Promoting Social Goals with Corporate and Securities Law

Should governments be relying on corporate and securities law to promote humanitarian goals?  This is the question that naturally arises when viewing the SEC’s Conflict Minerals Payment Rule, which requires corporations to disclose their conflict mineral usage as a means of curtailing the violence in the Congo. Yet the US is not alone in its reliance on disclosure mechanisms in corporate or securities laws to promote non-economic goals. The Danish government uses disclosure to promote gender parity on boards of directors; France relies on it to curb greenhouse gas emissions, and India uses it as a method for curtailing energy usage. Indeed, with almost a quarter of the world relying on non-financial disclosure standards, it seems that there are few social goals that cannot be addressed through reliance on non-financial disclosure practices.

However, this increasing reliance on disclosure requirements in corporate and securities law to promote social aims – or social disclosure – is giving rise to a new role for corporations.   They are now being asked to promote social policies, a role that was traditionally occupied by governments. To some extent this is surprising since corporate law is viewed mainly as a tool for promoting shareholder and other corporate interests, which brings us back to the question posed at the outset.

Nevertheless, using social disclosure rules to promote social aims can, to an extent, be justified.  For one, social disclosure rules can promote shareholder interests. These rules can provide shareholders with information about risk identification and management and the necessary tools for shareholder engagement. However, these benefits are only provided insofar as they are not outweighed by compliance costs and problems of informational overload. Second, social disclosure rules can be justified by promoting the interests of the public at large. As the Shenzhen Stock Exchange rules note, these obligations have been introduced to help build “social harmony”.  In short, social disclosure rules can be justified by serving both shareholder and societal goals.

Still, even if social disclosure rules are justifiable, they should be viewed as supplemental mechanisms.  In part, this is because corporate law, itself, for the most part, prioritizes the interests of shareholders over the interests of stakeholders.  Thus, social disclosure rules that confer benefits beyond those designed for shareholders may extend outside of their ambit. But more importantly, social disclosure rules should be limited because of the inconclusive evidence that these types of rules prompt changes in corporate behaviour. The only large-scale study of mandatory sustainability reporting found that disclosure obligations increase corporate priorities for employee training, but failed to find “a statistically reliable effect of mandatory disclosure on the prioritization of sustainable development by firms”.  Other studies have found that corporate reporting increased managers’ awareness of the issues, but failed to change their actual behavior.

Social disclosure rules are thus imperfect substitutes for direct regulation of corporate conduct on social policy issues, but do offer promise as complementary regulatory strategies. Consequently, in keeping with their complementary status, their role should be well-defined and properly delineated.  Thus, social disclosure rules should be drafted to refrain from being overly broad, bear a relationship to corporate objectives, and be specific.

A good example of social disclosure rules that are drafted with these objectives in mind are those found in the UK.  As part of its strategic review reporting requirements, UK corporations must disclose information on human rights “to the extent necessary for an understanding of the development, performance or position of the company’s business.” By inserting the caveat of “to the extent necessary,” the rules are drafted in such a manner that a natural de minimis threshold is created.  Corporations are therefore only required to disclose pertinent information, rather than every piece of human rights related information in the company’s possession. Moreover, the pertinence of the information in question is further clarified by the rule’s requirement that disclosure is necessary to understand “the development, performance or position of the company’s business”.  This additional wording prompts corporations to reveal human rights information that has a means/ends connection with the company’s business, thereby focusing the human rights information the corporation will disclose and demonstrating a clear link to both corporate managers and users of the importance of this information to the business.

Conversely, the SEC’s Conflict Minerals Rule is drafted with much more broad language than the UK approach.  The Rule does not contain any limiting wording, meaning that corporations must disclose any instance in which a conflict mineral is used, no matter how minimal the usage is.  In addition, as the aim of the Rule – promoting humanitarian aid – does not bear a relationship with the goals of securities or corporate law, it is less likely to gain importance in the eyes of corporate managers who are responsible for changing corporate behavior.

A second example of good social disclosure practices are those found in France where rules are drafted with a high degree of specificity.  French rules require corporations to disclose information on employment, but the rules break down the solicited information into subcategories.  Thus, instead of disclosing generic information on employment matters, corporations are required to disclose information on specific elements of employment information including collective bargaining agreements, health and safety conditions, and descriptions of training policies.

The UK and French approach to social disclosure rules both limits the breadth and scope of the required information as well as focuses it.  This enables corporations to reduce the overall amount of information they disclose, saving them time and money, but also helps users of this information – whether shareholders or the public at large – by providing them with quality, instead of quantities of, information.

Social disclosure rules are designed to encourage corporate managers to steer their corporation’s behavior towards a more socially acceptable direction.  Overly broad, unspecific disclosure rules with little relationship to the business risks corporate managers viewing these rules, not as redirection tools, but rather as burdens.  Confining the scope of social disclosure rules may, therefore, not only improve the quality of the provided information but also corporate managers’ willingness to meaningful engage with these types of rules.

The preceding post comes to us from Barnali Choudhury, Associate Professor at University College London.  The post is based on her paper, “Social Disclosure”, forthcoming in the Berkeley Business Law Journal and available here.