“(Public company) Directors are now preoccupied with (securities) regulatory compliance at the expense of time spent growing their companies. That’s bad for business, and bad for the U.S. economy.”, William R. Baker III and Joel H. Trotter
“It’s not just directors. Even more importantly, it’s the management teams of these companies; especially the CEOs, CFOs, and General Counsels. You think directors focusing much of their time on regulatory compliance matters is a problem for the company and the U.S. economy? It’s much worse when management is doing the same. Corporate America today doesn’t “wipe its ass” these days without consulting a lawyer to make sure they have ZERO chance of violating any government rule or regulation (no matter how inconsequential to the company, employees, customers, shareholders, or the safety of Americans, generally).”, Mike Perry, former Chairman and CEO, IndyMac Bank
October 28, 2015, William R. Baker and Joel H. Trotter, The Wall Street Journal
Nothing to Fear From the SEC?
Directors of public companies are preoccupied with costly and time-consuming regulatory compliance.
SEC Commissioner Luis Aguilar. PHOTO: GETTY IMAGES
By William R. Baker III And Joel H. Trotter
In a recent speech to corporate directors in New York City, Luis Aguilar, the longest-serving commissioner on the Securities and Exchange Commission, stated that “the SEC has rarely brought cases against directors” of public companies and that “directors should have nothing to fear from the SEC” if they are conscientious and responsible.
Mr. Aguilar is right about the SEC’s historical approach to enforcement against directors in their personal capacity. But from what we see every day in the boardrooms of corporate America, we’re not so sure he has drawn the correct conclusion. Our experience suggests that board members are more concerned than ever about regulatory liability—and with good reason.
Two years ago, SEC Chairman Mary Jo White announced the agency’s specific focus on “deficient” directors and other gatekeepers who “should be serving as the neighborhood watch” but “fail to do their jobs.” She bluntly warned that serving as a director “is not for the uninitiated or the faint of heart.”
The SEC is not looking only to go after egregious, enterprise-level meltdowns. Instead, during Ms. White’s tenure, the SEC has implemented a “broken windows” enforcement program that targets “violations and violators regardless of size.” Ms. White has explained that “it is important to pursue even the smallest infractions” because “minor violations that are overlooked or ignored can feed bigger ones.”
Meanwhile, public companies face a host of new rules and potential infractions. The 2010 Dodd-Frank financial law alone has to date spawned more than 13,700 pages and 15 million words of enabling regulations, with more mandatory rulemakings to follow.
The costs associated with SEC enforcement actions have never been higher. A recent U.S. Chamber of Commerce study reported that an SEC investigation imposes $4.6 million in average direct costs. Even when the SEC determines no wrongdoing, companies can incur enormous financial costs, with some investigations running well over $100 million.
Yet beyond their financial impact, SEC enforcement actions impose direct and indirect costs on public companies and their officers and directors, including management and board distraction and reputational harm.
The collateral damage can be far-reaching. Where companies choose to disclose a pending SEC investigation, proxy advisory firms such as Institutional Shareholder Services tend to use an inflexible approach in the governance ratings they publish, not taking into account the underlying merits of pending proceedings and negatively swaying votes at shareholder meetings.
Directors are now preoccupied with regulatory compliance at the expense of time spent growing their companies. That’s bad for business, and bad for the U.S. economy.
Mr. Baker, a former associate director of the SEC’s Division of Enforcement, and Mr. Trotter are partners in the Washington, D.C., office of Latham & Watkins LLP.