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,” 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:
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.
Underlying NACD’s Directorship 2020 initiative is a single observation: capitalism—and the role of the director—is changing. There are the more obvious forces behind this shift: vocal shareholder activists, a steady stream of regulation impacting the boardroom, emerging technologies, and the increasingly global marketplace; however, a quieter influence is also taking hold of capitalism: looking beyond the bottom line.
Since their formation, the ultimate goal of corporations has been to generate profit, and therefore shareholder return. As such, total shareholder return has served as a universal metric for investors when analyzing a company’s performance. Recently, several companies have been profiled for their use of “capitalism with conscience.” Panera Bread, for example, has established a number of locations which allow the customer to “pay what you can”; Intel not only links compensation to sustainability but ties employee bonuses to environmental metrics; and Office Depot announced this week the second round of its national “Green Business Challenge”— a public-private partnership launched in 2010 with ICLEI USA. These companies represent just a fraction of those embracing this “softer” side of capitalism. The list of companies upping the ante with respect to sustainability efforts is rapidly growing to include General Electric, Nordstrom, Microsoft, Starbucks, and more.
Observing this trend, Northwestern University Professor and former CEO and Chair of Bell & Howell Bill White posed this question at the recent NACD Directorship 2020 symposium in New York City: should we rename “total shareholder return” to “total stakeholder return”? Although attendees did not commit to a change in nomenclature, they generally agreed that stakeholder return was a necessary consideration in the boardroom. In fact, a key takeaway from the event was a recommendation that the board encourage metrics that foster stakeholder engagement as a strategy for risk mitigation.
Establishing a metric tied to sustainability is not entirely new. In 2010, NACD’s Blue Ribbon Commission on Performance Metrics recommended boards consider non-financial metrics in addition to the more traditional financial metrics, including categories such as community engagement, environment, health and safety, and corporate social responsibility. Additionally, earlier this year NACD Directorship magazine featured a comprehensive primer to sustainability in the boardroom.
Yet many still view sustainability and shareholder return as an “either/or” situation: attention to the former detracts from the latter. At the Bricks and Sticks Sustainability Symposium—an event produced by the U.S. Chamber of Commerce’s Business Civic Leadership Center—panelists representing the various stakeholders involved in public-private partnerships observed that today it is instead a “both/and” scenario. Sustainable long-term economic growth is dependent upon continuing environmental and stakeholder health, and vice versa. Directors play a critical role, according to Yalmaz Siddiqui, senior director of environmental strategy for Office Depot. The organization’s successful Green Business Challenge was in part driven by a strong message from the boardroom encouraging increased focus on sustainability.
Innovative and sustainable solutions for economic growth often require far-reaching and long-term thinking, which can pose a challenge for boards hindered by a more immediate, short-term focus on the bottom line. At upcoming symposiums in Chicago and Los Angeles, NACD Directorship 2020 will continue to explore how—and with which metrics—the board can oversee this changing facet of capitalism.
Ever since the rise of capitalism in post-feudal Europe, people have predicted its self-destruction. Private creation and ownership of wealth carries risks, and these risks have been spotted by advocates and enemies alike. Free-market proponent Adam Smith in Wealth of Nations warned against the dangers of separating ownership and liability in joint-stock companies. A century later, in Das Kapital, Karl Marx, a foe of capitalism, said capitalism would fail due in part to the inevitable decline of profits over time. And at the turn of this past century, capitalist icon and financier George Soros wrote of the “capitalist threat” in the Atlantic Monthly magazine, predicting that uninhibited pursuit of self-interest without concern for the common good would lead to a breakdown of the free-market economy.
In more recent times, however, we have not needed books or articles to sound the alarm. The current realitiesof persistent recession and excessive regulation say it all. Clearly, capitalism is under siege and we, its practitioners, are its only hope.
Fortunately, there are several existing communities devoted to this noble cause. One is NACD itself. At our national headquarters and in our chapters, we at NACD believe the organization is helping directors do their jobs well, which, in turn, strengthens companies and the economy.
But NACD is not alone in its dedication. A number of movements have emerged with the express purpose of saving capitalism from both itself and overregulation. One of the newest and fastest-growing is “conscious capitalism”—a movement that challenges business leaders and indeed all stakeholders to rediscover and live their companies’ true purpose—even while creating long-term wealth for owners.
The phrase was coined by Muhammad Yunus, who received a 2006 Nobel Peace Prize for founding the Grameen Bank, a provider of micro-loans. The term caught on quickly. Kip Tindell, CEO of the Container Store, and John Mackey, co-CEO of Whole Foods Market, co-founded Conscious Capitalism Alliance in 2007, which would join with an institute to become Conscious Capitalism Inc.(CCI).
