Corporate Governance

The SEC, Social Responsibility, and Conflict Minerals: Crossing the Disclosure Rubicon (Part 5)

By J Robert Brown Jr.

The SEC's assignment to develop and enforce the conflict minerals disclosure requirements entails the possible crossing of a disclosure Rubicon.  In effect, it is sending the SEC into a new and uncharted area of disclosure. 

As we have noted, the Agency has in the past used disclosure to affect substantive behavior.  In general, however, the substantive changes sought were designed to improve the efficacy of the financial disclosure system.  These efforts are discussed at length in Corporate Governance, the Securities and Exchange Commission, and the Limits of Disclosure. 

Conflict minerals disclosure is very different.  It is not designed to ensure better disclosure for investors but to encourage companies to stop buying minerals from the designated areas.  In other words, the disclosure is designed to promote corporate social responsibility. 

There are innumerable areas where disclosure might affect the behavior of corporations, some on the left, some on the right.  Indeed, the SEC's efforts under the prior Chairman to publicize companies doing business with states that sponsor terrorism was an unsuccessful example of the use of disclosure to change corporate behavior.  That effort foundered in part because the Commission mistakenly tried to provide the requisite disclosure rather than impose the obligation on the companies themselves.  ?

The SEC has throughout its history been beseeched by interest groups that want disclosure in order to alter corporate social behavior.  In recent years, some have sought increased disclosure of climate change; other the disclosure of campaign contributions. 

In the case of climate change, the SEC did issue a release on the topic but walked a delicate line.  The Release emphasized the importance of climate change disclosure but added no new requirements.  Instead, it discussed the places where the existing reporting regime already mandated disclosure.  The SEC, therefore, addressed the needs of particular interest groups but maintained the nexus between disclosure and the importance of the information to reasonable investors.

Conflict minerals requires no such nexus.  Thus, the SEC is enforcing a disclosure requirement that makes no pretense at providing information important to a reasonable investor.  Instead, the requirements are entirely designed to affect corporate social behavior.  By crossing this Rubicon, the SEC may have greater difficulty resisting interest groups seeking socially responsible disclosure. 

So, while this is a single, relatively narrow example, it may portend a new direction for the SEC:  Using disclosure to promote socially responsible behavior. 

Full post as published by The Race to the Bottom on December 31, 2010 (boomark / email).