move forward. For
example, we should adopt final rules regarding the use of universal proxy cards.
These rules should recognize that few shareholders can dedicate the time and
resources necessary to attend a company’s meeting in person and that, in the
modern marketplace, most voting is done by proxy. The Commission’s rules need to
change to reflect our current reality, empowering companies and shareholders
In a time when
ownership is global and disparate, the use of technology and the Commission’s
rules are simply tools to further the empowerment of a corporation’s owners. We
have seen throughout history that a company’s growth and its owners’ prosperity
are often enhanced by direct engagement. In other words, both engaging with one
another for the good of all, or mutualism. The result is a corporation that is
more nimble and grows in an ecosystem that thrives on transparency. This was
true in the 1700s and it is still true today.
As we move forward, we
have to ask ourselves how we can strengthen the corporation-shareholder
relationship. For it has been foundational to the success of the American
As I have discussed
tonight, the corporation-shareholder relationship must be reimagined in the
context of modern corporate governance to recapture its benefits. Shareholders,
like management, share the desire to grow a company’s bottom line. But they can
only help if they are heard.
We need to go back to
first principles: A corporation’s growth and its shareholders’ prosperity are
intertwined. To succeed, they must work together.
Thank you for your
time, and for inviting me to speak with you this evening.
publication, including footnotes, is available
Harvard Law School Forum
on Corporate Governance and Financial Regulation
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