Courtesy of Tyler Gellasch
An unexpected fight is unfolding at one small agency in DC that may have profound impacts on every single American for decades. The battle is being waged on the 10th floor of 100 F Street (also known as the headquarters of the Securities and Exchange Commission) and the Capitol building across the street. The fight is about what public companies need to tell their investors. And the resolution may impact the climate, our national debt, millions of investors, and perhaps the fate of our Democracy itself.
Since the aftermath of the Great Depression, the SEC has set the ground rules for our capital markets. And by doing so, its success and failure has a direct impact on our economy and our country. The SEC’s mission is to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” Setting the rules for what companies must tell investors is essential. As the SEC declares on its website, “[o]nly through the steady flow of timely, comprehensive, and accurate information can people make sound investment decisions. The result of this information flow is a far more active, efficient, and transparent capital market that facilitates the capital formation so important to our nation’s economy.” I agree.
Our capitalist system is built on the premise that markets and private actors, working with government, can address our biggest societal challenges. And the challenges facing our country are enormous. And, as these challenges have risen, so to must the forces to meet them. With rising sea levels, comes a rising imperative to address climate change, and shareholders have billions of reasons to want to know how their companies are meeting the challenge. With rising federal debt levels and tax avoidance by large companies comes a rising imperative for shareholders and the public to know how their companies are (or aren’t) paying taxes. And, as shown in this election cycle, with millions of corporate dollars now flowing into political campaigns, there comes a pressing need to make sure the owners of those companies know how their dollars are being spent. Finally, with rising income inequality and the new “gig” economy comes a pressing need to ensure that shareholders understand how workers are compensated and what their conditions are like.
Unfortunately, while we know these enormous challenges exist, we don’t know how companies are addressing them. Investors have spent decades filing proxy proposals and begging, cajoling, or using any other tactic they can to get more information. But as companies’ regulatory disclosures have over time stretched from dozens to hundreds of pages, the quality of information relayed hasn’t improved.
To be clear, most public companies are voluntarily reporting some information about their environmental, social, and governance (ESG) efforts. But those reports are usually glossy brochures or short website postings that aren’t part of the regulatory filings and they certainly aren’t uniform between companies. When companies disclose most of these social responsibility issues in their regulatory filings, it is often merely boilerplate—certainly not enough for an investor to have any understanding of the likelihood of a financial hit nor the magnitude.
That needs to stop.
These issues are in the news nearly every single day.
Recently, European officials surprised the world with an announcement that Apple may owe $14 billion or more in taxes, nearly the entire annual federal budget for Temporary Assistance for Needy Families (one of the largest, and most important anti-poverty programs). It turns out that Apple had secretly negotiated a deal with Ireland to ensure it paid near 0% in taxes on its massive profits. The deal was in blatant contravention to European rules. When the deal was exposed by a US Senate investigation in 2013, the European authorities acted.
In the US, shortly after the 2013 Senate investigation, the SEC took the unusual step of asking Apple whether its offshore tax disclosures were detailed and specific enough to identify the risks Apple faced. Apple’s then-current disclosures in its SEC filings made no reference to these facts, nor did they quantify the likelihood or magnitude of any risks associated with its tax strategies. The SEC asked good questions. They asked the types of questions you might expect investors would want to know about so they could assess the likelihood of a tax risk and the magnitude of it. Apple responded that it “does not believe that its current tax structure presently creates a specific material risk to the Company,” but offered a sentence of new boilerplate disclosure to alleviate concerns. Unfortunately, the SEC went away.
We now know that both Apple and the SEC were wrong. We now know that the company’s tax structures identified in 2013 posed at least a $14.5 billion risk. Only Apple had the information about its secret deal and knew the dollars involved. Yet, even after Congressional, SEC, and European investigations, Apple’s tax disclosures continued to provide no insight into the probability of any risk, nor the potential magnitude. To the contrary, the company repeatedly disclosed that it had adequate reserves for any potential tax risks.
This isn’t just a problem with international taxes.
Investors and the public are increasingly focused on how companies are spending their shareholders’ money on political campaigns. Consider that there has been approximately $1.8 billion raised for Presidential candidates and their aligned Super PACs, alone this election cycle. Funding campaigns is big business. The numbers become even more staggering once Congressional, state-level, and local-level elections come into play. And in the aftermath of the Supreme Court’s ruling in Citizens United v. FEC, corporations are playing an increasing role in it. Shareholders have a right to know.
But aside from just basic stewardship of their resources, investors deserve to know when their companies are touting their sustainability efforts on the one hand while funding political campaigns for climate change deniers on the other. In a few instances, we find regulators investigating whether companies’ lied. But at the core, there is no specific requirement for corporations to disclose their use of shareholder funds to support political candidates and causes.
Companies have also faced indictments, boycotts, and public scandals when they engaged in hot-button issues of the day. Take Target Corporation, which gave money to MN Forward, a conservative non-profit that endorsed anti-gay candidates in the state of Minnesota. When this contribution was revealed, Target faced an enormous public backlash that impacted its stock price and its sales. This kind of scenario will likely continue to occur if political spending is driven by corporate executives without shareholder understanding or oversight.
