The Oracle of Demos on Corporate Governance

When I read the title of the New York Times (NYT) editorial today in (Keeping Shareholders in the Dark 12 3 2013), I was curious. I was even a bit joyful thinking the Oracle of the Demos (NYT) had finally figured out an essential element of improved corporate governance. Joyfully, I thought, the NYT gets it, finally! Was it really possible that a press organ so devoted to enlarging the mission of government was going to investigate the non-disclosure of risk taking that currently characterizes the activities of so many of our largest public corporations Wouldnt shareholders have liked to know about what really had occurred with the London Whale (at JP Morgan) when the shock of huge losses were first disclosed In the campaign to make markets work better, an ally such as theNYTwould be a welcome addition indeed. It turned out to be a false hope.

The NYT is not interested in promoting essential information to shareholders. It is merely on the “fairness” bandwagon that resents anonymous financial support for favored politicians. It was not unusual to see the NYT worry about politics. After all, politics clearly trumps economics.

The main thrust of the editorial is that citizens and particularly shareholders have the right to know just how much of a corporation’s expenditures is devoted to assisting particular political parties and specific candidates for politicaloffice. Would such knowledge help investors to properly value the securities of a large public company Perhaps. If the auditors required disclosure of the portion of the corporate expenses devoted to political support or lobbying activities—which in the nature of the matter is not likely to be a major expense for most public corporations—could investors assess more accurately the future earnings stream of the corporation That doesnt seem likely to us. Nor does disclosure of which political party or candidate benefitted by such a corporate contribution mean that investors will be better equipped to more accurately estimate the future profits of the company. Knowing which particular candidate is favored by corporate decision makers might tell shareholders what particular legislation is important to the company, but in our view, such a disclosure would be a thin thread in an investors search for the level of future corporate profits. On that basis alone, the decision of the SEC to leave that kind of monitoring out of its current budget makes perfect sense.

If the NYT had a real interest in protecting shareholders, it would insist that the SEC require Directors—the ostensible representative of shareholders—become thoroughly engaged in understanding and reporting the risk profile of the companies they monitor. This would entail the formation of an active Risk Management Committee of the Board that could maintain a constant and vigorous program of risk monitoring. What hurts present or future shareholders is a sudden disclosure of activity that could have manifold impacts on the future earnings of the corporation. Investors need to know much more about how the corporation earns its profits.

In the Panic of 2007-10, it was the cascade of bad news about the risks contained on corporate balance sheets that previously been opaque that became so damaging to financial stability. Equally, it was disclosure about how corporations were actually making profits that caused the collapse in stock prices, particularly in the financial sector. As we show in our book Disorganized Crimes (Palgrave Macmillan 2013), this was a central portion of the corporate misgovernance that had such deleterious economic consequences.

If investor protection is the goal of government regulation, then the focus of the SEC should be concerned with adequate risk disclosure. That is the central issue of corporate governance in todays financially interconnected economy. Whether or not a publicly held corporation backs a certain political view or a particular candidate may arouse the Press Lords, but what arouses investors passions is walking into a risky situation with no prior warning. Hopefully the NYT will get the real message about what Government should be doing to protect investors.