SEC Commissioner: Private Company Boards Can be ESG Leaders
SEC Commissioner Robert Jackson says good governance can bolster innovation, human capital and societal success.
Private company boards are in the best position to propel environmental, social and governance issues which in turn can boost the bottom line and societal good, says Securities & Exchange Commission commissioner Robert Jackson.
“These companies have always been thinking about things like ESG,” he maintains. “I think it's crucial in the world we live in today with your customers, with your employees, with the communities you work in, to be ahead of these issues.”
The best private company boards, he adds, are constantly looking in the mirror and making sure they have directors with the right skills to move a company forward from a human capital and innovation perspective.
The following is a Q&A with Jackson, adapted from an interview at the Private Company Governance Summit in Washington, D.C., in June.
You’ve talked a lot about the importance of private companies to the U.S. economy. How so?
If what we care about in this country is job creation, economic growth, innovation — that's a private company phenomenon just as much as it's a public company phenomenon. We've had a lot of conversations in Washington about getting more companies [to go public], and I'm happy to have that conversation. I think it's important. But the truth is, I know where economic growth and job creation comes from and the answer is private companies across the nation.
What trends do you see on the private company side and governance?
What’s happening in private company governance is very exciting. First, these companies have always been thinking about things like ESG (environmental, social and governance). The investor engagement in private companies is often closer, not least because often it's the case that you'll have an investor representative or someone from a fund or someone from the finance industry on your board and they're in a position to share those views with you. I have been seeing more active engagement by investors, more active conversations about ESG.
There's been a lot of discussion in Washington about why we don't have more gender diversity on public company boards. And I'm a member of something called the Thirty Percent Coalition and our commitment is by 2030 to have 30% of board seats occupied by women in the United States. It’s not a mandate, but we’re working with private companies and public companies to encourage them to do searches that include candidates who are women.
And here's something interesting about that. For years, public companies have been working on this. I can tell you right now, talk to any public company board member and they'll say, “We are looking for qualified women to put on our board.” Yet the number — the percentage — of women on boards has barely changed in the last few years. So my staff and I did some data analysis. They get why, I know that they're trying. I know that there are qualified women. What's happening is that public company board seats turn over so slowly that it's just too rare that a board seat opens up so that the change can be made. The rate of women who are appointed to an open board seat is three times higher than it was 10 years ago.
That is the probability. If there's an open seat, the probability it'll be filled by a woman is three times higher, which is huge progress. But why hasn't that driven the overall number up? Because the rate of change is too slow.
Private companies have been thinking about how to refresh boards for a long time. It's on the agenda and I think that public companies could learn a lot from [private companies] about how to have that conversation. It's not an easy thing to go to a board member who's been a great servant and fit to the company and say, “Look, we think it's time. We need to make some transitions here.” I think public companies need to start moving in that direction. I think to the degree that we begin to refresh public company boards, not only will we get some more gender diversity, some more diversity of backgrounds, I think we'll get better boards because bringing new people into the board room on a regular basis, that's something we should have been doing years ago.
Private companies want to adopt good governance or strengthen what they have in place. Is there any advice from what you've seen in your work where you see companies that are doing a great job that you would offer examples of what to emulate?
I'm not here to say I have a model for good governance. First of all, I think most thoughtful boards of directors are having conversations today about environmental and social impact. And the reason I say that is not because I have a political view about whether that's desirable, but because I think a well-prepared board is thinking about those questions. Their employees care about it, the shareholders usually care about it. Certainly, their customers care about it and a well-prepared, strategically sound board is talking about it right now. What that conversation should look like, whether there should be certain kinds of disclosures or steps you take in the boardroom, that's a different conversation. But any boardroom that you walk into today and you say, “What's the thinking here about your environmental impact?” The only incorrect answer to that is, “We haven't thought about it.”
Why do you think it’s so important to have good governance on the private side? There aren't the same kinds of regulations. What do you think should motivate an organization to put that in place?
First of all, again, I want to just say I'm not here to say what is good or bad governance. I want to encourage all [private companies] to continue to work to figure it out. But you're the job creators. You're the people who are on the ground every day. You'll be closer to what works for you as a matter of good governance. But I think there are three reasons why the governance innovations coming [from private companies] is so exciting.
First, I think one reason to have good governance is that it helps performance and we can debate the degree and how and whether or not the studies are absolutely right. A lot of times, if you do a study of governance and compare it to performance, there'll be a relationship between the two. And you'll hear economists and I have some friends who like to say that's correlation, not causation. They say, “Look, Rob, it could be that the company happens to be well-performing and well-performing companies happen to adopt good governance” and scientists — like economists — would say this is very important, but who cares? Who cares if I'm an investor or I'm an employee or I'm a manager and want to be proud of where I work? I don't care whether the good governance causes good performance or good performance causes good governance. I want both.