Corporate political activity presents broad concerns to the general public and significant risks to our economy. For example, a study conducted by the International Monetary Fund, drew a link between banks’ political spending and heavy involvement in risky sub-prime mortgages.
These are issues of dollars and cents, but also about regulatory risk, management integrity, and reputational risk.
Some have argued that the issues I’m raising are concerns for only “special interest” groups or “fringe” investors. Well, here are some facts. According to US-SIF: The Forum for Sustainable and Responsible Investment, more than $6.5 trillion of US assets explicitly reference these issues in their decisions. But that’s just a fraction of the more than 1500 firms controlling more than $60 trillion worldwide have committed to the UN’s Principles for Responsible Investment. Put simply, investors and investor organizations want more and better information.
Why do all these investors care? They care because they need to. Improving disclosures isn’t about feeling good, it is about smart investing. It’s about managing risks, assessing management, and assessing opportunities. In other words, it’s all about the money.
Investors and the public have been demanding more information, and the SEC is obligated to ensure that companies provide whatever a “reasonable investor” deems important. They aren’t doing that now.
In fact, since taking the helm of the SEC in 2013, Chair Mary Jo White has been leading the financial regulators in the opposite direction. In what she called “disclosure overload,” Chair White explicitly argued that investors are bombarded with too much information, and that companies may be overburdened by their current obligations.
Chair White officially launched the “Disclosure Effectiveness” project, but the mission appeared to be the relieving of corporate burdens—not meeting investors’ needs. The FASB, a self-regulatory organization that helps set rules for financial statements, is currently engaged in a similar initiative. Both of these initiatives run counter to the plain language of the law, investors’ pleas, and prudent public policy.
And that is precisely why progressive firebrand, US Senator Elizabeth Warren, has called on the President to fire Chair White, even though White likely only has a few months left on the job. The message is clear: Investors, the public, and their allies want more and better disclosures now, not less.
Nevertheless, as part of Chair White’s initiative, the SEC recently released a so-called Concept Release on how it should revise its disclosure rules for companies. It was just a proposal of a proposal. It’s 340 pages long, and it is very technical. So you might forgive the public—or even many securities lawyers and policy wonks—for not paying attention.
But the response has been astounding. According to a report recently published by nine investor and public interest organizations, by August 16, the SEC had received 26,512 comments, more than all but 5 of its 161 major proposals since 2008. And that covers the Dodd-Frank and JOBS Act implementation years.
The amazing thing is, the comments easily can be put into two buckets: (1) those who read disclosures, and (2) the companies who make them (or the law firms or trade associations for those companies).
What do the comments say? Over twenty-six thousand of these letters call for better tax disclosures. More than ten thousand call for better disclosures on climate change and ESG issues. And nearly ten thousand call for disclosure of political spending. While not part of any public interest campaigns, more than forty comments discuss human capital and more than forty also talk about protection of human rights. And twenty comments raised the issue of enhanced derivatives disclosures—which isn’t terribly surprising in light of the AIG fiasco.
It is easy to understand why an oil and gas company may not want to disclose information about its sustainability practices, or human rights, or political spending. But a company’s reluctance to make these disclosures in the face of investors’ and the publics’ pleas (or even direct questioning by the SEC) is precisely why rules are needed.
And that’s what the SEC has heard from investors large and small, over and over again, from public pension fund trustees, private fund trustees, research analysts, investment advisers, and small investors. The story is always the same: They want more, not less, disclosure.
Since the SEC last significantly updated its requirements more than three decades ago, the world has changed. Rather than adapt to investors’ and the public’s demands for more and better information, the SEC has continued to substitute its judgment for those of investors. It has allowed corporate executives to do the same.
The law is not that investors are entitled to whatever a “reasonable SEC Chair” or “reasonable CEO” thinks is important. Rather, the law says that investors and the public are entitled to whatever a “reasonable investor” thinks is important. Let’s do that.
Informed and empowered investors are essential to a healthy economy. Improved disclosure enables good corporate governance and thereby improves firm performance. In combination, they are equally important to a sound economy. After decades of standing in the way, the SEC is now affirmatively working against investors.
An unprecedented group of investors and organizations has recently joined together to demand that the SEC reverse course and update its rules to give investors what they need to drive our companies, our country, and our world–forward. At an event held on September 20th by the Clinton-aligned Center for American Progress, a group of investors and non-profit organizations came together to breathe life into a coordinated effort to broadly improve disclosures across a broad swath of areas impacted by just one regulation.
All of these investors and organizations want the same thing: changes to just one regulation by one agency in DC. I suspect they’ll find a receptive audience in any new administration.
Tyler Gellasch is the founder of Myrtle Makena, LLC and the former Senior Counsel to the U.S. Senate Permanent Subcommittee on Investigations.