Improving Non-Financial Disclosure Obligations

Governments around the globe are increasingly relying on non-financial disclosure obligations to promote social goals, making social disclosure the mot du jour. Among others, the UK government uses it to promote the number of women on boards of directors, the Indian government uses it to curb energy usage, while the US government relies on it to curb the use of conflict minerals. However, this amalgamation of financial market disclosure requirements with social goals signals a convergence of private and public goals. Private corporations are now being asked, indirectly, to take on a role in promoting social policies − a role traditionally allocated to governments.

Against this background, my recent article examines the utility of disclosure rules in promoting social policies. It concludes that the role for public issues in corporate and securities law is limited, but that disclosure rules that are narrow in scope and boast a high degree of specificity can be effective supplementary devices for promoting social aims.

More specifically, my research finds that reliance on non-financial disclosure to promote social aims is, to an extent, justifiable. Thus, social disclosure obligations can promote shareholder interests by providing them with informational efficiency and the necessary tools for shareholder engagement. However, these benefits are only bestowed on shareholders when they are not outweighed by compliance costs and problems of informational overload.  Moreover, social disclosure obligations are justified through their promotion of societal interests. As India’s Securities Exchange Board has noted, these requirements are necessary to enable corporations to be accountable to the ‘larger society’.

Still, despite these justifications for the use of non-financial disclosure to further social aims, the role of governmental regulation in corporate and securities law should be viewed as a supplemental mechanism. In part, this is because corporate law, itself, prioritizes the interests of shareholders over the interests of stakeholders, as can be seen in the UK in the wording of section 172 of the Companies Act 2006 (which requires directors to promote the success of the company for the benefit of its shareholders). Thus, to the extent that non-financial disclosure obligations promote goals beyond those designed to benefit shareholders, their role should be limited.

The need to limit the scope of non-financial disclosure obligations is also supported by the inconclusive evidence that these types of social disclosure requirements actually change corporate behaviour. The only large-scale study of mandatory sustainability reporting found that disclosure obligations increase corporate priorities for employee training and implementation of ethical practices, but failed to find ‘a statistically reliable effect of mandatory disclosure on the prioritization of sustainable development by firms’. Other studies have similarly arrived at mixed results on the ability of social disclosure obligations to change corporate behaviour.

For these reasons, social disclosure obligations – although justifiable and oriented toward laudable goals – should, nonetheless, be viewed as complementary regulatory devices. As a result, they should occupy a well-defined and delineated space by bearing a relationship to corporate objectives, and by being drafted with a high degree of specificity.

A good example of social disclosure practices that are drafted with these objectives in mind is found in the UK. For example, 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’, a natural de minimis threshold is created, requiring corporations to disclose only pertinent information, rather than every piece of human rights information in the company’s possession. In contrast, the SEC’s Conflict Minerals Rule does not limit the obligations that ensue under it in any way, meaning that corporations must disclose any instance in which a conflict mineral is used, no matter how minimal the usage.

Another good example of social disclosure practices is that found in France where these obligations are drafted with a high degree of specificity. For example, where corporations are required to disclose information on employment, the requirement is broken down into sub-topics. Thus, instead of generic information on employment matters, corporations are required to disclose information on collective bargaining agreements, health and safety conditions, and descriptions of training policies. 

Confining the breadth and scope of social disclosure obligations allows corporations to reduce the overall amount of information they disclose. This benefits corporations by saving them time and costs, but it also helps users of this information by providing them with focused and meaningful, rather than generic, information. 

Social disclosure requirements are designed to prompt corporate managers to acknowledge – perhaps for the first time – certain social policy issues within the business environment and steer their behaviour accordingly. Bloated, unspecific disclosure requirements with little relationship to the business, conversely, risk corporate managers viewing these as time consuming, expensive burdens. Therefore, limiting the scope of social disclosure obligations may actually help further their efficacy.

Barnali Choudhury is a Senior Lecturer at the University College London.