The Week That Was: Problems With Disclosure-Based Activism

A ruling handed down on Wednesday by U.S. District Court Judge Denise Casper is yet another setback for the Securities and Exchange Commission as it deals with an albatross around its neck: long-delayed rulemaking requiring oil, gas, and mining companies to disclose information, on a project-by-project basis, about payments made to host governments.

Responding to a lawsuit by Oxfam America, the court’s summary judgment decision concluded that the SEC’s “duty to promulgate a final extraction payments disclosure rule remains unfulfilled more than four years past Congress’s deadline” and it “unlawfully withheld” agency action. The ruling requires the SEC to submit an “expedited schedule” for issuing the final rule within 30 days.

The problem here is one familiar to anyone who has followed the Dodd-Frank Act and rulemaking it required of the Commission. It goes like this: take a Congressional mandate; add commissioners who would rather said mandate just go away; sprinkle in lawsuits from industry trade groups (in this case the American Petroleum Institute); and serve with counter-challenge from activist groups (in this case claiming the SEC shirked its duty by not promptly rewriting the rule vacated by previous litigation).

The SEC, post Oxfam decision, now has to figure out how it can craft a rule that satisfies the contradictory demands of legislative intent and the legal issues that gave API the victory that sent the SEC back to the drawing board. Is a rule of this sort even worthwhile if, meeting the terms of the successful API lawsuit, public disclosure of the reports isn’t required? What’s the point?

That same question underlies the legal wrangling over the conflict minerals rule, another congressional foray into affecting social change via corporate disclosure. As things currently stand, companies still need to scrutinize their supply chains for the use of minerals that fund violent militias in the Congo; and they still need to disclose and audit their due diligence—but they don’t have to say whether they actually found any conflict minerals in their supply chain.

Whatever your feelings about this new breed of SEC rules, the fact is that once they are defanged by litigation, they aren’t useful to anyone. Activists and NGOs don’t get to effectively “name and shame” companies into doing good, and the business community is stuck with expensive busy work for their compliance officers. The only ones who may enjoy all this are class-action attorneys, eager to sue companies if they find any chink in the armor of the disclosures companies do make.

Nevertheless, the SEC is stuck with these rules and making sense of them. We don’t envy the job before them, especially now that, in the case of extractive resource payments, the clock is ticking with a judicial deadline.

Is there a better way? Some might argue that shareholders should be the true gatekeepers for ensuring that companies have clean supply chains and do the right thing.

The problem with that approach, however, is that the SEC can’t seem to master the process of no-action letter relief that companies would need to rely upon if those investor demands go too far.

In January, SEC Chairman Mary Jo White instructed the Division of Corporation Finance to hold off on issuing no-action letters on the application of Rule 14a-8, which allows companies to exclude shareholder proposals that conflict with a management proposal on the same issue, for the remainder of this year’s proxy season. That decision allowed the SEC to slink away from an earlier, controversial decision that allowed Whole Foods to exclude a proxy access proposal. There has also been considerable debate over when, and how, a no-action letter should be issued if a shareholder proposal runs afoul of the “ordinary business exception.” And whatever the SEC does, federal courts can overrule anyway.

The upshot for shareholders: any proxy proposal intended to force companies to address child labor, human trafficking, environmental issues, or militia-funding vendors would have to account for the very fuzzy standards companies could rely upon to avoid them.

Meanwhile, with federal legislation gaining steam that could force the SEC to collect human trafficking-related disclosures from public companies, expect even more confusion and legal kerfuffles.