They're also doing well from a performance point of view. So first of all, whatever that relationship looks like, it's important and I think good governance is good because it helps performance.
Second of all, I think it's crucial in the world we live in today with your customers, with your employees, with the communities you work in, to be ahead of these issues. For better or worse, in the world we live in there are no secrets anymore. If you're having a bad environmental impact, that's going to be known. If you're not fair to your employees, that's going to be well understood in the public sphere. And the best way to think about that and deal with it is to get ahead of it in the boardroom. Talk about it first. “Hey, we had to make some hard decisions. We had to let some people go, here's how we treated them. Was it the right thing to do? Why did we make the choices we made?” Let's be prepared to answer those questions today. I think good boards do that and a lot of private company boards I think have been taking those steps for years.
And then finally, what I like about private company boards, and I've said this a couple of times, is they're close to their investors. One problem in the public company boardroom is that the investors are so dispersed. A lot of them are passive. A lot of them don't really engage and understand what the business is, a lot of [private firms] don't face that problem. Now, it's funny, when I talk to private boards and I say, “One great asset you have is the super-engaged investors. I understand that working for highly engaged private investors is hard, but at least you're having the conversation. At least you know who to call. At least they'll be in the boardroom with you and you can talk to them.”
One challenge in the public company space is that they don't know who to call. And then when they call somebody, that person is often not engaged with the business, diversified away from the company's success, not particularly invested in what it's doing. I actually want to encourage all [private company leaders] to think about the investor engagement lessons you've learned and suggest to your public company colleagues to try it out. Because one thing that they're not doing as effectively as you are is talking to your investors. And there are good reasons for that, right? Their investors change every day when you're public.
How does and how will government impact how private companies handle governance? Will proposed changes like Elizabeth Warren's bill impact the private sector? One of the things she's proposing is regulating large private companies, not just public companies. What does the future hold in that regard?
I think, as a country, it's time for us to stop pretending that the decisions we make in the boardroom, the decisions we make in the securities markets, don't affect ordinary Americans. The truth is the decisions we make affect the kind of job opportunities they have, the kind of innovation they have, the kind of products available to them. The truth is every decision we make in corporate America affects ordinary families. We should stop pretending that those are two different worlds. And one reaction I have had to politics recently and the election is more and more people feel like [business leaders are] not thinking about them. That guys like me are not thinking about them. And we have to change that.
I'm lucky because I come from a big Irish Catholic family. My mother's one of nine, my father's one of five. I have more than 90 cousins. I see them every 4th of July. A lot of them are in that boat. I have a cousin who's in the NYPD up in the Bronx where I'm from. Another guy is a teacher up in Westchester [New York] where my parents live now. What they care about is, “Hey man, I worked my ass off and my 401k’s got $20,000 in it and I don't know how I'm gonna make this work. I've got two kids, tuition is $60,000 a year. I don't how to make that work.” That's what they care about and what they want to know from me is, “What are you doing to try to make our economy better, give me better opportunities.”
Understand that the choices you make, the conversations you have, affect those people and they know it and they're frustrated that we haven't done a better job for them.
Now Senator Warren's bill is starting a conversation about how do we handle the effect all of us have on those people. We're going to have a national conversation about that and I think we should, but what I will say is that for every board in this, you’re trying to figure out what's the right thing to do and how do we figure it out. And I think that's the most important conversation we're having because if we don't change the way ordinary Americans feel about corporations — private and public — we're going to live to regret it.
I think we're already beginning to see that and it's all of our responsibility — more yours than mine, honestly — to convince them that we want to do the right thing. I don't run a business. I didn't create any jobs this year. You did. I want to hear from [private company leaders] about ways the government can nudge you in the right direction.
One of the issues that's come up a lot recently is the difficulties companies have attracting talent. I recently did a Q & A with Jay Clayton, the chairman of the SEC, and he talked about when we look at the ESG formula, that the human capital management piece, to him, is the part that was of concern in terms of risks to businesses. How important is that to private companies and their boards? Should they be concentrating on the future workforce, how the workforce is treated?
I don't think there's anything more important. I'm very lucky to work with Jay Clayton. He takes a CEO approach to his job, and it's really transforming the agency. He likes to practice what he preaches. So nobody noticed this, but one thing he did that I thought was very cool a couple of months ago, he issued a management discussion and analysis of the SEC: What are our goals? How are we doing? He sat down and said, “Let me try and describe the business of the SEC.” So I think of him as that kind of leader and he is really right about human capital.
