32 ELR 10965 | Environmental Law Reporter | copyright © 2002 | All rights reserved

After Enron: How Accounting and SEC Reform Can Promote Corporate Accountability While Restoring Public Confidence

Michelle Chan-Fishel coordinates the Green Investments program at Friends of the Earth—U.S., which advances corporate accountability and responsibility through leveraging the power of financiers and capital markets. Friends of the Earth—International, is the world's largest federation of national environmental organizations, with member groups in over 60 countries. Chan-Fishel gratefully acknowledges the assistance of David Waskow of Friends of the Earth—U.S. for contributing to this Article.

[32 ELR 10965]

The recent bankruptcy of one-time energy giant Enron Corporation and its impact on the lives of employees and investors has spawned no less than six congressional investigations, four government probes, and countless news articles, editorials, and kitchen table discussions on the nature of corporate responsibility, governance, finance, and accounting. The Enron collapse, which has been described as "a landmark scandal of American business,"¹ may prompt major overhauls in many areas of economic life, including accounting practices, retirement saving, and corporate governance.

While many policymakers and analysts are focused on finding solutions that directly address some of the most out-rageous aspects of the Enron case—for example, barring corporate executives from selling company stock while employees are prohibited from doing so—others are seeking ways to address broader problems such as auditor independence. Still others are exploring more radical structural changes to the way we conduct our economic activity, tapping into the increasing sentiment among the American public that the Enron story, "with its Shakespearean themes of greed, ambition and arrogance,"² tells of how Big Business' unchecked power and greed can create misery for ordinary people.

The potential for dramatic structural and institutional reform of Wall Street and Corporate America opens up the possibility of not only addressing the question: "How can we prevent another Enron?" but also answering the question: "How can our corporations and markets better serve the public interest?" As current Securities and Exchange Commission (SEC) Chairman Harvey Pitt once wrote, the SEC has a particularly important role to play because "the Commission has within its power the wherewithal to make corporations socially responsible and afford a substantially higher degree of investor and public protection."³

This Article advocates for particular reforms to the SEC, important steps to help enable the rigor and incentives of the capital markets to promote corporate accountability and responsibility. The first part of this Article discusses the dangers of inadequate disclosure, and then describes benefits of increased environmental and social disclosure to advance public policy objectives, empower communities, and improve environmental quality. The Article next describes the role of the SEC in requiring corporate environmental disclosure, and makes the case for expanding SEC environmental reporting obligations. A review of current SEC environmental reporting requirements is discussed, followed by an analysis of corporate compliance with these requirements. The Article then details attempts by public interest organizations, investors, and insurance companies to improve SEC environmental reporting obligations, and concludes with a section outlining arguments for and rebuttals regarding enhancing SEC environmental and social reporting requirements.

When Workers, Communities, and the Environment Are "Off the Books"

The dangers of inadequate and/or misleading corporate disclosure are starkly clear, as demonstrated by the widespread misery and misfortune that has accompanied the collapse of Enron. The Enron case also demonstrates that investors needed fair and full disclosure of both financial as well as nonfinancial data. Indeed, inadequate reporting of nonfinancial information, such as related party transactions (which are required to be disclosed pursuant to SEC rules) and the amount and recipients of political campaign contributions (not currently required by the SEC), were at the core of many problems highlighted by the Enron case. However, most of the criticism leveled against Enron's financial disclosure practices has related to how it used off-balance sheet transactions to hide losses and "manage earnings."

The SEC, under both Chairman Pitt and his predecessor Arthur Levitt, has voiced concern over a potentially widespread problem of managed earnings in corporate financial statements. Although the creation of special purpose entities, which Enron so expertly and prolifically used, is one way to manage earnings, another method used to obscure losses and overstate earnings is to manipulate liabilities such as environmental remediation costs. When a company indefinitely and egregiously postpones booking its environmental liabilities, not only does it injure shareholders, it also potentially harms communities and impacts environmental health.

One key example is asbestos liability, which is currently estimated at $ 65 billion (Enron's losses were about $ 63 billion). Many companies that are currently responsible for the health damage caused by asbestos attempt to minimize the [32 ELR 10966] appearance of these liabilities on their balance sheets by exploiting loopholes in environmental disclosure rules. If these companies, along with their auditors, were required to move these asbestos liabilities onto their balance sheet, their earnings would decrease. Thus, companies probably would have ceased asbestos use at a much earlier date, and reduced damage to human health caused by prolonged asbestos exposure.

Another example of how environmental liabilities can be manipulated to manage earnings relates to toxic waste liabilities such as Superfund (Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA))⁴ cleanup costs. In 1997, Friends of the Earth (FOE) filed a complaint at the SEC alleging that Viacom had not adequately disclosed its Superfund liabilities. The company was formerly Gulf + Western, a large conglomerate which owned New Jersey Zinc, a mining company which created numerous toxic waste sites during its nearly 100 years of operation. According to local environmental groups, Viacom had delayed cleaning up a contaminated site in Palmerton, Pennsylvania, for over a decade, while tying up matters in court and keeping the charges off their books. Meanwhile, the generation of children growing up around the site had tested for higher than average levels of lead in their blood, which is associated with brain damage. As long as Viacom continues to evade its cleanup responsibilities and is allowed to keep their Superfund liabilities off its books, the longer children in Palmerton will suffer the consequences.

Not only can companies' questionable environmental reporting practices harm communities, but shoddy labor-related disclosure can also hurt employees and shareholders. For example, current SEC rules on reporting labor-related information are relatively vague. Companies generally do not disclose much about the quality of labor-management relations until a strike is imminent or declared, which is far too late: by that time the company, its shareholders and its workers are all adversely affected. Similarly, Occupational Safety and Health Administration (OSHA) data such as lost work days, fatalities, and near-miss accidents are value-relevant for shareholders and can provide a leading indicator of the quality of a company's risk management systems. But because worker health and safety data is left off the balance sheet, companies may be able to get away with perpetuating unsafe working conditions (particularly since OSHA's inspection capabilities are severely limited). Thus, keeping environmental and labor matters off the balance sheet is especially dangerous, because it can harm not only investors, but workers, human health, and the environment as well.

Putting the Environment "on the Balance Sheet"

Conversely, putting the environment on the balance sheet can advance public policy objectives, empower local communities and stakeholders to advocate for change, and prompt companies to improve environmental and social performance. In addition, and perhaps even more important in assessing the relevance of disclosure to investor interests, corporate environmental performance can be linked to financial performance.

Public policymakers have recognized, as U.S. Supreme Court Justice Louis Brandeis so famously said, that "sunlight is the best disinfectant."⁵ The most important and well-known environmental disclosure law in the United States is the Emergency Planning and Community Right-To-Know Act (EPCRA) of 1986⁶ and, more specifically, the § 313 requirements under EPCRA,⁷ that have come to be known as the toxic release inventory (TRI).⁸ The TRI requires disclosure of a facility's releases of specified toxic substances to land, air, and water—information that is then provided on-line to the public.⁹

However, the basic TRI rules are not the only disclosure requirements found in U.S. law. EPCRA itself mandates immediate reporting of emergency toxic releases¹⁰; and TRI, following the Pollution Prevention Act of 1990,¹¹ now requires disclosure of information regarding waste management and source reduction activities.¹² A number of other laws, including CERCLA¹³ and the Resource Conservation and Recovery Act (RCRA),¹⁴ also require disclosure of certain releases, particularly during accidents. In addition, some states have rigorous disclosure requirements as part of their permitting process for extractive industries.¹⁵ Finally, corporate environmental disclosure obligations also are embedded in federal securities laws, an area that will be explored in detail in this Article.

Advancing Public Policy Objectives

Since the 1980s, public policymakers have searched for and promoted ways to improve corporate responsibility with minimal reliance on direct "stacks and pipes" regulation, and have increased their use of market-based corporate responsibility mechanisms, including public reporting requirements.¹⁶ Among other benefits, increased corporate disclosure helps to align market incentives with public policy objectives, from improved environmental quality to enhanced national security.¹⁷

Many academics and policy analysts have advocated for increased environmental disclosure through SEC reporting requirements. In 1997, the National Research Council/National Academy of Sciences recommended that the SEC more strictly enforce and provide clarification for reporting of hazardous waste sites as financial liabilities as a way of [32 ELR 10967] encouraging companies to more quickly remediate sites.¹⁸ Similarly, the Capital Markets Committee of the National Advisory Council for Environmental Policy and Technology (an independent federal advisory committee comprised of 16 representatives from the business, finance, academic, governmental, and environmental sectors) recommended that the U.S. Environmental Protection Agency (EPA) "maintain a dialogue with the SEC to promote changes in corporate disclosure that would give investors more relevant information about the environmental performance of companies."¹⁹ Even current SEC Chairman Pitt, in a 1971 law journal article, wrote that "the Commission can, and should, require corporate entities to disclose what they are doing to the environment."²⁰

Disclosure to Empower Communities

Expanded environmental corporate disclosure can also benefit the public interest by empowering communities. Stakeholders such as communities, workers, and environmental groups have relied on corporate social and environmental performance data in their efforts to foster more responsible company behavior. Sidney Wolf has described the substantial impact that has come from community use of TRI data. For example, information disclosed under TRI has been used by citizens to convince IBM Corporation to phase out use of ozone-depleting chlorofluorocarbons; allowed an Akron group to obtain a commitment from B.F. Goodrich Company to reduce its toxic airborne emissions by 70%; and given activists the needed data to successfully enact toxics reduction statutes in Oregon and Louisiana.²¹ Similarly, information disclosed in corporate SEC filings have allowed activists to monitor the proposed activities of foreign companies in Tibet.

Improving Environmental Performance

Disclosure-related methods of improving corporate social and environmental performance illustrate the wisdom of the well-known management adage: "What gets measured gets managed." By requiring disclosure and auditing of corporate environmental and social issues, management attention will be brought to these areas, thus increasing the probability that a company's environmental and social performance itself will improve.

