Corporate Governance

Regime Change and the SEC's Corporate Governance Agenda: #4 Social Responsibility Disclosure

By J. Robert Brown

Let's face it.  The SEC regulates corporate governance but has a limited repertoire of weapons.  With some exceptions, the Agency can do little more than require disclosure.  But at least with disclosure, shareholders have the information necessary to bring pressure on management for reform. 

It is time for the SEC to define standards in connection with the disclosure of information related to corporate social responsibility.  Social responsibility typically takes into account activities designed to have an impact on stakeholders, including customers/suppliers, employees, the community, and the environment.  Disclosure today is voluntary and non-uniform.  This is both the type of information increasingly important to investors and therefore worthy of standardized disclosure requirements and, frankly, a place where disclosure requirements might affect substantive behavior.

In this regard, the US is already behind Great Britain.  Section 417(5) of the Companies Act of 2006 requires disclosure and provides:

• In the case of a quoted company the business review must, to the extent necessary for an understanding of the development, performance or position of the company’s business, include— (a) the main trends and factors likely to affect the future development, performance and position of the company’s business; and (b) information about— (i) environmental matters (including the impact of the company’s business on the environment), (ii) the company’s employees, and (iii) social and community issues, including information about any policies of the company in relation to those matters and the effectiveness of those policies; and (c) subject to subsection (11), information about persons with whom the company has contractual or other arrangements which are essential to the business of the company.

Rule proposals would need to develop a definition and standards.  This wouldn't be particularly easy and like any number of innovative disclosure areas, an effort that would need to be revisited periodically.  Nonetheless, in the realm of information important to investors, this qualifies. 

The Division of Corporation Finance should be instructed to develop a rule proposal providing for mandatory corporate social responsibility disclosure.

Full post as published by The Race to the Bottom on January 07, 2009 (boomark / email).