A points system for corporate disclosure?
With the peak traffic period of the 2015 proxy season nearly over, the transparency of corporate disclosure is still on many investors’ minds – so it’s logical that it was the focus of a panel at a half-day seminar hosted by the Millstein Center for Global Markets and Corporate Ownership last Thursday.
One point made was that regulators such as the SEC need new tools to be able to properly assess whether a company’s financial disclosures meet shareholders’ needs or are deficient – or even misleading. And investors need a way to gauge the context of a company’s disclosures so they can decide whether or not they’re being lied to. When it comes to disclosures the SEC finds to be in violation of securities laws, there’s great concern about the growing willingness of some companies to pay the penalty that’s imposed and just chalk it up as another cost of doing business.
One-time violations aren’t the problem here, the panelists agreed; it’s repeat offenders the SEC needs to find a way to be much tougher on, to the point where a penalty has a lasting impact. The regulator might take some cues from the Department of Motor Vehicles (DMV), one panelist suggested. ‘When people drive over the speed limit, they get a speeding ticket, but they get something else, too: points [against their license],’ he said. ‘And when they reach a certain threshold, [the DMV will] suspend their license.’
One aspect of disclosures is the context in which they’re made and there’s a way to measure this, the panelist continued. ‘You could say: one context is worth this number of points,’ he suggested. It would be fair because a company’s board would get advance notice about the number of points the company had accrued before it had reached the threshold where the SEC might choose to bar it from selling shares. That would give the board time to talk to senior management about fixing the problem.
A second panelist worried that such a system would limit the voluntary financial disclosures companies make. He also said he could foresee the threshold not working because there are some companies that would be deemed too big to fail, or too big to bar, which is all too familiar to most of us.
Another topic on the panel was the need for a discussion about the comparability of financial reporting in light of the fact that companies use various different formats. ‘Culture is the key to all of this,’ said a third panelist, who works at a large technology company. ‘Some companies are not very interested in disclosure, which reflects their values.’ One way to correct this is to encourage a race to the top, he suggested: ‘Competition can compel companies to do the right thing even if it’s uncomfortable, because their competitors are doing it.’
A fourth panelist had a more jaded view of disclosure based on seeing a growing tendency to water down disclosures around board diversity. Some companies are using diversity of thought instead of talking about the representation of women or members of ethnic minorities on boards, she said. ‘So you can get what you ask for, but it doesn’t end up meaning very much.’
If you think most shareholders don’t know when a CEO is being less than candid about the challenges and opportunities the company is facing, stay tuned for a future newsletter that will talk about the Rittenhouse Rankings, which a former a former corporate finance executive at Lehman Brothers devised several years ago as a sort of ‘candor index’.