Increased disclosure is a flexible, nonobtrusive, and effective means of improving corporate environmental performance, as evidenced by the effectiveness of TRI in spurring significant end-of-pipe improvements across industrial sectors.²² According to EPA data, industries reduced their applicable on-site and off-site releases by 45.6% in the first decade of TRI implementation.²³

The environmental progress spurred by corporate disclosure has also been visible at the firm level. For example, Marissa Caputo notes that EPCRA disclosure rules prompted AT&T to recognize its toxic air emissions and announce a goal of eliminating all of its toxic air emissions by 2000.²⁴ Similarly, EPCRA disclosure required Monsanto Corporation to report that it released over 20 million pounds of toxic emissions into the air. In 1988, Monsanto's chief executive officer then announced a pledge to reduce the company's air emissions of hazardous chemicals by 90% by 1992, a goal that Monsanto says it met.²⁵ However, Monsanto's record in reducing other emissions, particularly underground injections, has not been as clearly positive, undercutting Monsanto's overall emissions reduction record.²⁶ In a more recent case, DuPont, in 2001, agreed to pay an estimated $ 15 million to remediate dioxin-tainted waste sludge after the company began to monitor dioxin emissions at a Delaware plant under a new EPCRA requirement.

Expanding the Current Disclosure Model Internationally

The success of the TRI and other reporting mechanisms in the United States has spurred international efforts to adopt similar reporting regimes. For example, under the European Pollutant Emission Register (EPER) developed in 2000, European Union member governments are required to maintain inventories of emission data from specified industrial sources and make the data publicly accessible. However, the EPER will be superceded by a much more ambitious system currently under development, the United Nations Economic Commission for Europe (UNECE) Protocol for Pollutant Release and Transfer Registers (PRTR).²⁷ The PRTR Protocol under development by the European countries will likely cover a wider range of pollutants than is the case for the U.S. TRI and may also include water, energy, and resource use.²⁸ Expected to be open for signature in 2003 by countries in Europe—including western, eastern, and central Europe and the former Soviet Union—and perhaps non-UNECE countries as well, the protocol would apply a set of mandates for national disclosure regimes. Other countries, most notably Mexico, are also moving toward establishment of PRTR systems.

The disclosure requirements in U.S. law have also inspired a coalition of U.S. environmental, human rights, and [32 ELR 10968] labor organizations to advocate for social and environmental disclosure requirements that would apply to the international operations of companies incorporated in the United States or listed on U.S. stock exchanges. The coalition effort hopes to see a system established that requires U.S. corporations to report on environmental, labor, and human rights practices for facilities, subsidiaries, and contractors abroad.²⁹ The environmental element of the International Right-To-Know campaign incorporates the TRI, requiring reports to EPA on companies' toxic pollutants to the air, land, and water in overseas operations. It also would include disclosure of hazardous chemicals in the workplace, in accordance with U.S. law under EPCRA. Labor reporting would include application of OSHA reporting requirements, especially concerning serious work-related injuries and deaths. Human rights reporting would include disclosure of the existence of security arrangements with state police, military forces, or private security companies and disclosure of any displacement of indigenous populations.³⁰

The SEC and Corporate Disclosure

Although the TRI is the best-known disclosure law in the environmental community, many publicly traded companies perceive the disclosure duties imposed by the SEC as their most rigorous and important reporting obligation. The SEC was created with the authority to require corporations to disclose any information that would benefit the interests of investors and/or the general public.

About 70 years ago, in the wake of the stock market crash of 1929, the U.S. Congress passed legislation (the Securities Act of 1933³¹ and the Securities Exchange Act of 1934)³² that created the SEC, an agency that would ensure that companies and investors operated in an environment of truth and transparency.

The disclosure laws set forth in the 1933 and 1934 Acts have been the basis for the information investors rely upon, and have made U.S. stock markets the envy of and model for the rest of the world. However, today, as in the early 1930s, Congress is faced with a similarly historic moment—the largest bankruptcy in American business history, which has demonstrated that old accounting and disclosure regimes have not kept up with the new economy. The Enron collapse has revealed deep-seated problems in corporate governance, finance, accounting, and disclosure that prompted former SEC Chairman Levitt to call for a reexamination of all the "gatekeepers" who operate and regulate the markets.³³

Since 1998, the Corporate Sunshine Working Group (CSWG), an alliance of investors and public interest organizations, has worked to reform a key gatekeeper, the SEC, in an effort to broaden and deepen corporate nonfinancial disclosure rules to benefit investors, as well as the larger public interest. Members of this alliance include investors, asset managers, and public interest organizations who have submitted public comments to the SEC, produced case studies illustrating company noncompliance with existing SEC disclosure requirements, and advocated for broader, deeper, and more specific disclosure on nonfinancial matters, such as environmental performance, labor relations, and good governance.

The Investor Case for Expanded Nonfinancial Disclosure

Accurate and adequate disclosure of material information is key to the creation of transparent and efficient markets. According to noted securities professor Joel Seligman, the primary function of today's securities markets is for the "remediation of information asymmetries."³⁴ Not only can securities disclosure provide financiers with better information, but environmental disclosure can additionally promote more fair and efficient markets, limit the ability of companies to "game" regulators by manipulating environmental remediation costs, and reduce the possibility that environmental liabilities will be unfairly shifted to unwitting investors and consumers.³⁵ Indeed, Congress created the SEC with the intention of creating markets with prices that reflected real value by minimizing "the hiding and secreting of important information."³⁶ The Enron case is a perfect modern example of how important information was hidden from investors, which then created soaring share prices based not on real value, but on false perceptions.

Responding to Investors' Changing Information Needs

Particularly in the wake of the Enron collapse and the "dot-com" bust, investors and financial regulators are keenly interested in creating markets that reflect real value. Investors are increasingly searching for a company's "whole story," which requires going beyond financial reports, and actively seeking nonfinancial data to assist their analysis and decisionmaking. Currently, company financial reports are a poor source for critical nonfinancial information, such as data on corporate governance, strategic positioning, and management credibility, and corporate responsibility. Investors seek material corporate social and environmental information to recognize companies' potential or problems, to penalize companies for not adequately addressing social and environmental issues that may harm shareholder value, and to identify potential areas of strategic or competitive advantage.

A national survey of investors conducted by the American Institute of Certified Public Accountants in 2000 found that investors need new kinds of information on companies in order to make investment decisions. 79% of those polled believed that "corporate responsibility" information, such as compliance with privacy policies or overseas labor or environmental standards was necessary.³⁷ Notably, most [32 ELR 10969] of this corporate responsibility data is off the company balance sheet.

Similarly, a 1998 Ernst & Young survey of large institutional investors (managing $ 1 billion or more in assets) concluded that up to 35% of institutional investors' decisions are made on nonfinancial criteria.³⁸ In particular, Ernst & Young found that some of the most valuable nonfinancial factors that analysts consider is "strength of corporate culture," as expressed by indicators such as a company's ability to retrain and attract quality people, its environmental and social policies, and "strength of market position" as expressed by indicators such as brand image. Importantly, the study found that company public filings and reports are not the most helpful source for institutional investors, as these issues are again off the balance sheet. The SEC clearly needs to update its interpretation of corporate disclosure rules to ensure that company financial reports meet the changing information needs of investors.

Investor Demand for Corporate Social Information

In addition to the results of the investor surveys, another indicator of the importance and value of corporate nonfinancial performance data is the growth of the corporate social research providers such as the Investor Responsibility Research Center, Kinder, Lydenberg & Domini, Innovest Strategic Value Advisors, and Thompson Financial's Social Investing Research Service. These firms have been created for the explicit purpose of providing corporate social performance data to both "socially responsible" and traditional institutional investor clients. Socially responsible investors (SRIs) believe that certain kinds of nonfinancial corporate information on a company's social performance are material per se, regardless of whether they meet materiality thresholds defined by the accounting community or the SEC. As evidenced by the dramatic growth of SRIs in the United States, SRIs are not a "fringe" group, but rather are the fastest growing segment of the investing public, representing over $ 2 trillion, or almost one out of every eight dollars under professional management in the United States.³⁹

Many SRIs monitor companies' social and environmental performance with the belief that good management of environmental or "soft" issues is a proxy of good overall management capacity, which is a driver of financial out-performance. With the Enron case, many SRIs held Enron stock and engaged with corporate management to improve stakeholder relations, and promote better transparency. SRIs filed two shareholder resolutions at Enron requesting more disclosure, and eventually pushed the company to release reports on the company's social, environmental, and ethical performance. Other SRIs decided to not own or divest from the company. These investors believed that allegations of human rights violations and corruption associated with Enron's Dabhol power plant in India; its environmentally controversial pipeline through a rare Bolivian tropical dry forest; and its proposed energy project on sacred Native American burial ground (Columbia Hills in Washington State) belied the company's claims to corporate responsibility, therefore indicating of poor management credibility.

The Link Between Environmental and Financial Performance

In addition, academic studies suggest that the valuation of companies' stock may be linked to disclosure of environmental performance information, indicating that investors take into consideration and value the provision of such data. Evidence for the linkage between disclosure and firm stock prices has been based on market reactions to the disclosure of TRI data. Stock valuations dropped immediately for firms disclosing emissions data during the first TRI reporting period in 1988, and the decline in stock prices was greatest for firms that were not already known to be significant polluters.⁴⁰ The impact on stock valuation was found to be especially significant for the greatest polluters within particular industries.⁴¹ Even for firms already recognized as substantial polluters (and which therefore experienced less of an immediate impact following the initial TRI data release), significant reductions in stock prices occurred over a five-year period for those companies whose environmental performance declined over time and relative to other companies.⁴² In sum, market valuations appear sensitive to the data available concerning environmental performance, and disclosure thus provides critical information to investors.

