Fiduciary Duty, Materiality and Shareholder Proposals Discussed & Debated

While Milton Friedman’s essay “The Social Responsibility Of Business Is to Increase Its Profits” was published more than 50 years ago, the topic continues to be debated and sometimes misunderstood today by experts, investors and regulators alike.

During a recent Federalist Society discussion, there were a few key takeaways on the topic from panelists SEC Commissioner Elad Roisman, former Chief Justice of the Delaware Supreme Court Myron Steele, and moderator Paul Atkins:


·        Federal and Delaware state law make clear that fiduciary duty (i.e., the obligation to act in the best interest of a party) is ultimately owed to the corporation as an entity, for the benefit of its shareholders.

·        Investors have different views and priorities on any number of issues, making it next to impossible for boards of directors to manage the best interest of stockholders with disparate interests.

·        It is hard to foresee a change to Delaware law, such that the fiduciary duty would be owed to those outside the corporation or shareholders.

·        Delaware law, however, will not be an obstacle for a company that might be trying to adopt environmental, social and governance (ESG) standards as long as the board engages in a thoughtful process that determines if something is in the best interest of the company and its shareholders.

·         The role of the SEC in corporate governance matters is very limited, because state law has generally governed the chartering and governance of corporations.

·        The Securities Exchange Act of 1934 is silent on the issue of corporate governance. The Act’s  legislative history shows that  the original bill contained a provision, which  was ultimately struck, that read: “Nothing in this title should be construed as authorizing the Commission to interfere with the management of the affairs of an issuer.” It was struck, according to legislative history, because it was deemed unnecessary since the bill was not seen as likely to be misconstrued on that point.


·        U.S. Supreme Court decisions have looked to materiality as the touchstone of the U.S. public company disclosure regime and is ultimately tied to the financial value of the company. An item is material if a reasonable investor would consider the omission or misrepresentation of the fact as altering the total mix of information available.

·        Public companies must disclose material information to their investors (which may include environmental factors for some companies). The principles-based approach at the SEC allows each individual company to tailor that information so that it is useful to their investors.

·        Materiality can evolve. For example, two years ago few, if any, were talking about pandemics and supply chain disruption, but for public companies today, it is a large portion of disclosure they provide.


·        The shareholder make-up of corporations has changed. Historically, investors owned a company’s shares directly, but today most investors are invested through asset managers.

·        If disclosure is going to be examined, it should be looked at across public companies and all regulated entities, including asset managers who manage money on behalf of millions of individual investors.

·        Rule 14a-8 governs the process for a shareholder to get a proposal included in a company’s proxy. The SEC requires certain thresholds of ownership to be able to submit proxy proposals to reduce the potential for abuse of the process.

·        The SEC recently updated thresholds for shareholder proposals: It used to be $2,000 in equity for one year. Now there is a tiered system. The holding period is three years for $2,000 to show a longer-term investment horizon. However, shareholders who have a greater financial stake in the company do not have to wait as long.

·        This update was based in part on a study that showed that five individuals were responsible for 78 percent of all individual proposals brought to companies.

Watch the entire webinar discussion or listen to the podcast here.