Tag Archive: disclosures

Current Efforts Toward Corporate Disclosure Reform

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The discussion surrounding corporate disclosure reform has consistently centered on the issue of how to provide sufficient levels of information to investors and other readers without overburdening those responsible for preparing the disclosures. On July 29, the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness (CCMC) hosted an event addressing corporate disclosure reform. A variety of issues involving disclosure reform were discussed in panels featuring general counsels from leading companies, former officials from the Securities and Exchange Commission (SEC), the current head of the SEC’s Division of Corporation Finance, and other stakeholders.

Corporate disclosure reform has also been a recurring topic of discussion among the delegates of NACD’s advisory council meetings. Delegates are committee chairs of Fortune 500 companies and, along with key stakeholders, they discuss the issues and challenges currently affecting the boardroom. In particular, NACD’s Audit Committee Chair Advisory Council has discussed this topic at length, and this issue featured prominently in the discussions at the June 2013, November 2013 and March 2014 meetings. In particular, the November meeting featured senior leaders from the Society of Corporate Secretaries and Governance Professionals to discuss their efforts to streamline disclosures, while the March meeting included analysts from Moody’s Analytics and Morgan Stanley to share how they use disclosures.

Many of the key takeaways from the CCMC’s July meeting have been echoed at NACD’s advisory council meetings. These include:

The “disclosure burden” is largely driven by a desire to reduce liability. The first CCMC panel focused on the perspectives of two former SEC commissioners: Roel Campos, who is currently a partner at Locke Lord; and Cynthia Glassman, now a senior research scholar at the Institute for Corporate Responsibility at the George Washington University School of Business. There was agreement that disclosures have become documents of litigation. The usefulness of many disclosures was called into question, and in fact, many of the disclosures found on today’s financial statements are not actually mandated. For example, while comment letters issued by SEC staff from the Division of Corporation Finance and the Division of Investment Management “do not constitute an official expression of the SEC’s views” and are “limited to the specific facts of the filing in question and do not apply to other filings,”[1] many companies include disclosures based on these comment letters, often aiming to reduce their company’s liability by accounting for every possible contingency.

What’s more, if one company is asked by the SEC to provide a particular disclosure, other companies may feel compelled to disclose the same information even though they may operate in different industries.

Nevertheless, elimination of unnecessary or outdated disclosures requires a lengthy review process. Without a champion for reform, disclosures can linger on financial statements in perpetuity. An advisory council delegate noted: “It’s possible to take the initiative and cut the 10-K down. But it’s a significant time commitment, so you need buy-in from the CEO, CFO, and audit committee.”

Technology provides promising solutions. It was also observed that many disclosures are mandated by laws and rules stemming from the 1930s to the 1980s, when corporate information was only accessible in a physical form. Today, company websites often provide more detailed, current information than the 10-K. One CCMC panelist suggested that the SEC should encourage companies to rely more on these websites for the disclosure of certain information, such as historical share prices.

CCMC panelists also discussed ways to take advantage of technology to redesign and standardize the financial statements themselves, which could make them searchable and allow investors to make comparisons over time or across companies more easily. One panelist suggested that disclosure transparency could be enhanced by creating a “digital executive summary” document. In this summary, new, newly relevant, and the most material disclosures could be grouped in one place with hyperlinks to more detailed information. A similar notion has been discussed at recent Audit Advisory Council meetings, as one delegate offered: “Perhaps we need a second document, aside from the 10-K, that provides a shorter, more meaningful narrative that’s focused on the material issues that investors are interested in.”

Disclosure reform involves multiple stakeholder groups. The second CCMC panel of the morning focused on balancing the disclosure needs of various stakeholders. The panel included the perspectives of several professionals whose work is heavily influenced by the disclosure regime. They included Julie Bell Lindsay, managing director and general counsel for capital markets and corporate reporting, Citigroup Inc.; Chris Holmes, national director of SEC regulatory matters, Ernst & Young; Flora Perez, vice president and deputy general counsel, Ryder System Inc.; and Ann Yerger, executive director, Council of Institutional Investors.