Such environmental event studies are part of an increasing body of academic work that has demonstrated a correlation between environmental and financial performance. A May 2000 report entitled Green Dividends surveyed over 30 academic studies dealing with the relationship between firms' environmental performance and financial performance. It found that, according to the studies, on the whole there was a positive correlation between the types of performance.⁴³

International Trends in Enhanced Corporate Environmental Disclosure

Finally, the call for expanded corporate nonfinancial disclosure has been echoed worldwide. Internationally, accounting and securities bodies are beginning to revise their disclosure requirements to meet investors' changing information [32 ELR 10970] needs. In Canada, the Canadian Institute for Chartered Accountants is preparing to reexamine the Management Discussion and Analysis section of annual financial statements in an effort to determine whether to require more disclosure of environmental and other corporate responsibility issues.⁴⁴ In the United Kingdom, the Turnbull Commission and the London Stock Exchange have issued a new requirement for companies to disclose their risk management practices, including how they manage risks resulting from issues related to reputation and the environment.⁴⁵ In France, new laws were adopted in May 2001, requiring disclosure of many environment- and labor-related issues in company annual reports, including greenhouse gas emissions reporting and disclosure of occupational hazards.⁴⁶ That same month, the UNECE also issued a recommendation on the recognition, measurement and disclosure of environmental issues in company annual accounts/reports.⁴⁷

Current SEC Environmental Disclosure Regulations

Current SEC disclosure rules require publicly traded companies to disclose actual or potential environmental liabilities under Regulation S-K,⁴⁸ Items 101,⁴⁹ 103,⁵⁰ and 303.⁵¹

Item 101, governing the company's general description of business operations, requires disclosure of the material effects that complying with federal, state, and local environmental provisions may have upon the capital expenditures, earnings and competitive position of the registrant and its subsidiaries. The company is required to disclose any "material estimated capital expenditures for environmental control facilities for the remainder of its current fiscal year and its succeeding fiscal year and for such further periods as the registrant may deem material."

Item 103, governing the disclosure of legal proceedings, requires a company to disclose material environmentally related administrative or judicial proceedings. The SEC provides two specific materiality thresholds which require disclosure if the proceeding involves a claim, sanction or expenditure that exceeds 10% of current assets, or if the proceeding involves a governmental authority seeking potential sanctions over $ 100,000.

Item 303, governing disclosure in the Management Discussion and Analysis section of a financial report, requires a registrant to disclose "where a trend, demand, commitment, event or uncertainty is both presently known to management and reasonably likely to have material effects on the registrant's financial condition or results of operation." Such trends can include environmental issues such as impending environmental regulation.

Companies' environmental disclosures are also subject to the anti-fraud provisions of SEC Rule 10b-5,⁵² which prohibits a company from making false or misleading statements in SEC filings. The rule also prohibits a company from underreporting or omitting information that a reasonable investor would likely consider material given the total amount of information available to the investor.

The body of Generally Accepted Accounting Principles (GAAP) governing environmental and other types of accounting and disclosure are established through the SEC, the American Institute for Certified Public Accountants (AICPA), and the Financial Accounting Standards Board (FASB). GAAP is codified by the SEC through SEC Staff Accounting Bulletins (SAB), which reiterate and often provide interpretive guidance on SEC, AICPA, and FASB reporting and disclosure guidelines.⁵³

Finally, GAAP also requires a company to describe any significant developments in labor-management relations, primarily as a way of informing investors of impending or possible strikes or work stoppages. Under registrants' obligations to disclose material legal proceedings, many companies also disclose material labor grievances in arbitration and discrimination suits. However, SEC labor-related disclosure rules are relatively vague compared with environmental GAAP.

Materiality

Disclosure of nonfinancial information, whether it be related to environmental liabilities, legal proceedings, or future trends, is triggered by the "materiality," or significance, of the data. Materiality has been defined with various levels of specificity by companies, private auditors, the SEC, and the accounting profession through the establishment of GAAP and through case law.

Many registrants and auditors use a general and quantitative definition of materiality that defines material disclosures as those data with financial impact exceeding 5%-10% of net income. Although the 5% threshold is widely used, the SEC points out that that materiality definition has no basis in accounting literature or law.⁵⁴

On the contrary, the SEC's most recent (1999) pronouncement on materiality,⁵⁵ SAB 99 clarifies that qualitative information can be material, and that "exclusive reliance on certain quantitative benchmarks to assess materiality [32 ELR 10971] in preparing financial statements and performing audits of those financial statements is inappropriate; misstatements are not immaterial simply because they fall beneath a numerical threshold."⁵⁶ The bulletin provides several cases in which disclosures that fall beneath the 5% threshold can in fact be material, such as when the disclosure refers to a company's regulatory compliance, or if it relates to an important portion of the registrant's business operations.

The FASB provided another definition of materiality in its Statement of Financial Accounting Concepts No. 2 (FAS 2), which takes a relatively expansive view. FAS 2 states that a disclosure should be made if its omission or correction would probably change or influence "the judgment of a reasonable person relying upon the report."⁵⁷

Case law is consistent with FASB's expansive definition of materiality. In 1976, the Supreme Court, in TSC Industries, Inc. v. Northway, Inc.⁵⁸ mirrored FAS 2's definition by concluding that a disclosure is material if there is "a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information available." In addition, the Court maintained that a disclosure it material if "there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote."⁵⁹ In another important case, Basic, Inc. v. Levinson,⁶⁰ the Court concluded that materiality must be based on "delicate assessments of the inferences a 'reasonable shareholder' would draw from a given set of facts and the significance of those inferences to him."⁶¹

In addition to general definitions of materiality, the SEC sometimes creates specific "bright-line" materiality definitions for disclosing nonfinancial information. For example, Regulation S-K, Item 103 creates a relatively low reporting threshold on environment-related governmental legal proceedings, requiring proceedings over $ 100,000 to be disclosed; similarly, the SEC requires outright disclosure of a company's number of employees.

A Pattern of Inadequate Nonfinancial Disclosure

Since 1997, individual members of the CSWG have monitored companies' disclosure of nonfinancial data, and notified the SEC of alleged misstatements or omissions of material environmental and social information. The complaints have been varied, with allegations of material misstatements of environmental, labor, and legal issues inseveral types of public filings, including annual reports, quarterly statements and registration documents. The group maintains that noncompliance with SEC environmental and social reporting requirements is a systemic problem, and that better enforcement is needed.

In spring 2000, FOE notified the SEC of an alleged lack of disclosure by PetroChina, a foreign company intending to launch an initial public offering (IPO) in the United States. The environmental group contended that PetroChina did not adequately disclose material information about political risk, in particular separatist violence in Xinjiang province, an area in which the company had significant development and expansion plans. According to the SEC's SAB 99 on materiality, a qualitative disclosure can be material if it concerns a segment or other portion of the registrant's business that has been identified as playing a significant role in the registrant's operations or profitability. The complaint also alleged that the company should have disclosed the social and ethical issues that sparked an investor education and divestment campaign, which FOE claimed could ultimately have a material effect on the company's ability to raise future capital.⁶² The complaint tested the SEC's newly issued interpretation on materiality, and represented one of the first CSWG tests of a foreign company's registration statement.

The SEC did not respond to FOE's complaint at that time, and allowed the initial public offering to proceed without delay. However, the investor education and divestment campaign (which was conducted by a diverse coalition of groups and included independent investment analyses, fund manager briefings, an alternative "road show," letters to public pension funds, and media efforts) contributed to weak investor appetite for PetroChina's IPO. At the end, PetroChina only raised $ 2.8 billion, far short of its anticipated $ 7-10 billion. This significant shortfall clearly illustrates the potential materiality of nonfinancial issues, such as a company's environmental, human rights, labor, and national security impacts.

In fall 2000, the World Resources Institute (WRI) released Coming Clean, a policy paper based on an earlier study of the pulp and paper sector entitled Pure Profit. In Pure Profit, the WRI worked with company executives to identify the most significant pending environmental regulations facing the industry, and then created financial projections for various pulp and paper companies based on each regulatory scenario. The study found that the financial impact of these regulations would be different for each company based on geography, technology, and other factors: one-half of the companies in the group faced expected impacts of at least 5% of total shareholder equity, while others faced impacts of about 10%. In addition, the study found that impending regulations could affect some companies' earnings very little, while the value of other companies could be reduced by as much as 15%.⁶³

However, as WRI documented in its subsequent Coming Clean report, almost none of the companies studied reported the material effect these regulations would have in the Management Discussion and Analysis section of their SEC 10-K filing, as required under SEC Regulation S-K, Item 303.⁶⁴ Some investors with exposure in the forestry sector who learned of the study clearly recognized its findings as materially significant, but were unable to determine which companies were studied in the report, as WRI had concealed company names. Undeterred, several mutual fund companies and asset managers queried the forestry companies they owned about financial exposures to impending environmental [32 ELR 10972] regulations, with some funds filing shareholder resolutions on the topic.

In earlier years, members of the CSWG publicized similar cases of lack of adequate disclosure. For example, in 1998, a petition for enforcement was filed with the SEC by the United Steelworkers of America regarding Phelps Dodge. The petition alleged that Phelps Dodge had failed to disclose adequate information about its environmental permitting problems in the company's SEC 10-Q quarterly filing, and that its SEC 10-K annual filing failed to accurately estimate the cost of remediating a contaminated site. The company estimated that the cleanup would cost $ 36 million, while a New York court estimated that potential costs for thorough remediation of the site could be as much as $ 285 million. The petition served as a test case of AICPA Statement of Position 96-1, which provided guidance on accounting, estimating, and disclosing environmental liabilities.⁶⁵ The SEC has not responded to the union's petition for enforcement.

The next year, two Crown Petroleum shareholders filed a complaint against the company, asserting that it failed to disclose government-related environmental proceedings which exceeded $ 100,000 in potential costs, in violation of SEC Regulation S-K, Item 103. In addition, the shareholders alleged that Crown Petroleum did not disclose the material effects of a labor boycott in its 10-K forms, a boycott which the shareholders claimed could have resulted in as much as a 7.2% reduction in the sales of gasoline during the first half of 1999. The complaint alleged that although Crown Petroleum disclosed the existence of discrimination lawsuits, it neglected to disclose the material risks these lawsuits could pose to key federal contracts. According to the SEC, qualitative disclosures can be material if they relate to a registrant's compliance with contractual requirements.⁶⁶ The shareholders withdrew their complaint when the company voluntarily corrected one of its statements regarding gasoline sales.

