Pushing social policy by way of corporate disclosure is not exactly new to federal securities law. It is, however, becoming more common.
Among the oldest social policies targeted by disclosure requirements has been executive compensation, the subject of ever-increasing rules and disclosures since the 1990s—even if those rules haven't succeeded in curbing executive pay. The Dodd-Frank Act will pursue executive pay still more in coming months, but also on deck are disclosure requirements for conflict minerals and oil companies' payments to foreign governments.
And now companies are facing more of the same from other pending legislation. U.S. Rep. Carolyn Maloney, D-NY, for example, just introduced the Business Transparency on Trafficking and Slavery Act. The bill requests that the Securities and Exchange Commission mandate public companies to disclose all measures taken to counter forced labor, human slavery, trafficking, and child labor within companies' supply chains. If that concept sounds familiar, that's because it draws from California's Transparency in Supply Chain Act—already signed into law in that state, and going into effect on Jan. 1.
Meanwhile, another group of advocates recently submitted a petition to the SEC to enact a rule to require corporations to disclose their political spending. The collection of academics and governance activists argue that the disclosure requirement is important for the operations of corporate accountability mechanisms, while fulfilling the growing demand of public investors' interests on companies' political spending.
Neither Maloney's office nor the activists pursuing the political spending rule were available to comment, and given the anti-regulatory zeal in Congress these days, the fate of either measure is unclear right now. Regardless, Corporate America still has plenty of other policy making via disclosure coming soon. In the next tranche of Dodd-Frank rules, due from the SEC in coming months, companies will be required to disclose the pay ratio of the CEO compared to median employee wages—a number that many financial reporting voices say will be hugely difficult to calculate, and that critics say serves no purpose other than to beat up well-paid executives.
Disclosure in Practice
The Council of Institutional Investors favors the disclosure requirement on corporate political spending, calling transparency in general the cornerstone of good corporate governance.
Amy Borrus, the Council's deputy director, says as companies now have enormous leeway to make political contributions without disclosing the amount nor the recipient; that creates a risk to shareowners that the money can be used to underwrite candidates, issues, and activities that contradict the values and policies of the company.
“Shareowners need clear, concise financial and other disclosures to help them decide whether to invest in one company or another,” she said, but added that disclosure requirements should be reasonable.
David Cole, partner in the law firm Holland & Knight, agrees with the use of corporate disclosure to address social matters. Citing the conflict minerals rule and supply chain transparency as examples, he said, “When Congress regulates through mandatory disclosures, companies will have to disclose this information and people will start to see the reality behind all the human atrocities resulting from certain business activities.”
ANTI-TRAFFICKING DISCLOSURES
The following excerpt from the Maloney bill explains that a company must disclose how it:
(A) Maintains a policy to identify and eliminate risks of forced labor, slavery, human
trafficking, and the worst forms of child labor within its supply chain. If the person maintains
such a policy, the disclosure shall include the text of the policy or a substantive description of
the elements of the policy.
(B) Maintains a policy prohibiting the use of the person's corporate products, facilities, or services to obtain or maintain someone under conditions of forced labor, slavery, human trafficking, and the worst forms of child labor.
(C) Engages in verification of product supply chains to evaluate and address risks of
forced labor, slavery, human trafficking and the worst forms of child labor ...
(D) Ensures that audits of suppliers are conducted to evaluate supplier compliance with
the person's company standards for eliminating forced labor, slavery, human trafficking, and
the worst forms of child labor in supply chains. The disclosure shall specify if the verification
was not an independent, unannounced audit.
(E) Assesses supply chain management and procurement systems of suppliers in the
person's supply chain, to verify whether said suppliers have in place appropriate systems to
identify risks of forced labor, slavery, human trafficking, and the worst forms of child labor
within their own supply chain.
(F) Requires suppliers in its supply chain to certify that materials incorporated into the product comply with the laws regarding forced labor, slavery, human trafficking, and the worst forms of child labor of the country or countries in which they are doing business.
(G) Maintains internal accountability standards, supply chain management and procurement systems, and procedures for employees or contractors failing to meet the person's
company standards regarding forced labor, slavery, human trafficking, and the worst forms of
child labor. The report shall describe such standards and systems.
(H) Provides the person's employees and management who have direct responsibility for
supply chain management, training on forced labor, slavery, human trafficking and the worst
forms of child labor, particularly with respect to mitigating risks within the supply chains of
products.
(I) Ensures that recruitment practices at all suppliers comply with the person's company
standards for eliminating exploitive labor practices that contribute to forced labor, slavery,
human trafficking, and the worst forms of child labor, including by conducting audits of labor
recruiters and disclosing the results of such audits.
(J) In cases where forced labor, slavery, human trafficking, and the worst forms of child
labor have been identified within the supply chain, ensures that remediation is provided to
those who have been identified as victims.
Source: Petition by Mrs. Maloney on Efforts to Eliminate Slavery.
Cole argues that the best way to address social issues is to put them into public view, and only through mandatory public disclosure will corporations help to disseminate that information to the public. While collecting and disclosing that data does carry a cost, most companies involved will already have internal resources in place to comply with such requirements, he says.
“The hard cost to filing such disclosure will be minimal. and companies can certainly comply with the requirement,” says Cole. He points to Motorola as one example; the company has been posting its use of minerals on its Website long before any discussion to implement the conflict mineral rule came along.
Critics remain skeptical at the approach, citing unnecessary burden of costs and additional work for corporations only to serve certain interest groups in the economy. In addition, they question whether people outside of the interest groups really reap much benefit from adopting the policy.
Keith Bishop, partner in the law firm Allen Matkins, says using disclosure to address social issues is perfectly fine—if companies themselves make that decision. “What I am against is if minority groups want something and make corporations subsidize their interests through rules like these,” he says, referring to a comment letter against the petition for disclosure in political spending that he filed with the SEC.
Bishop says his opinion is not a judgment against any particular issue, since all of them matter to different interest groups. The real danger, he warns, is in expanding disclosure to address more and more problems. “Using disclosure requirements too often will weaken its impact in the long run,” he says.
Steve Quinlivan, partner at law firm Leonard, Street and Deinard, also warms that the disclosure strategy can unleash dangerous forces to the free market. For example, he says, imposing economic sanctions on countries where the conflict mineral trade thrives will leave people in those countries (mostly central Africa) even further in poverty. Or consider the pay-ratio disclosure requirement; even if companies try to improve that number by paying employees more, that means companies will be spending more on payroll without any real increase in productivity. “This is bad for shareholders,” Quinlivan says.
A better solution, Quinlivan says, is for Congress to assume the responsibilities of thorny policy issues rather than hand the burden off to regulators. “Congress is only trying to pan political heat to regulatory bodies,” he says. “They can just say, ‘No one can buy [conflict] minerals.”
Bishop adds that regulators must remember compliance costs borne by corporations and shareholders—which do exist, he says, even if advocates insist that the new disclosures are cost free.
With the state of California just five months shy from implementing its Transparency in Supply Chain Act, Bishop says he can confirm that “social policy by disclosure” has real costs, even if they are simply billable hours from clients calling up his law firm for advice. “Companies are paying lawyers to find out if they are subject to the law,” he says. “That is a cost.”
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