The Securities and Exchange Commission recently revised the periodic disclosure requirements of Regulation S-K, the latest installment in the SEC’s ongoing effort to improve the quality of public disclosures. In many instances, the new rules replace prescriptive requirements with flexible guidelines intended to elicit company—and industry-specific information that is material to investors’ understanding of the company’s business. The SEC’s move toward a principles-based disclosure framework centered on materiality can be understood as part of a trend in the United States and Europe toward increasing the scope of board and management discretion. For most of their history, U.S. public corporations were widely understood to be profit-driven enterprises governed by a rule-based corporate law regime designed to protect and advance the financial interests of shareholders. There is now a growing transatlantic view that corporations should be better understood as purpose-driven entities working toward “sustainable profitability” and guided by ethics, social responsibility, and values, all as defined by the board of directors in its business judgment. While the business judgment rule in the United States will continue to protect decisions made in good faith by unconflicted directors, one consequence of expanding the purpose of the corporation would be that directors’ decisions need no longer be targeted to the singular goal of maximizing shareholder returns.
The stakeholder governance model, particularly in the context of a more flexible regulatory regime, effectively increases the discretionary authority of boards and managers. Boards increasingly are expected—and in Europe may be required, in the foreseeable future—to consider a wide array of factors including corporate purpose, all corporate stakeholders, sustainability, and even the well-being of society and the economy at large. Managers, by the same token, have new latitude under the principles-based disclosure requirements to create and provide the information they see as material in this wider context. These broad mandates may fit the contours of the current moment in unexpected ways. Events of 2020 have turned the spotlight onto corporate America’s role in creating and perpetuating societal inequities, a development that has put enormous pressure on corporations to publicly adopt stakeholder-centric positions. The highly concentrated institutional ownership in today’s stock market—and asset managers’ widespread endorsement of the stakeholder model—may further drive boards to adopt an expanded view of corporate purpose in their decision-making.
The Principle of Materiality
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