The Conscious Capitalism movement, via CCI, has grown in less than half a decade to become a convening force—one strong enough to tear me away from my office! Last month I served on a panel at the Fourth Annual Conscious Capitalism Conference at Bentley University in Waltham, Massachusetts. The event focused on the importance of “love and care” in the workplace, along with similar topics, including the board’s role in corporate culture, the theme of my panel.
The conference brochure advised me that “conscious businesses have distinctive cultures that help to sustain their adherence to their higher purpose and their orientation towards maintaining a harmony of interests across stakeholders. Conscious cultures are self-sustaining, self-healing and evolutionary.” So far so good!
I assumed my purpose was to suit up, show up, and “carry the flag” for corporate directors. I could just picture myself as being the only “suit” among a sea of social activists and rising-star millennials, being a lone voice explaining that directors do care. In preparation for the panel, I had come up with what I call the 5 Cs:
code (help develop the code of conduct)
CEO (pick the company leader and successors with an eye to culture)
compensation (compensation committee sets incentives for nonfinancial and well as financial results)
controls (audit committee ensures compliance with laws, the code of conduct, and any other norms)
composition (nominating and governance committee selects the board, which then sets the tone at the top through all of the above)
But as it turns out, although I did intone my 5 Cs, I didn’t have to do much explaining about how the boardroom works. Directors and business VIPs were everywhere in the crowd of over three hundred—including some with strong NACD credentials.
Day 1 featured former Medtronics CEO Bill George, who co-chaired the NACD Blue Ribbon Commission on Executive Compensation, as a keynote panelist on the theme of love and trust in business.
On Day 2, the director community was also in evidence. The moderator of the corporate culture panel, Deborah Wallace, is an NACD Fellow, and her panel included NACD’s most recent Director of the Year, Jenne Britell, chair of United Rentals. Another director on the panel, Ralph “Bud” Sorenson, is the chair of the nominating and governance committee of Whole Foods. The conference also featured several notable CEOs, past and present (not only Tindell and Mackey, mentioned earlier, but also Ron Shaich, founder and co-CEO of Panera Bread; and Doug Rauch, former CEO of Trader Joe’s and current CEO of CCI).
Coming all the way from Australia was Ian Pollard, a prominent member of the Australian director community, active with the Australian Institute of Corporate Directors. And I couldn’t resist giving a shout-out to Steve Jordan, director of the U.S. Chamber of Commerce’s Business Civic Leadership Center. (BCLC advances businesses’ social and philanthropic interests through a variety of programs, including corporate citizenship awards and a disaster help desk that empowers businesses to help communities when natural disasters strike.) Like yours truly, Steve is a member of the advisory board of the Caux Round Table, which deserves its own full-length blog post—coming soon.
This star lineup told me that corporate America is already engaged in social responsibility, already devoted to making capitalism sustainable for the long term. Why else would such respected directors be there? And I noticed some knowing nods of agreement from the audience when I discussed the Global Reporting Initiative (GRI), the standard for reporting on company accomplishments in the environmental, social, and governance (ESG) realm—or “sustainability” for short. At NACD, we’ve been keeping our members in the know about such issues—which we will cover at our Board Leadership Conference in October 2012. As usual, our speakers and panels on sustainability-type issues will draw an appreciative crowd.
But Conscious Capitalism runs deeper than simply preaching to the choir about the importance of social issues. According to CCI co-founder Raj Sisodia, Conscious Capitalism has four defining characteristics: “First is a higher purpose. There needs to be some other reason why you exist, not just to make money. Second is aligning all the stakeholders around that sense of higher purpose and recognizing that their interests are all connected to each other, and therefore there’s no exploitation of one for the benefit of another. The third element is conscious leadership, which is driven by purpose and by service to people, and not by power or by personal enrichment. And the fourth is a conscious culture, which embodies trust, caring, compassion, and authenticity.”
Ideally, these values permeate the conscious corporation at every level, including all its employees. Keynote speaker Singh Kang, general manager of the Taj hotel in Boston, gave a good example. Taj is owned by the Tata Group, an $80 billion Indian conglomerate known for its benevolence to employees. Kang was general manager of Taj Mahal Palace in Mumbai during a terrorist attack on November 26, 2008, referred to as India’s 26/11. During the crisis, he stayed on duty, focusing on safety for all as his employees tried to protect guests, even taking bullets for them. Eleven employees died in the attacks. Their families received generous, lifelong survival benefits from their company, returning loyalty for loyalty.
This was Conscious Capitalism in action. These loyal employees and their equally loyal employer will remain forever etched in my mind, inspiring me to continue defending and protecting our economic system—along with the positive values it can foster.