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Sept. 11, 2020, 8:43 a.m. EDT

If the SEC changes this disclosure rule, the hardest part of being a company director will get even harder

Regulators want fewer big investors making 13F filings

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By Ethan Klingsberg and Elizabeth Bieber


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The hardest and arguably most important part of being a director of a publicly traded company in 2020 is not complying with your fiduciary duties or the Sarbanes-Oxley Act. Rather, it is making sure your stockholders, or as the Council of Institutional Investors puts it, your “owners,” understand your strategic plan and for you to understand their concerns and vision for the company.

Unfortunately, the Securities and Exchange Commission is now contemplating a roadblock to the ability of directors to perform this role.

A revolution in the shareholder base of publicly traded companies has occurred before our eyes over the last several years. Institutional shareholders, which typically hold well in excess of 80% of the shares of most U.S. publicly traded companies, have increased attention to their duties to their investors by increasing the number of in-house professionals and other resources dedicated to analyzing not only short-term performance, but also factors that impact long-term performance—including sustainability, governance and human capital, as well as approaches to operations, M&A, regulatory regimes and corporate finance.

While so-called shareholder activists, like Ed Garden of Trian Partners and Jesse Cohn of Elliott Management, are still poised to critique underperformers through high profile, public campaigns against managements and boards, the fact is that the traditional institutional investor no longer automatically supports management and incumbent directors, whether or not an activist is out there leading a campaign for change.

Directors and their executives have reacted in an exemplary manner. The “off-cycle shareholder roadshow” — where one or more directors join executives at meetings with stockholders outside the spring annual meeting season — has become de rigueur for public companies. Indeed, many companies now even invite shareholders to come in to meet with their full boards or governance committees. Others have special sessions where shareholders focused on particular topics, such as sustainability, and can meet as a group with one or two directors and executives.

Furthermore, the role of investor relations professionals has shifted from being a hand-holder to analysts building short-term models for quarterly performance targets to becoming a key vehicle for shareholder engagement. Heads of investor relations used to be confined to reporting to an executive officer, but they now regularly brief boards and their committees directly on what concerns about the strategic plan and disclosure they are hearing about from shareholders, including about what misunderstandings shareholders have, what additional information they need and what changes in direction they would like to see.

All of these developments are good for business. It means that a spectrum of shareholders can now be part of the dialogue. The culture of the boardroom has changed so that a shareholder no longer needs to be Trian or Elliott, threatening to run a proxy contest to unseat the board, to have the ear of the board. The more voices the better, especially when we are developing the mechanisms and processes to understand these voices and engage in constructive dialogue with them.

When shareholders use the means of “voice” rather than “exit” — to borrow from Albert O. Hirschman’s paradigm — we have a chance to replace volatility with thoughtful dedication of capital.

But all of these positive developments hinge on one factor: knowing who your shareholders are. Right now, mega-shareholders (those owning more than 5% of the outstanding stock) make mandatory filings, but for many companies, there are large numbers of institutional shareholders under this threshold that boards want to take into account and to which they want to organize outreach.

The way that these shareholders are identified is by the quarterly filings on Form 13F, which require most funds to publicly spell out all their holdings in listed companies. The transformation of the quarterly 13F filing deadline (on the 45th day after the end of each calendar quarter) into a major event for boards, executives and their advisors speaks to the integral nature of the 13F regime to what matters in the boardroom in 2020.

Amazingly, the SEC has proposed to cut back the 13F filing requirement dramatically — exempting, by the SEC’s estimate, nearly 90% of the investors currently required to file. That means boards would cease to have visibility on holdings by 4,500 institutional investment managers representing approximately $2.3 trillion in assets, according to one SEC commissioner. Only the most proactively vocal shareholders and the largest shareholders will be visible to boards.

The reactions to date on both sides — the corporations and the investors — has been misplaced. Defenders of corporations have complained that this proposed change would impede takeover defenses. Those on the shareholder side state that these changes will enable them to invest better and save on compliance costs.

Both sides are speaking from a world that has disappeared. The response to opinionated shareholders by boards can no longer be a takeover defense. Similarly, the benefits to a shareholder of staying under the radar pale in comparison to the benefits of having the company proactively reach out to you to make you smarter and find out your views — which is exactly what happens now in response to the quarterly 13F filings.

Let’s keep America’s board-shareholder dynamic healthy and constructive. Let’s not impede it by tearing down the 13F filing regime.

Also read: The Trump administration wants to discourage your 401(k) from including ESG investment options

Ethan Klingsberg is a partner and head of the U.S. Corporate Practice at Freshfields LLP in New York. Elizabeth Bieber is counsel and head of the shareholder engagement practice, also at Freshfields in New York.

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