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article imageOp-Ed: The SEC, disclosures, and a corporate culture with no obligations

By Paul Wallis     Aug 26, 2009 in Business
The US is decades behind the rest of the world in terms of corporate disclosures. The idea of regulated disclosures to the SEC is now cranking itself up into a stupor from its formerly comatose condition, thanks to the 2008 crash.
But there are some big problems with even the theory getting off the ground. The Madoff story which went on for decades, was as much a case of lack of real information as anything else, and that's how important disclosures can be. That's an indication of how far behind the times the US is, in this area.
There’s big hole in the information available to investors about risks. There is for example no obligation for companies to disclose environmental, social, and governance factors (ESG). That’s one area now receiving attention from the Obama administration, and pressure from industry groups and the media is rising:
If you check the word “disclosures” on Bloomberg, you’ll get a library on these issues, and Bloomberg itself has now set up an ESG data service for subscribers.
Groups like the Social Investment Forum have raised the matter of disclosures with the SEC Investment Advisory Committee, and a dialog is under way.
The Christian Science Monitor has an opinion piece which sets out the basics of ESG reporting across a spectrum of major issues like human rights, emerging technologies, and other issues. CSM seems to feel the SEC is making the right noises:
The first meeting of the SEC Investor Advisory Committee even included discussion on whether more disclosure is needed, particularly in the areas of environment and climate change.
All due respect to CSM and everyone else, but this is likely to be a very long road, before either the SEC or corporate America become fountains of information for investors. ESG is a bare beginning, in terms of requirements for corporate disclosures. There’s a heritage of almost prehistoric proportions involved in this concept, so some archaeological data is necessary here:
In other countries, disclosures are mandatory. Regulation has created the road rules, everybody knows what’s required, and in the EU, Australia, and other economies, risk disclosure is a known factor in corporate public records. In the US, however, the massive Thatcher- Reagan deregulation drive of the 1980s, in addition to destroying the concept of corporate accountability, also destroyed the mechanisms and even the theory of corporate disclosures.
(The US and UK, interestingly, were much worse affected by the 2008 meltdown than other economies. Everything was a revelation to the US and UK markets, who responded like the Babes In The Wood to each new catastrophe. In Australia, corporate and financial regulations prevented the US financial scenario, and in the EU, Germany is already getting back on track after a relatively shallow dive.)
That culture created the present US corporate world and its non-information syndrome. Management science and business academia spinelessly caved in to the cultural imperatives. The whole concept of corporate accountability and social obligations was obliterated by a wave of wannabe Gordon Geckos, Conspicuous Consumers, and other cases of vast intellectual vacuums.
By the time of the 2008 crash, US business was beyond any form of meaningful requirement to provide information to anyone. Wall Street was making clients sign contracts saying they couldn’t sue financial advisors, a major contradiction of basic property rights, and nobody in government gave a damn. The SEC was a joke, with a laissez faire policy which had been running for decades.
This lack of requirement for disclosure also meant that the finance sector could use selective myopia regarding mortgage securities, and the mess dragged on despite the fact that even the FBI was aware of major issues as far back as 2004. Congress, in the course of its bipolar disorders during the Bush administration, did little or nothing, and what was done had no effect. There were mutterings, but no action. Quite the opposite, some parts of Congress were implicated in the Fannie Mae and Freddie Mac meltdowns.
This heritage of harlotry has created big problems for any new disclosure regime, way beyond ESG:
1. The SEC is out of practice as a regulator. Some of its legal precedents and enforcement mechanisms would be in the fossil wings of museums by now.
2. There’s no working model to use as a legal precedent, except Roosevelt era materials and ideas. They were great in the 1930s, they’re out of their depth in the 21st century.
3. Congress is out of practice as a corporate law legislator. The concept of regulation has been gathering dust thanks to the sheepish behavior of successive governments.
4. US Business isn’t trained to even understand disclosure concepts. It’s an alien concept, vaguely associated with “socialism”, in the business culture. They may not know what it means, but they’re against it, whatever it is.
5. Telling investors about risks isn’t exactly high on the corporate agenda. These guys generally don’t even recognize the rights of shareholders to their own property.
6. Disclosures would be rough for some companies. Not all corporations are sleaze factories, but it’s a matter of opinion how many could survive full disclosures.
7. The business culture isn’t famous for its social sensitivity. If you remember how much effort it took to even get the outworker situation to the notice of the public, and how little was actually achieved, you’ll appreciate why disclosure in terms of human rights may not be very high on the priorities of some corporations.
8. The only form of Federal regulation with which US business regularly complies is in the case of the US trade embargoes. Those laws, which are outside the purely corporate regulation sphere, are enforceable, and enforced. That’s the bottom line for corporate compliance.
9. Corporate law is by definition complex. Putting together a working model of disclosure requirements will need to avoid complexity, and stick to specific information needs, like environmental impact statements, and preferably something requiring verifiable facts and figures for human rights issues.
By far the biggest problem will be creating a generation of corporate managers which has been trained in disclosures, and understands why disclosures are vital to the financial sector. The current generation of corporates are basically trained salespeople. If it’s not on a spreadsheet, looking good at a presentation at a meeting, they just don’t care. That’s not because they don’t get the message or know the risk elements, it’s because they’re not paid to understand them, or do anything about these issues.
Nor are they at risk if they fail to do anything about the ESG situations. There’s nothing in their contracts about it, and corporate law doesn’t contain any real big sticks to deal with systemic lack of information. They can be prosecuted for what they do, but not for what they don’t do. Even the basic idea of of "due diligence" only goes as far as a court says, if it gets to court. Otherwise, no effort is made.
They’ve also never been trained to take into account investor needs, except the majority shareholders who can fire them. More ominously, even major US funds have been suspiciously quiet on the subject of disclosures which if made during the financial crisis, would have saved them billions. Is there money to be made by non disclosure? Because if there is, that would explain a lot. Whole institutions were either too stupid, too lazy or too corrupt to deal with the bizarre valuations of securities which were actually worthless. That's just not credible. Somebody must have had an interest in non-disclosure.
ESG is only the tip of a huge iceberg which sank the US economy more efficiently than the one that sank the Titanic. Either the SEC gets the wool out from between its ears, or the culture that brought you the 2008 crash will just continue to keep producing disasters.
The answer? Something like an FBI/SEC hybrid, with the powers of both, able to actually monitor corporations in real time. Simple, effective, with enforcement built in. No need to even change the letterheads. That could be set up in minutes.
Let's hope it doesn't take another few decades.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
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