Thursday, June 19, 2014
Regular readers of this blog have seen several posts discussing the materiality of various SEC disclosures. See here and here for recent examples. I have been vocal about my objection to the Dodd-Frank conflict minerals rule, which requires US issuers to disclose their use of tin, tungsten, tantalum and gold deriving from the Democratic Republic of Congo and surrounding nations, and describe the measures taken to conduct audits and due diligence of their supply chains. See this post and this law review article.
Last year SEC Chair Mary Jo White indicated that she has concerns about the amount and types of disclosures that companies put forth and whether or not they truly assist investors in making informed decisions. In fact, the agency is undergoing a review of corporate disclosures and has recently announced that rather than focusing on disclosure “overload” the agency wants to look at “effectiveness,” duplication, and “holes in the regulatory regime where additional disclosure may be good for investors.”
I’m glad that the SEC is looking at these issues and I urge lawmakers to consider this SEC focus when drafting additional disclosure regulation. One possible test case is the Business Supply Chain Transparency on Trafficking and Slavery Act of 2014 (H.R. 4842) by Representative Carolyn Maloney, which would require companies with over $100 million in gross revenues to publicly disclose the measures they take to prevent human trafficking, slavery and child labor in their supply chains as part of their annual reports.
The sentiment behind Representative Maloney’s bill is similar to what drove the Dodd-Frank conflict minerals rule (without the extensive audit requirements) and the California Transparency in Supply Chains Act (CTSA). In her announcement she stated,
“Every day, Americans purchase products tainted by forced labor and this bill is a first step to end these inhumane practices. By requiring companies with more than $100 million in worldwide receipts to be transparent about their supply chain policies, American consumers can learn what is being done to stop horrific and illegal labor practices. This bill doesn’t tell companies what to do, it simply asks them to tell us what steps they are already taking. This transparency will empower consumers with more information that could impact their purchasing decisions.”
While the Conflict Minerals and CTSA are “name and shame” laws, which aim to change corporate behavior through disclosure, the proposed federal bill has a twist. It requires the Secretary of Labor, the Secretary of State and other appropriate Federal and international agencies, independent labor evaluators, and human rights groups, to develop an annual list of the top 100 companies complying with supply chain labor standards.
I don’t have an issue with the basic premise of the proposed federal law because human trafficking is such a serious problem that the American Bar Association, the Department of Labor, and others have developed resources for corporations to tackle the problem within their supply chains. A number of states have also enacted laws, and in fact Republican Florida Governor Rick Scott, hardly the poster child for liberals, announced his own legislation this week (although it focuses on relief for victims).
Further, to the extent that companies are using the 2011 UN Guiding Principles on Business and Human Rights to develop due diligence processes for their supply chains, this disclosure should not be difficult. In fact, the proposed bill specifically mentions the Guiding Principles. I don’t know how expensive the law will be to comply with, and I’m sure that there will be lobbying and tweaks if the bill gets out of the House. But If Congress wants to add this to the list of required corporate disclosures, legislators should monitor the SEC disclosure review carefully so that if the human trafficking bill passes, the agency’s implementing regulations appropriately convey legislative intent.
I know that corporations are interested in this issue because I spoke to a reporter yesterday who was prompted by recent articles and news reports to write about what boards should know about human trafficking in supply chains. As I told the reporter, although I applaud the initiatives I remain skeptical about whether these kinds of environmental, social and governance disclosures really affect consumer behavior and whether these are the best ways to protect the intended constituencies. That’s what I will be writing about this summer.