I think most of us who’ve drafted disclosure for public companies over the years have resigned ourselves to the fact that, aside from the plaintiffs’ bar & a few other folks who get paid to review corporate disclosures, pretty much nobody else reads them – including most investors.  Since that’s the case, the question becomes “What’s the point?” A recent CLS Blue Sky Blog post discussing a new paper, “The Hidden Work of Disclosures” takes a stab at answering that question.

Although the paper approaches this issue from the perspective of mutual funds, I think much of what the authors say has relevant to those who work on the corporate side. They argue that the discipline of disclosure strengthens internal governance, and that this pays dividends to investors whether they read those disclosures or not. This excerpt summarizes their argument on the governance benefits of disclosure:

First, disclosure empowers lawyers.Funds typically assign responsibility for drafting and revising disclosures to fund counsel, and that designation is consequential. Stewardship of the disclosure process elevates the authority of lawyers within organizations that financial professionals would otherwise dominate. SEC-enforced disclosures give lawyers the authority to rein in straying portfolio managers and to say, “This is in your prospectus.… This is how it’s disclosed to shareholders, and this is what we need to do.”

Second, disclosure builds a culture of compliance. Drafting a prospectus and updating it annually is a cross-department exercise recruiting portfolio managers, risk teams, accountants, marketing personnel, compliance officers, and independent trustees into periodic collaborations. Leading this process, in-house lawyers and outside counsel work collaboratively, discerning SEC priorities and requirements for internal teams and translating complex financial frameworks for external audiences.

In-house lawyers acquire the character of “good inspectors” rather than enforcement cops, building trust and gaining access to information, while anticipating problems before they arise. Outside counsel provide an industry-wide view by benchmarking funds’ practices against market trends, which tells funds whether they are safely “in the antelope herd” or “about to get picked off by the lions.” Compliance culture isn’t about altruism. A fund’s reputation for doing the right thing is a highly prized asset that establishes its status within the industry, the trust that the SEC has in the fund, and most important, its brand value among investors.

Disclosure forces institutional learning. Annual reviews compel funds to revisit their disclosures, kick the tires, and reconcile public representations with operational reality. Interviewees described disclosures as the “blueprint,” the “playbook,” and “gold standard,” guiding fund operations from top to bottom with current information. Lawyers, in turn, cross-pollinate among funds—sharing best practices related to disclosure drafting and revision through bar committees, trade associations, law firms, and professional contacts. Disclosure language and compliance methods spread through this network, producing a degree of industry-wide convergence that command-and-control regulation alone could not deliver.

Over on The Business Law Prof Blog, Ann Lipton cites this paper in support of her opposition to permitting semiannual reporting.  As she puts it, “a switch to semi-annual reporting may not simply mean less information to investors; it loosens the obligations of boards, and managers, to oversee the company.”

– John Jenkins