close
close

ESG and “Stakeholderism” | The regulatory assessment

Lisa Fairfax explains how stakeholder concerns play a role in FINRA regulations, corporate governance and ESG.

In a recent discussion with The regulatory assessmentLisa Fairfax, Presidential Professor at the University of Pennsylvania Carey Law School and Public Governor on the Board of Directors of the Financial Industry Regulatory Authority (FINRA), provides insights on current corporate governance topics including environmental, social and governance (ESG ) and ‘stakeholderism’.

For example, she discusses how a wide range of stakeholder views help advance FINRA’s broader mission of serving the investing public through its supervision of brokerage firms. She also describes how ESG objectives are sometimes misinterpreted as a tool to advance unrelated political goals. Fairfax says ESG should ensure companies consider a wide range of potential factors that could impact their financial performance.

In addition to teaching at the University of Pennsylvania Carey Law School, Fairfax is co-director of the Institute for Law & Economics at Penn Carey Law, serves on the boards of the Institute for Law and Economic Policy and the Securities and Exchange Commission (SEC). Society, and is a member of the American Law Institute and the Advisory Group for the American Law Institute Restatement of Law, Corporate Governance.

She has received the Outstanding Mentor Award from the Business Associations Section of the American Association of Law Schools and the Trailblazer Award from the Minority Group Section of the American Association of Law Schools.

Before joining the University of Pennsylvania Carey Law School, Fairfax was the Alexander Hamilton Professor of Business Law at the George Washington University Law School, where she led the George Washington Corporate Law and Governance Initiative. She also served on the SEC’s Investor Advisory Committee, served on FINRA’s National Adjudicatory Council, and served on the Committee on Corporate Laws of the American Bar Association’s Business Law Section.

The regulatory assessment would like to share the following interview with Professor Lisa Fairfax.

The regulatory assessment: Can you explain FINRA’s role and how it works with the SEC to regulate brokerage firms and foreign exchange markets?

FINRA has existed for 85 years under a framework created by Congress. It regulates a crucial part of the U.S. securities industry: brokerage firms that do business with the public. FINRA oversees approximately 3,600 brokerage firms and 630,000 registrants. FINRA’s mission is investor protection and market integrity. It provides education and compliance tools to investors and companies, writes rules for day-to-day brokerage activities that enhance investor protection under the federal securities laws, and examines member firms for compliance with those rules and securities laws.

FINRA is a nonprofit organization funded by industry fees, not taxpayer dollars. FINRA’s leadership is not appointed by the government, but FINRA is closely supervised by the government and in particular by the SEC, which has a number of different programs that oversee FINRA’s operations and regulations. The SEC has a special office that provides ongoing oversight of FINRA.

TRR: What do you see as some of the biggest challenges facing financial regulatory or supervisory organizations, such as FINRA, today?

Most financial regulators face challenges arising from an accelerated pace of change in markets, in investment products and in the way investors communicate and consume information. Fortunately, FINRA’s status as a self-regulatory organization has given it the ability to keep pace with these changes and prepare for new risks.

As new markets have taken shape with an influx of new investment products, regulators must continually reassess and adapt their rules and guidelines, supervision and enforcement. For example, FINRA is seeking to increase its regulatory capabilities and expertise regarding crypto assets, a $1 trillion market that is attracting many new and young investors.

Meanwhile, FINRA is also taking efforts to protect investors amid changes in how investment scams are perpetrated and how bad actors victimize investors, especially senior investors. For example, FINRA introduced several new safeguards, including the first uniform, national standards to protect seniors.

TRR: What is the role of a “public governor” at FINRA? How is your role different from that of an industry member on the FINRA board?

FINRA’s Board of Directors oversees and provides advice and guidance to management in the administration of FINRA’s affairs. We review and approve all regulatory proposals, FINRA’s budget and other matters. All governors, both public and industrial, have the same duties: to act in the best interests of FINRA.

As a self-regulatory organization, FINRA is able to more directly engage stakeholders in its deliberations and benefit from their expertise, including expertise on different companies’ business models and how they operate, the complex and rapidly evolving securities markets, and the concerns of a wide range of business models. range of investors. The same applies at board level. We bring our different perspectives to the same task: guiding FINRA’s mission to protect investors and ensure market integrity. When discussing a proposal, you never know who is ‘public’ or ‘industry’; we all advocate for the interests of the investing public and a vibrant industry.

TRR: You have written about stakeholderism, or the shift of corporate focus from shareholders to a broader group of stakeholders. How might a shift toward stakeholderism impact the regulatory approach of organizations like FINRA?

Stakeholderism is an important topic when applied to FINRA because the agency has always served the interests of a diverse group of stakeholders, including the companies they regulate, the investors they serve, and the government that oversees its activities. FINRA’s mission of investor protection and market integrity means that FINRA must focus not only on broader societal issues impacting the financial markets, but also on recruiting, retaining and promoting a broad range of employees who are essential to ensuring ensure FINRA can carry out its mission. FINRA has served these stakeholders for decades and in that time has done much to ensure that it works in the best interests of all its stakeholders. The separation between ‘public’ and ‘industry’ in the Board of Directors is an example of this. The regulatory process is also specifically designed to welcome the views of all stakeholders.

TRR: ESG considerations have become increasingly important in recent years. Can you describe ESG and the impact it can have on companies, investors and the regulatory landscape?

Unfortunately, describing ESG and its impact is difficult because there is significant confusion about the meaning of ESG. Some people are convinced that ESG is about pushing companies to advance political or social issues unrelated to legitimate business concerns, while others insist that ESG is inextricably linked. to long-term financial sustainability.

Those who coined the term ESG saw it as a tool to assess material financial risks and opportunities. ESG is designed to capture the idea that because groups beyond shareholders and issues beyond short-term profits impact financial performance, companies must consider and respond to these groups and issues to ensure long-term financial sustainability better guarantee the term. In other words, ESG matters to our business ecosystem because ESG issues ranging from climate, health, safety and workforce diversity to corporate governance all impact companies, investors and the regulatory landscape.

TRR: You have argued to include mandatory disclosure requirements for ESG matters. You too declared that regulators have historically not included disclosure requirements for companies on key issues related to ESG. What do you see as the main contours of the current debate on requiring companies to disclose ESG issues? What are the strongest reasons for mandatory ESG reporting?

One of the most important aspects of the ESG debate is the need to clarify the importance of ESG for companies and investors. I don’t believe ESG is about companies pursuing a political agenda. Instead, ESG aims to recognize the impact of environmental and social issues on financial performance. This means that ESG is linked to materiality and financial concerns.

For example, in addition to the tragic loss of life, studies show that weather-related events – such as those currently occurring in the United States and increasing in severity and frequency – have significant economic consequences, including the destruction of physical and capital assets, disruption of supply chains and labor markets, undermining workers’ mobility and opportunities and reducing overall economic activity and growth. As a result, the failure to consider and understand these economic consequences is both a risk and a missed opportunity.

This is why so many investors are interested in information about ESG. Mandatory disclosure is important for creating a baseline, facilitating comparisons between companies, and increasing accuracy and accountability. However, voluntary disclosure is also important, especially to allow greater flexibility, experimentation and gap-filling. So, as I’ve written, the voluntary versus mandatory disclosure debate represents a false choice, because both are important to a robust disclosure landscape.

The Sunday Spotlight is a recurring part of The regulatory assessment which periodically shares conversations with regulatory leaders and thinkers, shedding light on important regulatory topics and ideas.