Finally, in 2001, a group of nine institutional shareholders filed a complaint at the SEC regarding Abbot Laboratories. The shareholders alleged that Abbot did not adequately disclose risks associated with the company's use of polyvinyl chloride plastics (PVCs) in the manufacture of medical devices. PVCs are made with di(2-ethylhexyl)phthalates (DEHPs) and produces dioxins when incinerated. Prolonged exposure to DEHPs may adversely affect male reproductive tract development, and as the shareholder complaint pointed out, in March 2001, the California Medical Association passed a resolution that strongly urges all hospitals to phase out their use in neonatal intensive care units of PVC products that contain DEHP. Dioxins, a known human carcinogen, have been associated with intelligence quotient defects, hyperactive behavior, and developmental delays. Governmental and scientific scrutiny regarding the health effect of PVCs occurred before and after the complaint, which not only pointed out Abbot's lack of disclosure in this area, but also requested that the SEC create general guidance on emerging science issues. The shareholders argued that they deserved disclosure of possible health, market, and liability concerns resulting from their company's use or creation of a potentially harmful product. Environmentalists such as Healthcare Without Harm applauded the investor effort, as it highlighted the role that disclosure can play in implementing the precautionary principle, a core environmental concept which maintains that when human health and/or environment is potentially and critically at risk, action to mitigate that risk is warranted even in the absence of complete information regarding the probability, scope, and severity of that risk.⁶⁷

Investor Lawsuits Alleging Inadequate Disclosure of Labor and Environmental Matters

In addition to the complaints filed with the SEC, shareholders have also recently filed lawsuits against companies for providing allegedly false or misleading information to investors, again illustrating a systemic problem of underreporting of environmental and social matters.

In Longman v. Food Lion, Inc.,⁶⁸ two Food Lion shareholders sued the company for allegedly omitting information about labor law violations and unsanitary conditions at grocery markets operated by the company. In 1992, a American Broadcasting Company Prime Time Live broadcast exposed alleged labor and public health violations at Food Lion stores; the day after the story, the price of Food Lion's Class A stock fell approximately 11%, and the price of its Class B stock fell approximately 14%. The plaintiffs claimed that in the two and one-half years before the broadcast, company earnings had been artificially inflated because of the company's deliberate misrepresentations about their labor and sanitation conditions. However, in the years preceding the Prime Time Live story, there had been a bitter labor dispute between the company and the United Commercial and Food Workers Union, in which the two sides traded press releases and the union eventually called for a boycott of the grocery chain in 1990. The U.S. Court of Appeals for the Fourth Circuit ruled that because the labor dispute was known in the public domain, it was thus already disclosed to the market and that the plaintiffs were unable to prove "justifiable reliance on the alleged artificially high stock price set by the market." The court found that the Prime Time Live story focused on individual incidents of unsanitary practices rather than widespread procedures at the company, and that these individual events did not meet the materiality threshold so as to require disclosure.

In 1999, the shareholders of U.S. Liquids, Inc. filed a class action suit against the company for allegedly misleading shareholders about material environmental issues while raising capital through a public offering. In 1998, the company had claimed that its liquid waste management services would generate 20% earnings per share growth in 1999. This claim allowed U.S. Liquids to raise $ 30 million through share offerings in 1998 and 1999, and inflated its stock to a Class Period high in early 1999. Several months later, the public learned that EPA and the Federal Bureau of [32 ELR 10973] Investigation were investigating illegal dumping activities at one of the company's most profitable sites. Share price dropped by 50%, and trading of the stock was halted after the company announced that earnings would be substantially lower than originally projected. The plaintiffs allege that the company deliberately misled the investing public by representing that it was in environmental compliance when the company either knew or was reckless in not knowing that illegal disposal of PCBs into the Detroit sewer system had occurred. The company has, in turn, sued its contractor. The lawsuit is still ongoing.

The SEC Responds to the Systemic Problem of Inadequate Disclosure

In 2001, EPA stepped up its efforts to educate companies of their SEC obligations regarding disclosure of environmental liabilities and enforcement actions. In 2001, the Agency publicly released a 1997 study which found that 74% of companies failed to report cases in which a national, state, or municipal agency is contemplating or has initiated an environmentally related legal proceeding that could result in monetary sanctions of over $ 100,000 (for which disclosure is required under Regulation S-K, Item 103). In fall 2001, the Agency issued an Enforcement Alert newsletter that notified companies of their SEC-mandated environmental disclosure duties.⁶⁹ EPA is also preparing a guide to assist investors and the public on how to access environmental information on companies using EPA databases, some of which provide information on a facility rather than corporate basis.

The systemic problem of inadequate corporate environmental disclosure, as illustrated by the years of CSWG complaints, shareholder lawsuits, and the EPA study, prompted the SEC to address this issue. In 2001, the SEC created a dedicated telephone helpline to assist registrants to properly reporting environmental issues. Commission representatives also announced at the 2001 American Bar Association annual meeting that the SEC would begin screening company 10-K filings for compliance with a number of different criteria, including environmental disclosure and auditor independence.⁷⁰

2001 also witnessed a small but significant development in the realm of SEC social disclosure requirements. In response to a PetroChina-related letter from Rep. Frank Wolf (R-Va.), Acting SEC Chairperson Laura Unger requested that the head of the SEC's Division of Corporation Finance create a memorandum describing the nonfinancial issues that companies should disclose, especially with respect to foreign activities. That memorandum explicitly clarified, for the first time, that shareholder divestment campaigns and consumer boycotts can be considered material, and thus subject to disclosure under SEC rules. Although the SEC's position was set forth in a memorandum rather than an official SAB, it still represented a step toward creating a specific duty to disclose such information, which is important given the SEC's vague definition of materiality.

The Call for More Expansive SEC Nonfinancial Disclosure Requirements

The CSWG's call for expanded social and environmental disclosure echoes a petition and a series of lawsuits filed in the 1970s by the Natural Resources Defense Council (NRDC) that were aimed at expanding SEC disclosure rules to include more environmental and equal-opportunity employment-related information.⁷¹ In this petition, and in the ensuing series of lawsuits filed to ensure the SEC's adequate and proper consideration of the matter, the Commission did not maintain that social and civil rights information was financially immaterial. Rather, it concluded that the markets were not interested in this information, as the socially responsible investing community was rather small at the time.

In addition to urging more rigorous enforcement of existing SEC disclosure rules, the CSWG is calling for the adoption of specific corporate disclosure rules to enhance information about a company's environmental, social and governance issues. CSWG is reaching out to investors to provide specific input and feedback on what kinds of additional nonfinancial disclosure items would be most useful and desired in the financial decisionmaking process. Although the CSWG has not finalized a proposed expanded disclosure schedule for submission to the SEC, expanded disclosure can take three forms: (1) broadening disclosure to new issue areas, (2) making existing requirements more specific, and (3) lowering materiality standards.

Broadening disclosure to new issue areas would enable investors to make more informed judgments about a company's corporate culture. For example, when the Securities Acts of 1933 and 1934 were originally enacted, there were relatively few disclosure requirements in the corporate governance area. Today, as a result of different investor demands and information needs, the SEC requires disclosure of executive compensation packages and provides extensive instruction for how to calculate stock options, for example.⁷²

Corporate governance disclosure eventually evolved from an emerging area of investor interest to official GAAP. Similarly, investors today are evaluating companies on nonfinancial criteria such as indicators of corporate responsibility and brand equity, and GAAP need to keep up. Expanding disclosure requirements to today's emerging issue areas could include requiring, among other items, (1) an attestation of whether the company was in compliance with the Foreign Corrupt Practices Act, (2) requiring a company to describe product recalls by product category, (3) or disclosing the amount and content of business or trade with countries that is officially discouraged as a matter of national policy. The CSWG's proposal, which addresses these areas, is found in the appendix to this Article.

Second, expanded disclosure can be achieved through providing more interpretive guidance to existing but vague disclosure rules. For example, GAAP for environmental matters are much more instructive than those governing labor issues. Because of the laws and liabilities surrounding Superfund, and the relatively more quantifiable nature of environmental issues, a small body of accounting practices [32 ELR 10974] has developed governing the estimation and reporting of environmental liabilities, e.g. when to recognize an environmental liability, how to estimate costs, how to account for insurance.⁷³ In contrast, reporting of labor-related issues is relatively broad, with fewer detailed instructions. Were labor disclosure rules as instructive as those governing environmental matters, companies might have to discuss (as proposed by the CSWG) particular indicators of labor-management relations such as the number and aggregate value of violations found by the National Labor Relations Board, rather than wait until a strike was imminent to report on labor issues.

Finally, nonfinancial disclosure requirements can also be expanded by establishing a specific or a lower materiality threshold. For example, in the area of corporate governance, a company must disclose board members' and executives' transactions with the company (related-party transactions), and any of their illegalities, regardless of the magnitude of the illegality. Similarly, the SEC requires companies to disclose environmentally related, government-initiated proceedings seeking sanctions of over $ 100,000. These disclosure requirements have relatively low materiality thresholds, or are simply required outright, reflecting the fact that information on such issues allow investors to take into consideration a company's governance, systemic controls, and management integrity.

The Insurance Industry Calls for Better Environmental Disclosure

In 1991, Rep. John Dingell (D-Mich.), Chairman of the House Committee on Energy and Commerce, requested that the U.S. General Accounting Office (GAO) determine the amount that property and casualty insurers had paid in claims for Superfund cleanup costs. In congressional testimony, insurance companies maintained that the solvency of their industry was at stake if they were found liable for Superfund cleanup costs. In light of such dire predictions, the committee wanted to know whether publicly traded insurers reported their environmental liabilities, as required by SEC disclosure regulations. The GAO found, in 1993, that insurance companies' disclosure of Superfund liabilities was poor, with only 2 out of 16 insurers disclosing dollar amounts relating to environmental claims in their 10-Ks. The GAO recommended that the SEC revise its environmental liabilities disclosure guidance for insurers.⁷⁴

The insurance companies defended their poor disclosure, maintaining that it was impossible to estimate their exposure to liabilities because their client companies were not putting their own liabilities on the books. Without better disclosure from companies, the insurers argued, the industry could not be adequately prepared for such liabilities, let alone disclose their exposure to them.