Our investor advisory has issued a recommendation that we talk to public companies about what rules would help. And I'll tell you right now, well-governed boards are talking about human capital investments. How do we treat our employees? What kind of training are we doing? What kind of refreshment are we doing? Do we have the right kinds of managers, mentors throughout the organization to build this company and to innovate? Those are conversations that good boards are having.
I actually believe that private companies are doing a far better job on human capital creation and management than public companies are. There are lots of explanations for why. If you say to a public company, “Why don't you make more investments in the workforce?” They'll say, “Well, it’s quarter-to-quarter pressure, I have to hit earnings. I don't have the flexibility of private companies.” [Private companies] face pressure from investors, too, but manage to job-create, make long term investments, manage to think about the way you're treating the people that work for you in a more systematic and careful way than public companies do. So, I think Jay's right about this, and I think public companies have a lot to learn from [private firms] about the right way to treat American workers. The SEC held a summer-convening looking at some issues including short-termism and long-termism. Should private companies to be part of that conversation? Absolutely.
We know we have fewer public companies and IPOs, but there is a movement to invest in private firms. CalPERS, the large pension fund, is looking at investing more in private equity and venture-backed firms. Do you think that's a good idea and does that create an issue where the SEC would have to step in if we see more investments from institutional investors?
I think it's very healthy and a very good thing that public pension funds are considering all kinds of asset classes. I worked with those guys and know them very well. I don't think they have a choice. I mean, first of all, anybody who's had a conversation with a large pension knows that they are in the terrifying position of being significantly underfunded and way behind the obligations they are going to face.
Should they be thinking about different asset classes and investment types than public companies? Absolutely. I don't think that they really have a choice, number one. Number two, there is more job creation, more economic growth on the private side than there is on the public side. What responsible pension fund would sit that out? I don't think it's actually an option. I think they have to engage on the private company side. Now, whether they do it through private equity or different vehicles, [those are] decisions that their boards will make. But, for me, does it mean that we might someday have more regulation of the private space? Not necessarily.
I think what it means is that the kind of investor profile that you all will find yourselves having is shifting. And I'm very confident, because I know these boards well, that private companies will adapt to that, that you'll continue to engage with those investors and then you'll be able to persuade them that you're doing the right thing.
I think those conversations are going to change because there are going to be more pensions, more public types of funding, but I don't think that means the government will come. I think it means those investors will come and that you'll have to work out with them exactly what they care about and how to accommodate those concerns while running your business.
For companies that have recently gone public and are doing well, do they tend to have had good governance in place when they were privately held? Does good governance before mean success after?
I don't want to be the guy who shows up and says, “Hey, adopt good governance and you'll succeed.” It’s not that easy. First of all, the definition of good governance is going to depend on the industry. It's going to depend on the people. It's going to depend on the board room. In my experience, both as a banker and as a lawyer and as a regulator, the companies that have been innovating in their boardroom, that do hard turnover decisions, that are looking for diverse candidates, that are thinking about ESG, that are working on human capital; those companies tend to be the best-prepared companies period. They tend to be the best-managed, best-led companies, period. And yes, those companies tend to be more successful in the public markets.
If you choose to go public, you'll have more success because, when you start to get hard questions, you're going to have answers and I think that's why this conversation is so important. A lawyer would say being thoughtful about your governance is necessary to your success, but not sufficient. There's a lot of other things that go into a successful IPO, being a successful public company. But having thought through governance is one of the things you have to have done in the world we live in now.
Is there something specific about good governance, something you've seen that you're like, “Yeah, why doesn’t everyone you do this?”
It's a good question. I think one thing I'll say is the board refreshment process. I've thought to myself, why doesn't every company do this now? I think you all might say every company does, but you all know there's a serious conversation about do we really need to move some people on? And then there's like you get a memo from a law firm, check the box and put everybody back on the board. And I've been involved in both kinds of board searches and I'm starting to wonder why more people don't do the first thing. I mean, literally, one-on-one conversations with every board member about, “Hey, you've been on this board 11 years. How do you feel about the experience? What's the expertise you bring to this room? Is there another place we can get that?” Should we be thinking about that every year?
One of the things investors are talking about is requiring a labor representative on the board. But what I want to say is every board should have somebody who is an expert in that area — not necessarily a representative of labor, but someone who understands that issue, someone who's engaged with those conversations, someone who's dealt with wage and hour issues, someone who's experienced in that area. It doesn't have to be from a union, it could be someone who's gone through those issues, is a credible expert about it. Having somebody like that in your boardroom in today's day and age is hugely valuable. It's like having someone on your board who knows cyber — that’s huge. Do you have to? It depends on your business. Is it helpful? Absolutely. And I wish people would be thinking through that board refreshment. “Who's on our board and why? How did we get here and is this the right group of people from our business now?”