From the investors’ perspective, it was noted that because investors are voracious consumers of information, they will rarely say “no” if offered more information.

Several corporate counsels noted initiatives at their companies that are designed to increase disclosure transparency, including efforts to work directly with investors to determine the information that was the most important to them. In fact, nearly half of the respondents to the 2013–2014 NACD Public Company Governance Survey indicated that a representative of the board had met with institutional investors in the past 12 months:

survey graphic

The SEC is currently developing solutions. The final panel of the morning featured Keith Higgins, director of the SEC’s Division of Corporation Finance, who provided his views regarding the state of the disclosure system and described how the division is currently conducting its disclosure reform initiatives. More details regarding the division’s plans to tackle disclosure reform can be found in this speech by Higgins to the American Bar Association in April.

Throughout the morning’s discussions, there were also points of disagreement, such as the relevance of specific disclosures. Each session, however, provided evidence that on all sides of the issue there are those making good-faith efforts to improve the system.

[1] http://www.sec.gov/answers/commentletters.htm.

SEC Roundtable on Conflict Minerals Regulations

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On Tuesday, the Securities and Exchange Commission (SEC) convened a roundtable for an area the Commission does not usually delve into: the humanitarian crisis in the Democratic Republic of Congo (DRC). As part of the Dodd-Frank financial reform legislation, the SEC was given the responsibility of drafting rules requiring publicly listed companies to disclose whether their products contain “conflict minerals.” In this context, the conflict minerals are tin, tungsten, tantalum, and gold produced in the DRC or adjoining countries, as well as any others the U.S. Secretary of State may designate as financing conflict in the DRC.

Although the SEC issued proposed rules on the disclosure in December 2010, it has since failed to meet its April deadline established for final rules, citing difficulties in drafting a rule that would not pose prohibitive costs of compliance for companies. To this end, the SEC convened a public roundtable representing corporations, investors and human rights advocates.

The first panel discussed what is covered by the rule, and what steps would be required to comply. Panelists included Sandy Merber, General Electric; Irma Villarreal, Kraft Foods Inc.; Yedwa Zandile Simelane, AngloGold Ashanti Ltd.; and Mike Davis, Global Witness. The panel discussed a series of questions the Commission had developed from the first round of comment letters including:

  • Should functionality be a test of whether a product is included in the report?
  • If the mineral is used as an ornament, should it be included?
  • Should rules include a de minimis point?
  • How to define “contract to manufacture” in rules

Unlike many of the rules to develop from Dodd-Frank, this did not trigger contention among those representing corporations, investors and advocacy groups. While the representatives from Kraft Foods and General Electric noted the practical impossibility of fully identifying the sources of all their products by the next reporting season, the other panelists, recognizing this, responded that they would be content with a “good faith” effort, improving year over year. Even so, the sheer scope of the rule’s potential impact demonstrates the difficulties the SEC faces in writing the rules, and for companies to comply. Villarreal noted that Kraft Foods has 40,000 different products with 100,000 suppliers.

The second panel continued to discuss the steps necessary for compliance as well as reporting. Panelists included Benedict S. Cohen, The Boeing Company; Jennifer Prisco, TE Connectivity; Darren Fenwick, Enough Project; Kay Nimmo, ITRI, Ltd.; and Darrel Schubert, Ernst & Young LLP and the Auditing Standards Board. Picking up where the first panel left off, the roundtable discussed further questions from the SEC, such as:

  • Should the disclosure be included in the annual report or in a separate report?
  • Should scrap and recycled minerals be exempt?
  • How should the country of origin be defined?
  • Who should conduct the audit? A Certified Public Accountant (CPA), or non-CPA?
  • Should the SEC specify a standard for the audit, and, if so, what standard?

The SEC faces a difficult task—draft rules that satisfy the Dodd-Frank requirements and advocacy groups, without imposing punitive costs or unattainable expectations on corporations. In light of the recent dismissal of proxy access rules from the U.S. Court of Appeals, the SEC must also create rules that will survive potential court challenges. As the voice of the director, NACD is currently drafting a comment letter. Stay posted for further developments in this area.