Shortly thereafter, the American Society for Testing and Materials (ASTM) was given responsibility to take the lead on developing a standard for estimating and disclosing environmental liabilities. The ASTM's standards would complement the SEC's environmental disclosure requirements, which through the 1990s improved in their specificity and instruction. In 2001, the ASTM concluded this standard-setting process and developed two new standards for estimating and disclosing environmental liabilities. Notably, the new ASTM disclosure standard requires companies to measure the materiality of the environmental liabilities in the aggregate, rather than individually by site.⁷⁵

This protocol would greatly increase the amount of environmental liability information disclosed by SEC registrants, and would provide investors with a much better view of a company's exposure to environmental liabilities. For example, in the aforementioned Viacom Superfund case, FOE alleged that Viacom was responsible for at least $ 270 million of combined Superfund liabilities. However, the company's SEC 10-K filings made no mention of these liabilities, because individually the exposures were immaterial. However, under the ASTM standard, which measures materiality based on aggregate liabilities, this figure would be material and would require Viacom to put their Superfund liabilities on the books.

Arguments Against Expanded Nonfinancial Disclosure

Opponents of expanded nonfinancial disclosure have posed four main arguments against expanded corporate nonfinancial disclosure: (1) that disclosure of material nonfinancial issues is already required given the expansive definition of materiality, (2) that investors do not seek or use nonfinancial (especially environmental and social) information, (3) that the SEC is not a "social engineer," and (4) that additional requirements would put an undue burden on registrants.

"Additional Disclosure Is Unnecessary"

Opponents of expanded corporate nonfinancial disclosure argue that additional disclosure requirements or instruction are unnecessary given the relatively expansive definition of materiality. This definition, which describes material information as any data that a reasonable investor would want to know about a company given the total mix of information available to him or her, is, they assert, sufficiently broad to cover both financial and nonfinancial disclosures, and provides adequate instruction regarding nonfinancial disclosures. This position was taken by the SEC in the 1970s. Prompted by a rulemaking request submitted by the NRDC, the SEC held a series of public hearings, at which many investors and the Equal Employment Opportunity Commission testified that disclosure of environmental and equal-opportunity employment information was financially material. In a subsequent legal proceeding before the U.S. Court of Appeals for the District of Columbia Circuit, the SEC maintained that if equal opportunity information were indeed material, that it would require discussion of equal employment under its general disclosure requirements, and apply its enforcement capabilities accordingly.⁷⁶

The Sunshine Response

The SEC has maintained that general materiality analysis applies to environmental, social and other issue areas, thus [32 ELR 10975] negating the need for additional and specific nonfinancial disclosure instructions. However, SEC itself has seen the need for promulgating explicit accounting and disclosure instructions to address a range of emerging issues. In the corporate governance field, for example, the SEC saw fit to require a company to provide details of board members' backgrounds, their service on various board committees, business ties with the company, and instances in which the company has made loans or donations to organizations or persons connected with the director. In addition, the SEC provides lengthy instructions on how to calculate executive compensation. Clearly, if the general materiality threshold were adequate instruction for all areas of nonfinancial disclosure, the SEC, the AICPA and FASB would cease promulgating new disclosure instructions that contribute to the constantly-evolving body of GAAP.

An additional need for explicit disclosure instructions stems from the Court's view in Levinson,⁷⁷ which states that "silence [i.e., a failure to disclosure material information], absent a duty to disclose, is not misleading under rule 10b-5."⁷⁸ In other words, unless the SEC or another officially recognized accounting body explicitly creates an independent duty to disclose certain information, a company is not required to report it.

This view was expressed by the Fourth Circuit in Longman, in which shareholders sued the company for material misrepresentations after a Prime Time Live broadcast exposing worker and sanitation conditions caused the company's share price to drop. The court ruled that the labor dispute was known and in the public domain. Furthermore, since the company had no independent duty to disclose the information, it was not required to report it. However, despite the fact that the United Commercial and Food Workers Union was in a public struggle with the company, Food Lion's share price dropped 11% the day after the television story aired. This market reaction suggests that investors had not fully accounted for the company's labor problems.

Finally, international bodies such as the Organization for Economic Cooperation and Development (OECD) and the International Corporate Governance Network have pressed for companies to provide additional disclosure and to adopt best practices in the field of environmental reporting. The OECD Guidelines for Multinational Corporations, to which the United States has agreed to adhere, state that "enterprises are also encouraged to apply high quality standards for non-financial information including environmental and social reporting where they do not exist. The standards or policies under which both financial and non-financial information arecompiled should be reported."⁷⁹ Similarly, the International Corporate Governance Network maintains that "boards that strive for active cooperation between corporations and stakeholders will be most likely to create wealth, employment and sustainable economies. They should disclose their policies on issues involving stakeholders, for example workplace and environmental matters."⁸⁰

"Investors Do Not Seek Information on Corporate Nonfinancial Performance"

Opponents of expanded nonfinancial disclosure also argue that because materiality is defined as information that investors seek about a corporation for financial decisionmaking, corporate social and environmental information is irrelevant to the investing public. Some have suggested that the very definition of a security limits investor interest to purely financial objectives, i.e. profit maximization, and that corporate social information falls outside the realm of investor-based materiality.

The Sunshine Response

While in the 1970s, the SEC argued against expanded corporate environmental and social disclosure on the basis that there was no market demand for this information, the same argument clearly cannot be justified today. As discussed above, both traditional and socially responsible investors seek and incorporate nonfinancial information as an essential part of their investment analysis and decisionmaking. Large institutional investors use nonfinancial data as a basis of up to 35% of their asset allocation decisions; while social investors, who rely on corporate social data as material per se, represent about one out of every eight dollars under professional management in the United States.⁸¹

As previously noted, investors' increasing use of nonfinancial information is being corroborated, although not spurred, by a growing body of academic research which points to a correlation between responsible corporate behavior, superior management, and financial performance. In a related field of study, other researchers, including the SEC itself, are studying the importance of intangible assets (such as an innovative and productive workforce, or corporate reputation) on corporate value.⁸² This link has prompted the creation of financial research and management consulting firms specializing in quantifying the financial value or capturing and communicating the business value of "corporate responsibility."⁸³ Since nonfinancial performance contributes to corporate value and plays a part in financial decisionmaking, the SEC needs to keep up with investors' information needs.

"The SEC Is Not a Social Engineer"

A third argument against expanding nonfinancial disclosure requirements (particularly those in the environmental or social fields) is that the SEC is not a social engineer; its mission is to protect investor interests and it does not have the [32 ELR 10976] mandate to advance or fulfill other public policy objectives or improve corporate conduct.

The Sunshine Response

An excellent rebuttal to the argument that the SEC has no mandate to promote the public good was set out in an article penned by current SEC Chairman Pitt, in his 1971 piece Using Federal Securities Laws to "Clear the Air! Clean the Sky! Wash the Wind." In the article, Pitt and his co-author Theodore Sonde promote the use of SEC disclosure laws to advance environmental protection, contending that "the commission has within its power the wherewithal to make corporations socially responsible and afford a substantially higher degree of investor and public protection."⁸⁴ The authors also suggested changes in SEC disclosure requirements, including a recommendation that the SEC instruct companies with environmentally sensitive activities to include in their registration statements the following disclosure: "NOTICE: THE ISSUER OF THESE SECURITIES IS ENGAGED IN ACTIVITIES WHICH HAVE HAD A SERIOUS ADVERSE IMPACT ON THE ENVIRONMENT."⁸⁵

Prof. Cynthia Williams' 1999 Harvard Law Review article⁸⁶ also reveals the SEC's ability and mandate to promote the public interest, not just the narrower investor interest. The article examines the statutory and legislative history of the SEC, and demonstrates that Securities Exchange Act of 1934 grants the SEC statutory authority to promulgate proxy rules for two explicit and separate purposes: for the public interest or for investor protection. Williams echoes Pitt's assertion that Congress intended that the 1934 Act foster public responsibility among corporate America.⁸⁷

The SEC has since largely forgotten its general public interest mandate, and instead has focused on its mission on a narrow interpretation of investor protection. In stating, in 1975, that it is prohibited from requiring disclosure for the "sole purpose of promoting social goals unrelated to those underlying" the Securities Acts,⁸⁸ the SEC has narrowly and unnecessarily interpreted its public interest mandate to promoting the public good through solely ensuring transparent markets.

The SEC has also eschewed disclosure requirements designed for the primary purpose of influencing corporate behavior, and in the NRDC proceedings pleaded that it could not require expanded disclosure solely to have an effect on corporate conduct.⁸⁹ However, during the Watergate-era scandals over companies' questionable payments to political campaigns, the SEC created corporate governance disclosure rules, and defended its ability to require disclosure for the purpose of influencing corporate conduct, noting that "disclosure may, depending on determinations made by a company's management, directors and shareholders, influence corporate conduct. This sort of impact is clearly consistent with the basic philosophy of the disclosure provisions of the federal securities laws."⁹⁰

In short, the SEC has both the statutory authority to require corporate disclosure for promotion of the public interest and the precedent of requiring such disclosure to influence corporate conduct. The SEC has authority to promote disclosure for "activist" reasons in addition to its clear and unquestioned ability to require disclosure to promote enhanced investor decisionmaking.

"Additional Disclosure Requirements Would Be Onerous"

Some companies have argued that expanding nonfinancial disclosure requirements would be onerous and put an undue burden on registrants. A related argument is that expanded disclosure would create an avalanche of information and ultimately confuse investors rather than enlighten them.⁹¹

The Sunshine Response

The collapse of Enron and its devastating effects on many investors, large and small, should illustrate that the benefits of full disclosure outweigh the costs. The argument that expanded disclosure would put an undue burden on registrants is mirrored frequently by companies that generally resist increased regulations. Indeed, the very establishment of the SEC and the attempt to regulate securities were met with prophesies of economic catastrophe from some companies and sympathetic lawmakers in the 1930s.⁹² But despite the doomsday rhetoric, U.S. securities laws have created the world's most transparent and robust capital markets, which until recently have enjoyed high levels of investor confidence.

