Corporate Disclosure, Social Policy, and Dirty Pool

Several times now I’ve mentioned that the Dodd-Frank Act “works” in the sense that it has brought more stability to the financial system, even if other parts of the law are wrong-headed. Today, let me talk about one of those wrong-headed parts: the Conflict Minerals Rule.

Or more accurately, let’s use the Conflict Minerals Rule as the flagship example of a much broader bad idea in Dodd-Frank—using federal securities law to force social policy on corporations. Because as much as the Conflict Minerals Rule is an exasperating waste of compliance officers’ time (which it is), we have a whole host of other examples, too. This business of using securities law to score political goals is getting way out of hand.

Nobody argues that the objective of the Conflict Minerals Rule, to shut down financing for African warlords, is a bad idea; the objective is a great idea. But if you want to shut down financing to overseas thugs and terrorists, you attack the problem through trade sanctions or anti-money laundering laws—not through a company’s filings to the Securities and Exchange Commission. You could say the same about other daft Dodd-Frank rules such as the CEO Pay Ratio Disclosure Rule (Section 953 of the law), or assessing your workforce diversity (Section 342).

The Conflict Minerals Rule has a particular place in my heart, because not only does the concept not belong in federal securities law, but opponents challenged its disclosure requirements on grounds that it violates a company’s First Amendment rights. And they won. So now companies have to go through the due diligence exercise of compliance with the rule, but they don’t actually have to disclose what they found. I’m not sure whether to laugh or re-read my old copy of The Trial.

All of these rules are noble goals that would probably advance business and society from where we are now, but they should be pursued in a different venue—like, say, an annual shareholder meeting, with a good old-fashioned shareholder proposal.

Which brings me to my next concern. Last month we saw Letitia James, the public advocate for New York City, call on the SEC to investigate Smith & Wesson for poor disclosures in its securities filings. The problem, James said, was that “Given the real risk of reputational harm to the company from the use of its guns in the San Bernardino shooting and in other crimes, Smith & Wesson shareholders would consider it important to know how frequently the Company’s firearms are involved in criminal activity and whether the Company’s firearms are disproportionately used by criminals.”

This was the second time James used her role as a steward of New York City’s public funds to wade into gun control politics. Earlier in December, James sent a letter to TD Bank that pretty much told the bank to reconsider the business ties it has to Smith & Wesson, or she would lean on City Hall to cut its own business with TD Bank.

That’s politics, and James is a politician, so I don’t object to her threats against TD Bank. But to attack S&W for poor disclosure is ridiculous, and to call for an SEC probe is dirty pool. Under the law Smith & Wesson faces no liability for its guns used in mass shootings. In my opinion it should, but that’s why we complain Congress: to change the law. We don’t complain to the SEC to achieve an end we can’t accomplish politically.

Likewise, activists do themselves few favors when they take corporate disclosure of a voluntary good governance effort and turn it back against the company as a weapon. We’ve seen lawsuits against Costco and Nestle, for example, accusing the companies of failing to live up to their professed standards against human trafficking in the supply chain. The plaintiffs claim that the companies are violating California’s Transparency in Supply Chains Act, because the law requires companies to disclose how they are trying to remove human trafficking from their supply chain if at all. So when a company says its Code of Ethics prohibits slave labor, and then a distant third party uses slave labor the company failed to find—bam. Lawsuit.

I don’t mind lawsuits in egregious cases, although a wiser route would be for anti-trafficking activists to work with regulatory agencies and sanction companies that turn a blind eye to slave labor. What the world of corporate governance doesn’t need, however, are trigger-happy litigants that demand perfect corporate behavior (which is impossible) and then lunge into court when imperfections are found. That does nobody any good. It encourages companies to remain silent about human trafficking, or say they cannot audit abuses effectively. Then nothing gets done at all.

Businesses are part of our social fabric, so they need to address social issues people consider important. That I get. And socking them in the pocketbook to get what you want is fair game—but socking them in the securities filings is not. And socking them in the securities filings because you can’t win your arguments anywhere else, that’s worst of all.

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  1. […] Corporate Disclosure, Social Policy, and Dirty Pool by Matt Kelly in Radical Compliance […]

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