Tag Archive: Elisse Walter

Directors Can Add Valuable Perspective to SEC’s View of Sustainability

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The sustainability information in CSR reports is not, from our perspective, “investment-grade;” that is, it is not necessarily material, not industry specific, not comparable, and not auditable.

Business news headlines on any given day highlight the importance of sustainability issues such as resource scarcity, climate change, population growth, globalization, and transformative technologies. In today’s world, management of these and other sustainability risks and opportunities influences corporate success. Thus, understandably, investors are increasingly requesting information on how companies are managing these factors.

Aulana Peters

Aulana Peters

A concept release from the Securities and Exchange Commission (SEC) on disclosure effectiveness includes a lengthy discussion of sustainability disclosure. In the release, the SEC states that it is “interested in receiving feedback on the importance of sustainability and public policy matters to informed investment and voting decisions.” We hope that the SEC’s request for input on sustainability issues signals an understanding that the information investors consider “material”—much like the world around it—is changing. As a result, corporate disclosures should also evolve to provide investors with the information they need to make informed investment and voting decisions.

Sustainability issues are increasingly important to a company’s financial condition and operating performance, and thus merit the attention of its board. At more than 55 percent of S&P 500 companies, the board oversees sustainability, according to the Investor Responsibility Research Center Institute. Such boards are to be applauded for taking a more holistic view of risk oversight, and for getting out in front of global challenges.

This shift in focus by investors and the business community is driven by a growing recognition that sustainability issues are business issues, not only born of social or political concerns. One recent study found that when companies focus their efforts on managing material sustainability factors—namely, those critically linked to their core business—they outperform their peers with significantly higher return on sales, sales growth, return on assets, and return on equity. They also show significantly improved risk-adjusted shareholder returns.

Clearly, the board plays a key role in developing a company’s capacity to create long-term value and in safeguarding its assets. In this regard, a board’s careful consideration of information on material sustainability factors would help it to fulfill its oversight responsibilities, by assisting it in understanding, prioritizing, and monitoring business-related risks and opportunities.

For example, a board should regularly consider how its company measures, manages, and reports its material sustainability risks. A pharmaceuticals company might consider how it is addressing a $431 billion counterfeit drug market, where mitigation strategies in an increasingly complex, global supply chain could stem or reverse the loss of consumer confidence and company revenues, and prevent up to 100,000 deaths each year (see Roger Bate’s 2012 book Phake: The Deadly World of Falsified and Substandard Medicines). The plunging stock price and loss of goodwill suffered by Chipotle Mexican Grill after outbreaks of E. coli and norovirus at its restaurants demonstrate the way in which a failure to manage sustainability risk factors can seriously damage a company’s reputation and shareholder value.

Moreover, sustainability issues not only raise risks, but also present opportunities that can and should be taken into account by the board as it considers development and implementation of the company’s strategic goals.

Sustainability issues may have a material impact on a company’s ability to achieve such goals. For automakers, a strategy that incorporates fuel-efficient technologies and alternative fuels can help the company capitalize on legal and consumer trends regarding fuel economy and emissions in a market where car ownership is projected to triple by 2050.

Elisse Walter

Elisse Walter

Sustainability issues directly affect a company’s financial condition and operating performance. Therefore, it is not surprising that investors are increasingly demanding more effective and useful sustainability information. Many companies have made efforts to meet this demand through disclosures in corporate social responsibility (CSR) reports, by responding to questionnaires, or otherwise engaging with investors. The sustainability information in CSR reports is not, from our perspective, “investment-grade;” that is, it is not necessarily material, not industry specific, not comparable, and not auditable. To that point, a 2015 PwC study found that 82 percent of investors said they are dissatisfied with how risks and opportunities are identified and quantified in financial terms; 74 percent of the investors polled said they are dissatisfied with the comparability of sustainability reporting between companies in the same industry.

What the markets have lacked, until now, are standards that can guide companies in disclosing material sustainability information in a format that is decision-useful. These standards must be industry specific. Sustainability issues affect financial performance differently depending on the topic and the industry. Therefore, investors need guidance on which sustainability issues are material to which industries, and they need industry-specific metrics by which to evaluate and compare the performance of reporting companies.

The Sustainability Accounting Standards Board (SASB), an independent 501(c)(3) nonprofit, was created to address this market inefficiency. The mission of SASB is to develop and disseminate industry standards for sustainability disclosure that help public corporations provide material, decision-useful information to investors via MD&A and other relevant sections of SEC filings such as the Form 10-K and 20-F. SASB’s standards are formulated with broad market participation and draw upon metrics already used by the corporate community. They will continue to evolve, as our world, and thus material sustainability issues, change.

Investors want to place their funds in entities that have good prospects for the future. To do so, they evaluate the information that is material to a company’s prospects. Not all that information rests in the financial statements that reflect a company’s current financial condition. We believe that, in today’s world, risks and opportunities not yet reflected in a company’s financial statements influence its success.  And, the information that is “material” to investors—much like the world around it—has changed.