The CSWG's proposed disclosure items draw largely from information that is already collected by the company. For example, some proposed disclosure items call for the disclosure of selected value-relevant information currently reported to other federal agencies such as OSHA or EPA. Others call for disclosing information that is known but would otherwise be withheld because of current materiality definitions, such as information on aggregate product or environmental liabilities.

A third category of information is the type that a company may not currently track but is material to shareholders, such as compliance with the Foreign Corrupt Practices Act or significant consumer and scientific trends. This category of [32 ELR 10977] disclosure may create a marginal burden on registrants, but could significantly improve the quality and usefulness of company financial statements, which currently do not meet investors' information needs in the "new economy."

Moreover, a few thousand companies around the world have begun tracking additional environmental and social performance information and creating voluntary corporate environmental or social reports; this phenomenon provides evidence that it is entirely possible to track and disclose additional nonfinancial information to a variety of stakeholders. Of particular note in the realm of voluntary reporting is an effort that dozens of organizations and companies have embarked upon. The global reporting initiative (GRI) is an initiative to standardize these voluntary corporate environmental and/or social reports to ensure their usefulness and comparability over time and between companies.⁹³

In light of the GRI, critics of expanded SEC disclosure have argued that voluntary, instead of mandatory, nonfinancial corporate reporting is preferable and adequate. The CSWG supports the goals of the GRI, but also believes that since GRI reporting standards are voluntary, they have a limited usefulness for investors who need better nonfinancial information on all companies in their investing universe. Although several large companies have issued GRI reports, they represent a minute portion of all publicly traded companies. In addition, an Ernst & Young study found that voluntary corporate and environmental reports, which have traditionally been prepared for stakeholder or public relations purposes, are currently one of the least valuable sources of nonfinancial information for investors.⁹⁴ This suggests that disclosure of social or environmental information in financial reports, rather than stand-alone reports, will be more useful to investors.

Others have argued that expanded nonfinancial disclosure might actually be detrimental to the capital markets, as it could confuse investors by deluging them with an abundance of information that is marginally useful, and eclipse more material data. But the simple fact is that nonfinancial factors are not simply "noise," but are increasingly material drivers of shareholder value, as evidenced by the eroding correlation between a company's market versus book value. In addition, corporate data in SEC filings are, to a certain extent, used directly by the investing public; but more often than not, they are interpreted by financial analysts for use by small savers. Thus, the risk that investors would be confused by additional information in financial reports is likely to be less than critics assert.

Conclusion

When the SEC was created, Sen. Duncan Fletcher (D-Fla.), co-sponsor of the bill that ultimately became the Securities Exchange Act of 1934, described the goal of his bill as "restoring as a rule of moral and economic conduct, a sense of fiduciary obligation, and second, establishing social responsibility, as distinguished from individual gain."⁹⁵ With those intentions, Congress created the SEC, an unprecedented institution that would ensure transparency and create capital markets that would see America through decades of dramatic economic growth, stunning technological and financial change, and increasingly deep and complex capital markets.

However, 70 years later, the largest bankruptcy in American business history has created a crisis of public confidence in Corporate America, Wall Street, and the accounting industry. Policymakers are again searching for ways to restore a sense of fiduciary obligation and social responsibility to companies that are under ever-mounting pressure to demonstrate earnings every 12 weeks. What is needed today, short of perhaps a wholesale change in modern capitalism,⁹⁶ is a new SEC that provides better regulation and transparency to respond to companies' increasingly complex financial engineering, and investors' changing information needs in a new global economy.

Policymakers may be tempted to deal more narrowly with the questions posed by Enron's collapse by focusing on important but limited proposals such as ensuring adequate accounting for special purpose entities. These reforms are important, but policymakers and the SEC itself should not shrink from the broader questions posed by Enron's collapse. Borrowing from the words of SEC Chairman Pitt, the SEC should make a concerted effort "to focus its powers and authority in environmental and other areas in furtherance of the public interest it has been mandated to uphold."⁹⁷

APPENDIX

CSWG Proposed Expanded SEC Nonfinancial Disclosure Requirements

The following is a list of 20 proposed expanded corporate disclosure items, which have been selected by the CSWG for their financial value-relevance, as well as their ability to enhance corporate governance and responsibility. The proposed disclosure items can be categorized as: (1) those that require new issues to be discussed, (2) items that provide more detailed instructions to existing requirements, and (3) those that change materiality thresholds.

Several proposed items essentially change the materiality threshold for disclosure of issues that taken individually [32 ELR 10978] (such as a product recall for a single product, a particular site that requires environmental cleanup, or an individual wrongful death settlement) may not be material, but in aggregate may be significant. The Big Five accounting firms recommended to the SEC that it should require companies to disclose information that "the likelihood that a statement that is currently immaterial may have an effect in future periods because, for example, of a cumulative effect that builds over several periods."⁹⁸

General Information

To provide context to existing corporate disclosures, inform analysis on corporate strategy, market positioning, etc.

1. List of countries where company has facilities or operations (new).

This information is provided by Dun & Bradstreet, but is outdated within three to six months given the large amount of mergers and acquisitions. This data could inform investors of a company's exposure to country risks.

2. List of major suppliers for core business operations (new).

This information provides investors with information on a company's production and value chain, and could inform shareholders of a company's exposure to country risks.

3. For nonretail companies, list largest 20 customers by percentage of sales.

A listing of a company's largest customers provides investors with important data on which to analyze a company's strategic positioning in the marketplace, its vulnerability to customer trends and conditions.

4. Number of employees employed with the United States and abroad. Total number covered by a labor union within the United States and abroad, along with name of union and status of union-management relations.

Levels of unionization, both domestically and abroad provides basic information to investors about labor-management relations. Generally, for registrants the only obvious threshold for disclosing information on union-management relations concerns strikes, work stoppages, lockouts, and other grave situations; shareholders should receive more detailed information on labor-management relations before these situations arise.

Good Actor Indicators

To provide indicators of the integrity of management, compliance with applicable laws, and recognized areas of corporate citizenship.

1. Disclosure of compliance with Foreign Corrupt Practices Act (FCPA) (new).

Regulation S-K, Item 303 specifically instructs foreign issuers to consider governmental economic, fiscal, monetary, or political policies or factors that have or could materially affect their operations or investments by U.S. nationals. However, SEC rules do not provide instruction for U.S.-based multinational companies regarding their compliance with similar U.S. foreign policy-related laws. Notably, the accounting provisions of the FCPA itself do not provide companies with explicit materiality guidance. Compliance with the FCPA, which seeks to address corruption and bribery, can also be viewed as a "good actor" indicator.

2. Disclose security arrangements with state police and military forces or with third-party military or paramilitary forces (new).

Disclosure of security arrangements would help inform investors of the expenditures related to operating in countries or areas with high levels of political risk. Such company-specific disclosure is more helpful to investors than relying on general sovereign risk data.

3. Disclosure of company-adopted human rights, including standards and codes including brief description of internal and external monitoring mechanisms (new).

Disclosure of human rights standards, particularly in the case of companies with international operation, assists investors in determining how a company is managing one of the most consumer-sensitive issues in the global marketplace. The most prominent example of how human rights-related issues can impact financial performance is Nike and the consumer campaign against the company's sweatshop conditions in Asia.

4. Amount and content of business/trade with countries that is officially discouraged as a matter of national policy (because of, for example, hostile relations or abuse of human rights), J-7 countries or companies on the List of Foreign Asset Controls (new).

SEC rules do not provide sufficient instruction for U.S.-based multinational companies regarding compliance with foreign policy objectives. Such information could provide investors with a picture of a company's exposure to country risks, particularly as countries of concern (formerly referred to as "rogue" countries) may be subject to future U.S. sanctions.

Expenditures

To provide additional information regarding company expenditures.

1. Corporate contributions to political organizations directly or through political action committees (new).

This information provides guidance to shareholders as to company expenditures to influence public policy; institutional investors may agree or disagree with the registrant's use and magnitude of such lobbying expenditures.

Potential Liabilities

To provide leading indicators of potential liabilities that may occur as a result of remediation, lawsuits, fines, endangered contracts, or damage to brand equity.

1. TRI emissions data: current estimates of air and water emissions, by specific site, category, and quantity (new).

TRI chemicals emissions have been demonstrated to be value-relevant, and are an indicator of risk and, if not properly managed, potential for Superfund liability.

2. State by product category number of outstanding claims and number and aggregate value of settlements related to product liability, injury, and wrongful deaths.

A record of numerous small offenses may reveal an inattentive/ineffective management and inadequate systemic controls.

3. State by product category number and value of product recalls.

Product quality is a key driver in corporate value. For manufacturing companies, information about product recalls can [32 ELR 10979] be a more objective indicator of product quality than customer surveys.

4. State outstanding cases and number and aggregate value of National Labor Relations Board (NLRB) and/or National Mediation Board (NMB) charges and findings of fact (detail).

Currently, SEC requirements require disclosure of immanent strikes or work stoppages. Providing information on NLRB/NMB charges provides a better picture and can be a leading indicator of the state of management-labor relations.

5. State outstanding cases and number and aggregate value of U.S. Department of Labor (DOL) charges under the Fair Labor Standards Act and findings of fact (detail).

Similarly, providing information on DOL charges provides investors with a clearer picture of labor issues and can be a leading indicator of labor relations.

6. State number and aggregate value of complaints filed at and violations found by the Equal Employment Opportunity Commission and/or Office of Federal Contract Compliance Programs (new).

