Academics Assess Benefits of Disclosure as Tool for Social Change
Commentary by Karen Woody
Four academics examined the financial reports of 151 SEC-registered mine owners in order to determine the "real effects" of the mandatory dissemination of mine safety disclosures ("MSDs"). In a paper released by the University of Chicago Booth School of Business, the authors conclude that the disclosure and dissemination of mine safety information resulted in an increase in mine safety performance, but also caused a reduction in productivity.
The authors claim that MSDs mandated by Section 1503 of the Dodd-Frank Act:
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decreased the number of citations per inspection hour by approximately 11% for MSD mines relative to non-MSD mines;
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decreased the number of injuries by 13%;
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significantly reduced labor productivity due to increased labor costs; and
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focused investors' attention generally on "socially undesirable activities leading to feedback effects from the capital markets that can alter managers' behavior."
The authors question the efficacy of SEC regulation concerning conflict minerals and mine safety performance that attempts to impose penalties to minimize "socially undesirable behaviors." The authors conclude that the "desirability" of nonfinancial disclosure policies hinges on the tradeoff between improvements to safety and the associated costs.
Commentary
From a securities law standpoint, mandating nonfinancial disclosures for the purpose of effecting social change stretches the legal concept of materiality to a breaking point. From a social change standpoint, the scope of nonfinancial disclosure is too narrow to be practical, given that the requirements apply only to the subset of mining companies that are SEC registered issuers. Mine safety cannot be achieved fully under Section 1503 unless the regulation is made to apply to all companies that are engaged in mining. Until then, nonfinancial disclosure imposes significant costs on certain market participants even as it exempts others and strains important legal concepts.
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