To help companies disclose material sustainability information, the capital markets need standards for disclosure of sustainability information that are created by the market, specific to industry, and compatible with U.S. securities law.

The management and disclosure of sustainability issues merits the attention of directors. The public comment period for the SEC’s disclosure effectiveness concept release runs through July 21. This is an important opportunity for publicly held companies and their directors to be heard on these critical issues, and to stress the importance of a market standard that serves investors while not overburdening issuers.

Aulana Peters was an SEC Commissioner from 1984-1988. Elisse Walter was the 30th chair of the SEC. Peters and Walter serve on the SASB board of Directors.

SEC Leadership and Audit Committee Priorities for 2013

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In the midst of the general process to determine the next leader of the Securities and Exchange Commission (SEC), current Chairman Elisse Walter[1] spoke to NACD’s Capital Area chapter this week. The conversation covered a wide range of topics, from diversity in the boardroom to the sequester’s impact on the SEC.

A significant portion of the discussion focused on the auditing profession, including activity from the Public Company Accounting Oversight Board (PCAOB). Having served on the SEC’s staff in a variety of roles beginning in 1977, Walter has had a front-row seat to the evolution of auditing and oversight. From her perspective, although audit has improved in the years since Sarbanes-Oxley, the improvements have not been enough to meet the current environment. Walter also highlighted the utility provided by PCAOB’s new Auditing Standard 16: Communications with Audit Committees and the proposed changes to the auditor’s reporting model.

On mandatory audit firm rotation—another significant proposed rule from the PCAOB—Walter was less committed. While there are many pros and cons to the concept, she noted the potential impact was uncertain.

PCAOB member Jay Hanson has commented several times on the concept release. Without a causal link between an audit failure and the audit firm tenure, Hanson remarked that he could “not see how the Board could move forward on mandatory rotation.” Furthermore, “mandatory rotation would be extraordinarily difficult to justify through an economic analysis of its costs and benefits.”

Last year, NACD’s National Audit Committee Chair Advisory Council spearheaded an initiative to propose an alternative solution to mandatory audit firm rotation: the audit committee evaluation of the external auditor. On Wednesday—the advisory council’s first meeting in 2013—delegates reviewed the status of the project. Since NACD CEO Ken Daly’s participation in a PCAOB roundtable last fall—during which he presented the assessment tool—the evaluation form has been downloaded over 1,500 times.

While directors wait for the PCAOB to decide its next steps regarding mandatory audit firm rotation, the advisory council outlined areas it plans to focus on in 2013. These include:

  • The quality of information presented to the board from management. Delegates suggested dashboards that are board- rather than management-oriented.
  • Cybersecurity and emerging technologies. Cyberterrorism and new technologies, such as social media, present significant risks to companies—oversight of which is often assigned to the audit committee.
  • Oversight of big data. Increasingly, investors are using data found in sources other than the annual financial report to analyze and make trading decisions. In some cases, the markets have information about a company’s products and performance before the board. 

Produced with KPMG’s Audit Committee Institute and Sidley Austin, NACD’s National Audit Committee Chair Advisory Council will next meet in early June. For a summary of the council’s 2012 meeting, visit our Board Leaders Briefing Center.


[1] The Chairman’s views were her own, not those of the SEC.

NACD Insight & Analysis: The Undeterred SEC

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Recent business news is seemingly filled with stories covering the SEC’s push to fulfill the requirements set by Dodd-Frank.

In the last week, NACD Directors Daily has featured reports of the SEC pursuing an insider trading case, proposing rules restricting bonuses at large brokers and investment advisers, and examining practices at banks that have restructured troubled loans. In addition, it was reported this week that the SEC has seen an uptick in whistleblower claims, receiving “one or two high value” tips every day. The agency is not expected to receive a raise in funding in the current debate over the federal budget, leading many to question how the SEC will be able to function at the elevated level required by Dodd-Frank.

In speeches this week, SEC commissioners have discussed the difficulties the agency faces in the future. At the Practising Law Institute’s annual symposium, Chairman Schapiro noted how the current budget freeze on the SEC restricts the organization from functioning as necessary, but, despite her call last year for 800 new employees to carry out the Dodd-Frank mandates, the agency’s budget has been frozen at $1.1 billion since the end of the last fiscal year. The current proposed federal budget is under debate, causing uncertainty over whether portions concerning financial services oversight will be restricted.

SEC Commissioner Elisse Walter echoed the Chairman’s views at the U.S. Chamber of Commerce this week. Her comments focused on the difficulty the SEC has in depending on the budget, particularly as it pertains to making long-term investments in technology.

Directors should be aware that, regardless of the apparent difficulties the SEC says it will have in the upcoming year, the agency is ultimately responsible for carrying out the mandates established by Dodd-Frank. For example, the SEC is expected to issue final rules on the whistleblower bounty program, despite their perceived lack of necessary resources. Boards would be prudent to prepare their companies for the challenges posed by compliance issues. With respect to the new whistleblower program, boards should examine their current internal reporting structure, as well as review their corporate culture.