Choking on Disclosure

The newsletter Compliance Week reported on a symposium of general counsels, risk and compliance officers from a variety of public companies, mainly mid to large cap companies. These officers generally felt overwhelmed with the current and evolving structure of disclosures and filing regulations. Having gone through SOX as a first generation, accelerated filer, I can speak personally about the pressures this Act put on a small, efficient finance and accounting function. The people in the CW Symposium have very large staffs and access to sizable outside resources, and they feel overwhelmed!

They also felt that their boards had been forced into a checklist mentality, which has taken them away from their most important function which is to formulate, implement and monitor the company's strategic growth initiatives.

The example of the new SEC disclosures on climate risk is cited as an egregious example of regulation without purpose or value. Responsible scientists globally have a difficult time quantifying what climate change is, let alone "climate risk." Take this down to the level of an individual corporation: the concept of a corporation being able to describe or measure the effects of its actions on its incremental climate risk is laughable. Nevertheless, trees will be felled, paper wasted, and expensive lawyers will draft opaque prose that meets the standard, but which also will be glossed over by institutional investors for whom this provides no guidance on whether or not to buy or sell shares.

Ken Jones, the Chief Compliance Officer of Huron Consulting said, "We spend three times as much money...on executive compensation reporting than we did two years ago." This is a CAGR of 73%! The Dodd-Frank bill will add considerable complexity to the already foggy bog of executive compensation reporting.

To be fair, there's another side to the executive compensation issue. The previous disclosure was woeful, and in light of egregious practices that came out during the financial meltdown, it was clear that this was, and is, a serious issue of misappropriation of shareholder funds as well as an issue of economic rent capture. Since nothing substantive was achieved to address the fundamental issues that Rakesh Khurana has so clearly identified for so long, it was inevitable that a crushing set of regulations, yet to be implemented through rules, would emerge from the vacuum.

What about smaller public companies, which is where I have served as a CFO and a board member? Kevin Fry, the general counsel of PACCAR, said "You can't be a little public company anymore." That is not good for economic vitality.