PROMOTING CORPORATE SOCIAL TRANSPARENCY

Professor Cynthia Williams

Thirty-one years ago current SEC Chair Harvey Pitt wrote that “[i]t seems clear then, that social, political and economic matters are of interest to shareholders, at least insofar as those matters are related in some way to the corporation, its activities and policies.” Theodore Sonde & Harvey L. Pitt, Utilizing the Federal Securities Laws to “clear the Air!Clean the Sky! Wash the Wind!”, 16 How. L.J. 831 (1971). Recognizing that the federal securities laws give the SEC the power to promulgate disclosure regulations “as necessary or appropriate in the public interest or for the protection of investors,” Pitt and Sonde advocated for broader disclosure of companies’ environmental practices. As they put the point, “placing the public interest in a paramount position, of course, is in accord with the broad purposes of the federal securities laws, and suggests Congressional recognition of the fact that the regulation of corporate activities, in part or whole, cannot be a parochial endeavor, but rather, must accord its scope in a highly industrialized society to the full range of man’s concerns.” Today, Congress and the SEC would do well to demonstrate a recognition that the term “corporate accountability” should mean more than simply producing accurate financial statements--as has been required by law for over seventy years.

When Harvey Pitt made those arguments, in 1971, the United States was in the midst of vigorous public debate about issues of corporate responsibility. Yet, at the time Pitt made his arguments for expanded environmental disclosure, it was not clear that very many investors would find the information important. By 1974, only four mutual funds had been created with the goal of using social and environmental criteria, as well as financial information, to make investment decisions: the Dreyfus Third Century Fund, Pax World Fund, First Spectrum Fund, and Social Dimensions Fund. Two of these funds had no assets; the other two together had $18.6 million under management.

Today, the facts are very different. Close to 200 mutual funds, with assets as of 1999 valued at $154 billion, make investment decisions based in part on social or environmental information--to the extent such information is available. Altogether, approximately 1 out of 8 dollars under professional management in the United States, or $2.3 trillion, is invested using social screens. Some of the country’s biggest pension funds are also moving in this direction. The California Public Employees Retirement System (“CALPERS”), which is the country’s largest public pension fund, decided in November of 2000 to screen all of its international emerging markets’ investments for adherence to the Global Sullivan Principles and the International Labor Organization’s Fundamental Principles and Rights at Work. Pension fund managers are being encouraged by the AFL-CIO’s Center for Working Capital to invest labor union menbers’ $5 trillion in companies demonstrating productive and fair labor/management relationships.

Today, as Congress and the SEC grapple with issues of corporate ethics and a crisis of investor confidence, there is renewed interest in issues of corporate social accountability. One regulatory response should be exactly the one Pitt championed thirty years ago: the SEC should require companies to provide more information about their social and environmental actions, here and around the world. A mandate for such disclosure requires no act of Congress or the President. It is clearly within the scope of the SEC’s legal authority, as Harvey Pitt recognized. Moreover, an SEC requirement for broad disclosure is clearly warranted. Investors and fund managers who include social and environmental criteria in making investment decisions deserve high quality, accurate social and environmental information in a consistent format that is comparable between companies. If Harvey Pitt would take up the opportunity to do what he stated so clearly three decades ago, he is positioned to exercise historic leadership of the Commission.

For further analysis of this topic, see Cynthia A. Williams, the Securities and Exchange Commission and Corporate Social Transparency, 112 Harvard Law Review 1197 (1999). See also www.corporatesunshine.org or www.offthebooks.org.