This information can provide leading indicators of discrimination and harassment before such issues create legal liabilities. On June 20, 2000, the day 302 employees of Nextel Communications Inc. filed a racial and sexual discrimination complaint against the company seeking $ 2 billion, company shares fell from around $ 69 to around $ 62.⁹⁹ Other recent discrimination cases include the January 2001 $ 5 billion racial discrimination lawsuit against Microsoft, and Coca-Cola's racial discrimination lawsuit which was settled for $ 192 million, plus legal fees of $ 20 million.¹⁰⁰ Regarding complaints or violations found by the Office of Federal Contract Compliance Programs, SAB 99 states that information may be material if it reflects a company's compliance with contracts. However, no further instruction is provided to registrants, and disclosure of Office of Federal Contract Compliance Programs data would be a robust indicator of such contractual compliance.

Potential Trends and Uncertainties

To provide indicators of trends in potential liabilities, consumer and market demand, pertinent regulation, etc.

1. Change materiality threshold to account for cumulative environmental liabilities, penalties, settlements, fines, and violations (threshold).

Investors and insurers are unable to determine whether environmental liabilities in aggregate may be materially significant. In response to the lack of adequate information on environmental liabilities, the insurance industry has been supporting the creation of a voluntary environmental liabilities estimation and disclosure format that is being developed through the American Society for Testing and Materials (ASTM). The proposed ASTM disclosure standards call for the disclosure of environmental liabilities if, in aggregate, they are material.

2. Identify any domestic or international trends in customer or stakeholder complaints, accidents, or any recently published peer reviewed scientific literature that the company is aware of that may be suggestive of the potential for the company's products, services, or activities to cause serious harm to human health or the environment (detail).

This kind of information on trends, if deemed to be material, should be reported in the Management Discussion and Analysis section of a company's 10-K filing, in which registrants disclose known events, trends or uncertainties that could affect liquidity, capital resources, or results of operations. Although companies commonly consider the effect of impending regulations, Item 303 does not provide sufficient instruction for registrants to disclose consumer and scientific trends.

Such trends are playing an increasingly influential role in the results of company operations, and can be a leading indicator of future regulation. For example, activism from anti-smoking advocates created significant consumer and eventually legal impacts for the tobacco industry; similarly, a union-led consumer boycott of Crown Petroleum could have resulted in as much as a 7.2% reduction in the sales of gasoline in the first half of 1999. Finally, the consumer backlash against genetically engineered food led activists to perform independent lab tests of genetically engineered corn, which eventually resulted in a loss of $ 100 million for Aventis. Disclosure of emerging information from credible sources on products and activities that could pose material impacts should be proactively disclosed, and not withheld until consumers, investors or communities are adversely impacted.

3. List and discuss significant environmental, health, or safety problems caused by normal use of the company's product by the ultimate customers.

Shareholders should be appraised of products that, from normal use, potentially pose significant environmental or human health problems. Such potential problems should be disclosed before they are manifest through lawsuits or legal liabilities; recent examples would include health problems associated with breast implants, and the safety issues associated with Firestone/Bridgestone tires.

4. State number and aggregate value of complaints filed at and violations found by OSHA, under the categories "fatality," "serious," "willful" and "repeat," including lost workdays (new).

OSHA information already reported to the federal government and is value-relevant for shareholders. In particular, OSHA data such as lost workdays, fatalities, and near-miss accidents are value-relevant and can provide a leading indicator of future workplace safety.

5. Provide specific instruction regarding the disclosure of uncertain financial risks posed by prospective environmental regulations.

Although Regulation S-K, Item 303 requires disclosure of trends or uncertainties that may have a material impact on the company, members of the CSWG has documented numerous cases in which prospective environmental regulations were not disclosed,¹⁰¹ this indicates that registrants and investors would benefit from specific mention of environmental regulation as a type of trend or uncertainty.

1. Kurt Eichenwald, Enron's Many Strands: The Overview; Enron Panel Finds Inflated Profits and Self-Dealing, N.Y. TIMES, Feb. 3, 2002, at 1.

2. Jim Yardley et al., Enron's Many Strands: The Former Chairman; His Influence Lost, Lay Prepares to Answer Questions in Washington, N.Y. TIMES, Feb. 3, 2002, at 28.

3. Theodore Sonde & Harvey Pitt, Utilizing Federal Securities Laws to "Clear the Air! Clean the Sky! Wash the Wind!," 16 How. L.J. 906 (1971).

4. 42 U.S.C. §§ 9601-9675, ELR STAT. CERCLA §§ 101-405.

5. LOUIS BRANDEIS, OTHER PEOPLE'S MONEY 92 (1932 ed.).

6. 42 U.S.C. §§ 11001-11050, ELR STAT. EPCRA §§ 301-330.

7. Id. § 11023, ELR STAT. EPCRA § 313.

8. See David Roe, Toxic Chemical Control Policy: Three Unabsorbed Facts, 32 ELR 10232 (Feb. 2002).

9. See Environmental Defense, Scorecard, at http://scorecard.org.envreleases/us-map.tcl (last visited Mar. 30, 2002).

10. 42 U.S.C. § 11004, ELR STAT. EPCRA § 304.

11. Id. §§ 13101-13109, ELR STAT. PPA §§ 13101-13109.

12. But see Environmental Defense, The Limits of TRI Data, at http://www.scorecard.org/general/tri/tri_gen.html (last visited Mar. 30, 2002).

13. See 42 U.S.C. § 9603, ELR STAT. CERCLA § 103.

14. Id. §§ 6901-6992k, ELR STAT. RCRA §§ 1001-11011.

15. See, e.g., Washington Forest Practices Act, RCW 76.09; Washington Mining Act, RCW 79.01; California Z'berg Nejedly Forest Practice Act of 1973, PRCS 4511.

16. See generally Mark A. Cohen, Information as a Policy Instrument in Protecting the Environment: What Have We Learned?, 31 ELR 10425 (Apr. 2001).

17. For example, the William J. Casey Institute for Security Policy has recommended securities disclosure as a way to enhance national security.

18. NATIONAL RESEARCH COUNCIL, INNOVATIVE TECHNOLOGIES IN TOXIC WASTE CLEANUP NEED FEDERAL BOOST (1997).

19. OFFICE OF COOPERATIVE ENVIRONMENTAL MANAGEMENT, U.S. EPA, GREEN DIVIDENDS? THE RELATIONSHIP BETWEEN FIRMS' ENVIRONMENTAL PERFORMANCE AND FINANCIAL PERFORMANCE (2000) [hereinafter GREEN DIVIDENDS].

20. Sonde & Pitt, supra note 3, at 850.

21. Sidney M. Wolf, Fear and Loathing About the Public Right to Know: The Surprising Success of the Emergency Planning and Community Right-To-Know Act, 11 J. LAND USE & ENVTL. L. 217 (1996).

22. Madhu Khanna et al., Toxic Release Information: A Policy Tool for Environmental Protection, 36 J. ENVTL. ECON. & MGMT. 243-66 (1998).

23. OFFICE OF POLLUTION PREVENTION & TOXICS, U.S. EPA, 1996 TOXIC RELEASE INVENTORY PUBLIC DATA RELEASE—TEN YEARS OF RIGHT-TO-KNOW 95 (1998).

24. Marissa Caputo, SEC Environmental Disclosure Rules and CERCLA Liability, 4 MD. J. CONTEMP. LEGAL ISSUES 97 (1992-1993).

25. Mary Graham & Catherine Miller, Disclosure of Toxic Releases in the United States, ENV'T, Oct. 1, 2001, at 8.

26. See data for Monsanto facilities, found at EPA's TRI website, http://www.epa.gov/triexplorer/chemical.htm (last visited Dec. 30, 2001).

27. The protocol is being negotiated under the UNECE. The Aarhus Convention on Access to Information, Public Participation in Decisionmaking and Access to Justice in Environmental Matter, at http://www.unece.org/env/pp (last visited Mar. 30, 2002).

28. See the UNECE website for documents on the development of the PRTR Protocol, found at http://www.unece.org/env/pp/prtr.htm and http://www.unece.org/env/documents/2001/cep/wg5/ac2/cep (both last visited Mar. 30, 2002).

29. Proposal for International Right-To-Know Disclosure Legislation (Dec. 2001) (on file with author).

30. See http://www.irtk.org (last visited Mar. 30, 2002).

31. 15 U.S.C. § 77.

32. Id. § 78a et seq.

33. Arthur Levitt, Who Audits the Auditors?, N.Y. TIMES, Jan. 17, 2002, at 29.

34. Joel Seligman, The Transformation of Wall Street, in ROBERT REPETTO & D. AUSTIN, PURE PROFIT: THE FINANCIAL IMPLICATIONS OF ENVIRONMENTAL PERFORMANCE (World Resources Inst. 2000) [hereinafter PURE PROFIT].

35. Caputo, supra note 24.

36. H. REP. NO. 73-1383 (1934); Cynthia Williams, The Securities and Exchange Commission and Corporate Social Transparency, 112 HARV. L. REV. 1258 n.59 (1999).

37. American Institute of Certified Public Accountants, Findings of National Investor Poll on Auditing and Financial Reporting (2000), at http://www.aicpa.org/auditor_independence/report.htm (last visited Mar. 30, 2002).

38. JONATHAN LOW & T. SEISFELD, MEASURES THAT MATTER 8 (1997).

39. SOCIAL INVESTMENT FORUM, REPORT ON RESPONSIBLE INVESTING TRENDS IN THE U.S.: 2002 (2001), available at http://www.socialinvest.org (last visited Mar. 30, 2002) [hereinafter SOCIAL INVESTMENT FORUM].

40. James T. Hamilton, Pollution as News: Media and Stock Market Reactions to the Toxic Release Inventory Data, 28 J. ENVTL. ECON. & MGMT. 98 (1995).

41. Shameek Konar & Mark A. Cohen, Information as Regulation: The Effect of Community Right-To-Know Law on Toxic Emissions, 32 J. ENVTL. ECON. & MGMT. 109 (1997); Cohen, supra note 16; David W. Case, The Law and Economics of Environmental Information as Regulation, 31 ELR 10773, 10775 (July 2001).

