SEC Commissioner Advocates for Broader Range of Standardized Disclosure Requirements

Steven Lofchie Commentary by Steven Lofchie

SEC Commissioner Kara Stein advocated for a broader range of standardized disclosure requirements, including as to environmental, social and governance ("ESG") information disclosure.

In a speech at the Council of Institutional Investors 2018 Fall Conference, Ms. Stein criticized the argument against ESG information disclosures that investors are already "overload[ed]" with information from public company disclosures. Ms. Stein stated that, in her five years at the SEC, she had "not heard this concern expressed by even one investor." Referencing a recent ESG information disclosure petition, Ms. Stein said that the SEC should concentrate on making public companies disclose information that investors ask for.

Ms. Stein argued that the SEC should focus on organizing and fairly presenting disclosure information rather than discussing alleged "information overload." Ms. Stein asserted that since public companies are already electing to provide more information to investors voluntarily, the SEC should address the lack of uniform standards and comparability between companies. According to Ms. Stein, non-GAAP (i.e., generally accepted accounting principles) metrics are voluntarily disclosed by 97 percent of S&P 500 Companies. However, the metrics are not standardized or uniform and, therefore, are less useful to investors.

In addition to mandating uniform disclosure information standards, Ms. Stein recommended that the SEC should empower independent auditors to determine whether public companies fairly present non-GAAP metrics and other information (such as key performance indicators) to investors.


Commissioner Stein asserts that 97% of all issuers are reporting non-GAAP metrics and, therefore, these metrics should be standardized. This might make sense if the metrics that they are reporting are similar, but non-GAAP metrics could be almost anything, and what is reported could be quite issuer-specific. Without knowing more about the specific types of non-GAAP metrics that firms are reporting, it is not possible to know if it would be useful to standardize - or if it is even possible.

The Commissioner suggests using non-GAAP metrics to report on soft data such as "employee satisfaction" and ESG reporting. It is not at all clear that such measures can be standardized. Take measurements of both employee satisfaction and the social good, for example. It is doubtful that Google and Chick-fil-A define the "social good" in the same manner. (According to the Internet Encyclopedia of Philosophy, Spinoza "denied that anything is good or bad independently of human desires and beliefs." The same source reports that Nietzsche, in contrast, defined the "good man" as "one whose thoughts and actions disrupt the complacent normal of modern life" and the "herd mentality." It would be difficult to reconcile these contrasting views of good with each other, or perhaps with those of Commissioner Stein.)

As to the notion that independent auditors can play an important role in defining ESG measures: the only way that an "audit function" works is if ESG is defined in a very objective and standardized manner - something to which Nietzsche would clearly object.

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