Saturday, March 2, 2019

Does Congress believe in efficient markets?

I’ve previously posted that judges sometimes suggest that markets are efficient to a degree that borders on the mystical.*  But on the opposite end of the spectrum, it often seems as though Congress does not believe in efficient markets at all.  For example, the PSLRA’s “crash damages” provision contains the implicit assumption that when negative information comes to light, it will take 90 days for the stock to appropriately internalize it.  15 U.S.C. §78u-4(e)(1).  Dodd Frank requires all public companies to disclose information on their compliance with the Federal Mine Safety & Health Act (I amuse myself by highlighting for my class the “mine safety disclosure” in the Starbucks 10-K, for example), even though that information is public via other channels.  (Spoiler alert: the disclosures apparently make a difference, so Congress may be right!) 

And most recently, we have the Improving Corporate Governance Through Diversity Act of 2019, introduced by Representative Meeks in the House and Senator Menendez in the Senate.

These identical bills would require public companies to disclose “Data, based on voluntary self-identification, on the racial, ethnic, and gender composition of the board of directors of the issuer;  nominees for the board of directors of the issuer; and the executive officers of the issuer.”  The bills would also require disclosure of veteran status, and any policies for promoting diversity among boards of directors and corporate executive officers.  And then, oddly, the bills would require the Commission’s Director of the Office of Minority and Women Inclusion to publish “best practices with respect to compliance with this subsection,” in consultation with a newly established advisory council of issuers and investors (I say “oddly” because – they want to publish best practices for disclosing diversity information?  I’m guessing that’s not what they’re going for, but that’s how it’s drafted.)

In any event, these bills represent something of a challenge to the efficient markets hypothesis because in most (if not all) cases, the racial, gender, etc characteristics of board members, board nominees, and top officers is readily available to investors.  What may not be available, of course, are policies for promoting diversity, absent a rule requiring disclosure – which it turns out, we already have, at least with respect to director nominations.  See 17 CFR § 229.407(c)(2)(vi); see also Developments on Public Company Disclosures Regarding Board and Executive Diversity.

Of course, the reality is these “disclosure” rules are not about disclosure at all; they’re about substantively pressuring companies to diversify their management teams – which explains, I assume, the bit about “best practices”; the goal is to craft guidelines for best practices in hiring, not best practices in disclosure.  (Relatedly, Congress has begun to express concern about diversity in finance more generally.)  For this reason, it is not at all surprising that the Chamber of Commerce has firmly endorsed this legislation, viewing it (explicitly) as a less-intrusive alternative to mandated diversity requirements, such as the ones adopted by California.

And yeah, there’s nothing unusual about securities disclosure requirements functioning in this manner, it’s just that you’d usually expect those requirements to force disclosure of things investors don’t already know.

It seems to me that a much more helpful – and more radical – proposal would be to force disclosure of things investors don’t know, such as general information about diversity throughout the company (a proposal made most recently by Jamillah Williams).  This kind of data is usually confidential, though it is reported to the EEOC.  Interested parties can request it via FOIA for firms that contract with the government, and companies like Oracle and Palantir have fought fierce – and ultimately losing – battles to keep it secret, ostensibly because diversity data is a “trade secret,” but more likely because the true numbers are embarrassingThat’s information that is much more likely to enlighten.

*a critique, among others, that I elaborate upon in my forthcoming essay, Fact or Fiction: Flawed Approaches to Evaluating Market Behavior in Securities Litigation

https://lawprofessors.typepad.com/business_law/2019/03/does-congress-believe-in-efficient-markets.html

Ann Lipton | Permalink

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