There was a time when the SEC's role in the corporate governance process was largely limited to disclosure. In theory, states developed substantive standards while the SEC was assigned responsibilities for disclosure.
The separation was never quite as clear as commentators suggested and, indeed, in a number of instances, the SEC tried to use disclosure to affect substantive practices. See Essay: Corporate Governance, the Securities and Exchange Commission, and the Limits of Disclosure. But at least in the one instance where the SEC overtly tried to intervene into the substance of corporate governance, the Business Roundtable overturned the effort. See Business Roundtable v. SEC, 905 F.2d 406 (DC Cir. 1990).
Things changed, however, with the adoption of Dodd-Frank and SOX. SOX assigned the SEC the authority over audit committees, Dodd-Frank over compensation committee. Both Acts added clawback requirements that are enforceable by the SEC, and Dodd-Frank inserted say on pay, something to be implemented by the SEC. The role of the SEC in the substance of corporate governance will likely continue to grow.
Less discussed, however, the SEC has increasingly been thrown into the middle of the debate over corporate social responsibility. The most obvious example of this is the provision in Dodd-Frank that requires disclosure by public companies of the use of "conflict minerals." These are minerals that are mined in the Congo (former Zaire) and some portion of which is used to fund violent groups in that country. The goal of the disclosure requirements is to induce companies to not use raw materials funding these organizations. In short, the goal is corporate social responsibility.
It is the SEC that has been assigned the task of implementing these requirements. This is a new task for the SEC and a potential Rubicon (a point of no return) that is being crossed. No longer is disclosure about information important to investors. It is about changing the social behavior of corporations.
We will return to this issue in the final post.