Yesterday, the SEC issued a "concept release" on the issue of shareholder proxy voting. According to a story in the Washington Post earlier this week, action is part of a broader move to increase transparency and improve investor information. Earlier this year the SEC issued guidance on company disclosure of information on climate change risk. Currently they are looking at even more disclosure of information on company risks.
Increased disclosure of information on risks is a step forward. But let me suggest that there is another broader step the SEC can take to enhance transparency. They should also be looking a broadening disclosure of information on intangibles - in the form of both qualitative descriptions and quantitative non-financial metrics.
In an early posting, I mentioned a new book on One Report: Better Strategy through Integrated Reporting. The "One Report" would be a compilation of financial and non-financial information that could then use Internet technology and Extensible Business Reporting Language (XBRL) to provide more specific information to relevant stakeholders. This may be a bridge-too-far for the SEC right now. But it points us in the right direction.
One step in that direction would be to look at increasing the discussion of company intangible assets in the Management Discussion and Analysis (MD&A) sections of the quarterly and annual reports. As noted in our earlier working paper Reporting Intangibles: A Hard Look at Improving Business Information in the US, the SEC issued expanded guidance on the use of non-financial metrics in the MD&A back in 2003. Since then, the SEC has issued other guidance on qualitative disclosures, such on climate risk as noted above and on valuation techniques. As far as I know, there has been not follow up study of the compliance and effectiveness of the disclosure requirements, especially concerning non-financial metrics. It is time for the SEC to revisit the issue in a systematic way.
Increased disclosure on intangibles would have a two-fold positive impact. It would give investors the information they need to make informed decisions. It would also force business executives to pay more attention to how manage their intangibles. Both markets and management benefit -- as would the economy as whole.
Leave a comment