42. Khanna et al., supra note 22.

43. GREEN DIVIDENDS, supra note 19. Other studies include RALPH EARLE III, THE EMERGING RELATIONSHIP BETWEEN ENVIRONMENTAL PERFORMANCE AND SHAREHOLDER WEALTH (2000); STEPHEN GARONE, THE LINK BETWEEN CORPORATE CITIZENSHIP AND FINANCIAL PERFORMANCE (1999); DON REED, CFA, GREEN SHAREHOLDER VALUE, HYPE OR HIT? (World Resources Inst. 1998). A few bibliographical websites have also been created to house academic research on this topic, including: http://www.figsnet.org, http://www.sristudies.org, and http://web.mit.edu/doncram/www/environmental/envir-fin-literature.html (last visited Mar. 30, 2002).

44. Conversation with Alan Willis, Canadian Institute of Chartered Accountants (Nov. 13, 2000).

45. The United Kingdom's Institute for Chartered Accountants' Internal Control: Guidance for Directors on the Combined Code, the guidance document for implementing the requirements of the Turnbull Commission (see http://www.icaew.co.uk/internalcontrol, last visited Mar. 30, 2002), instructs companies to regularly consider and report on "significant internal and external operational, financial, compliance and other risks," including those related to "health, safety and environmental, reputation and business probity issues." Id.

46. Decret du Portant Application de l'Article 116 de la Loi n 2001-420 du 15 Mai 2001 Relative aux Nouvelles Regulations Economiques. On file with author.

47. See Press Release, European Commission, Accounting: Commission issues Recommendation on environmental issues in companies' annual accounts and reports (June 11, 2001), available at http://europa.eu.int/comm/internal_market/en/company/account/news/01-814.htm (last visited Mar. 30, 2002).

48. 17 C.F.R. pt. 229.

49. Id. § 229.101.

50. Id. § 229.103.

51. Id. § 229.303.

52. Id. § 240.10b-5.

53. Examples of environmental GAAP include: AICPA's Statement of Position 96-1, Environmental Remediation Liabilities (1996), which provides guidance on recognizing, measuring and disclosing environmental liabilities; FASB Interpretation Number 5, Accounting for Contingencies (1975), which requires accrual of a contingent liability if the loss is probable and reasonably estimable; and the SEC's SAB 92, Accounting and Disclosures Relating to Loss Contingencies (1993), which provides additional guidance to FASB 5 and its corollary interpretation, FASB Financial Interpretation Number 14, Reasonable Estimation of the Amount of a Loss (1976).

54. SEC, SAB 99—Materiality (Aug. 12, 1999) [hereinafter Materiality].

55. Id.

56. Id.

57. FASB, Statement of Financial Accounting Concepts No. 2, Qualitative Characteristics of Accounting Information (1980).

58. 426 U.S. 438 (1976).

59. Id. at 448.

60. 485 U.S. 224 (1988).

61. Id.

62. Friends of the Earth, Analysis of PetroChina Company Limited Registration Statement with Respect to Material Financial and Nonfinancial Disclosure (Mar. 21, 2000). On file with author.

63. PURE PROFIT, supra note 34.

64. ROBERT REPETTO & D. AUSTIN, COMING CLEAN: CORPORATE DISCLOSURE OF FINANCIALLY SIGNIFICANT ENVIRONMENTAL RISKS (World Resources Inst. 2000).

65. The AICPA Statement of Position 96-1 was released in 1996 to improve and narrow the way companies were applying existing environmental liabilities accounting practices promulgated by FASB, the SEC, the Accounting Principles Board, and AICPA itself. In particular, it defines when liabilities are "probable" and "reasonable estimable," instructs companies to calculate accruals independent from potential claims for recovery, and details how companies should present environmental liability information in financial statements.

66. Materiality, supra note 54.

67. For a discussion of the principle, see Mark Geistfeld, Implementing the Precautionary Principle, 31 ELR 11326 (Nov. 2001).

68. No. Civ. A.-92-696-4 (4th Cir. 1992).

69. U.S. EPA, ENFORCEMENT ALERT (2001), available at http://es.epa.gov/oeca/ore/sec.pdf (last visited Mar. 30, 2002).

70. Joseph McLaughlin, Securities Law Highlights From the ABA Annual Meeting, INSIGHTS: THE CORPORATE & SECURITIES LAW ADVISOR, Oct. 2001, at 1.

71. For a summary of the NRDC petitions and lawsuits, see Williams, supra note 36.

72. See SEC Regulation S-K, Rule 402 on accounting for and disclosing executive compensation.

73. See supra note 48-53 and accompanying text.

74. U.S. GAO, ENVIRONMENTAL LIABILITY: PROPERTY AND CASUALTY INSURER DISCLOSURE OF ENVIRONMENTAL LIABILITIES, REPORT TO THECHAIRMAN, COMMITTEE ON ENERGY AND COMMERCE, HOUSE OF REPRESENTATIVES (1993).

75. American Society for Testing and Materials, Disclosure of Environmental Liabilities, Standard E-2173.

76. Williams, supra note 36, at 1258.

77. 485 U.S. at 224.

78. Id. at 239.

79. Organization for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises, at http://www.oecd.org/pdf/M0000150000/M00015419.pdf (last visited Mar. 30, 2002).

80. International Corporate Governance Network Statement on Global Corporate Governance Principles, available at http://www.icgn.org/documents/globalcorpgov.htm (last visited Mar. 30, 2002).

81. SOCIAL INVESTMENT FORUM, supra note 39.

82. Research on intangible assets are being conducted by academic and governmental institutes such as "The Intangibles Research Center" at New York University's Stern School of Business, the Ernst & Young Center for Business Innovation and the OECD.

83. For example, Innovest Strategic Value Advisors (http://www.innovestgroup.com/, last visited Mar. 30, 2002) and Safety and Environmental Risk Management Rating Agency (http://www.serm.co.uk/home.html, last visited Mar. 30, 2002) serve investors by rating companies and forecasting corporate share value based on companies' environmental performance indicators. Both small and large management consulting firms, from Smith O'Brien to PricewaterhouseCoopers (Reputation Assurance), assist companies with enhancing shareholder value through commitments to "corporate responsibility."

84. Sonde & Pitt, supra note 3, at 906.

85. Id. at 889.

86. Williams, supra note 36.

87. Section 14(a) of the Securities Exchange Act of 1934 grants the SEC the statutory authority to create proxy regulations "as necessary or appropriate in the public interest or for the protection of investors." See Williams, supra note 36, at 1235, 1238.

88. Id. at 1272 (citing Commission Conclusions and Rulemaking Proposals, Securities Act Release No. 5627).

89. See id. at 1269.

90. Id. at 1270 (citing Senate Comm. on Banking, Housing and Urban Affairs, 96th Cong., Staff Rep. on Corporate Accountability, at 276).

91. See, e.g., the views of Harold Kahn, of PricewaterhouseCoopers' Value Reporting and Reputation Assurance Practice, in Should the SEC Require Environmental Disclosure in the Public Interest?, ENVTL. F., May/June 1999, at 38.

92. For example, Rep. Elmer Studley (D-N.Y.) claimed that "if Congress [passes the legislation that would create the SEC], more than a billion dollars worth of real estate south of Fulton Street in Manhattan alone will become unproductive and tenantless." 78 CONG. REC. 7943 (1934). Rep. Fred Britten (R-Ill.) added that the bill "could dictate the conduct of officers, directors, and even stockholders of corporations; its requirement for balance sheets, monthly reports, and other accounting data would cost the Nation hundreds of millions of dollars a year, and for no particular purpose." Id. at 7944. Sen. W. Warren Barbour (R-N.J.) submitted written testimony from Richard Whitney, then-president of the Stock Exchange of New York, which claimed that the bill "may have very disastrous consequences to the stock market resulting in great prejudice to the interests of investors throughout the country." Id. at 2827.

93. For more information on the GRI, see http://www.globalreporting.org (last visited Mar. 30, 2002).

94. LOW & SEISFELD, supra note 38.

95. See Williams, supra note 36, at 1241.

96. Some analysts, such as Prof. Stephen Diamond, posit that Enron's collapse is indicative of the nature of post-War modern capitalism:

Today's capitalists face a world of intense global competition, rapidly advancing technologies and massive initial capital requirements to get any kind of truly sophisticated business off the ground. Under such daunting circumstances, the ability of large corporations to find ways of making a profit has become so difficult that increasingly corporations are turning to financial manipulation, on the one hand, or to sweatshop labor, on the other, to squeeze an additional dollar out of their existing assets. . . . Using the corporate form to "bet" with what Louis Brandeis famously called "Other People's Money" turned out to be a disaster. It is certainly true that, as the Wall Street Journal and Paul O'Neill want to argue, that [Enron] was just a failed business model. Unfortunately, the Enron business model is the model for almost all of modern capitalism! The last decade has seen the American economy create a massive amount of new debt and other financial obligations that cannot possibly be supported by the productive base of the economy.

Letter to the Editor (unpublished), N.Y. TIMES, Jan. 19, 2002, on file with author.

97. Sonde & Pitt, supra note 3, at 906.

98. BIG FIVE AUDIT MATERIALITY TASK FORCE: STATUS REPORT AND INITIAL RECOMMENDATIONS (1998).

99. Michael Wall, Atlanta Bucks Trend of Rising EEOC Cases, ATLANTA BUS. CHRON., June 23, 2000, at 1A.

100. Stephanie Armour, Bias Suits Are on the Rise, DES MOINES REG., Jan. 10, 2001, at 6D.

101. See, e.g., a 2000 report of the WRI, which found that several forest products companies did not adequately disclose the material effects of pending environmental regulations, despite the fact that the companies themselves identified these risks. REPETTO & AUSTIN, supra note 64. Similarly, a March 2001, complaint submitted to the SEC by FOE—International and FOE—U.S. revealed that Scotts Company failed to disclose the fact that impending regulations on peatlands in the United Kingdom would result in the possible closing of three major Scotts peat mines.

32 ELR 10965 | Environmental Law Reporter | copyright © 2002 | All rights reserved