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Erschienen in: Schmalenbach Business Review 2/2019

20.12.2018 | Original Article

Shaping Corporate Actions Through Targeted Transparency Regulation: A Framework and Review of Extant Evidence

verfasst von: Katharina Hombach, Thorsten Sellhorn

Erschienen in: Schmalenbach Business Review | Ausgabe 2/2019

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Abstract

This paper discusses targeted transparency regulation by securities regulators: corporate disclosure regulation aimed at nudging firms towards changing their business activities in socially desirable ways. Using Corporate Social Responsibility disclosures and other prominent examples, we first document disclosure regulators’ public policy objectives. Based on a framework that develops the causal chain linking a disclosure mandate to the desired corporate action, we review empirical evidence on the effectiveness of targeted transparency implemented via securities regulation. The paper concludes with a discussion of opportunities and challenges for future research in this area.

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Fußnoten
1
For a range of examples of targeted transparency regulations, refer to Fung et al. (2007, p. 52).
 
2
We acknowledge that corporate disclosure regulation can be implemented through different channels, which we discuss in Sect. 2.1. We thank an anonymous reviewer for this point.
 
3
The title of a speech by Hans Hoogervorst, Chairman of the International Financial Reporting Standards Board (IASB), at the IOSCO conference in Rio de Janeiro, 2 October 2014.
 
4
In addition, arguably going back as far as the 17th century French Code Savary (e. g., Howard 1932), another objective of corporate financial reporting regulation is to improve the management of firms and hold managers, who act as stewards of firms’ assets, accountable towards their capital providers.
 
5
We follow Leuz and Wysocki (2016, p. 530) in defining ‘real effects’ as “situations in which the disclosing person or reporting entity changes its behavior in the real economy (e. g., investment, use of resources, consumption) as a result of the disclosure mandate”.
 
6
Specifically, Art. 1 of Regulation 1606/2002 states: “This Regulation has as its objective the adoption and use of international accounting standards in the Community with a view to harmonising the financial information presented by the companies … in order to ensure a high degree of transparency and comparability of financial statements and hence an efficient functioning of the Community capital market and of the Internal Market.” Brüggemann et al. (2013) documents that these objectives are consistent with the objectives stated by securities regulators implementing IFRS in other jurisdictions.
 
7
The effectiveness of corporate disclosure regulation aiming at price efficiency is questionable. For example, more public disclosure about fundamentals does not necessarily lead to more information being reflected in prices (e. g., Banerjee et al. 2018; Goldstein and Yang 2017), and greater price efficiency does not necessarily lead to greater economic efficiency (Kanodia and Sapra 2016).
 
8
The ‘pecking order’ among these three regulatory tools in terms of effectiveness and efficiency (net benefits) is an important question (see also Weil et al. 2013) that is beyond the scope of this paper.
 
9
For empirical evidence on the determinants of successful shareholder engagement in CSR issues, see Dimson et al. (2015).
Table 2
Examples of targeted transparency in securities regulation
Panel A: European Union
Extractive payments (Directive 2013/34/EU)
“The report should serve to help governments of resourcerich countries to implement the EITI principles and criteria and account to their citizens for payments such governments receive from undertakings active in the extractive industry or loggers of primary forests operating within their jurisdiction.” (Recital 45)
Country-by-country reporting (Directive 2013/36/EU)
“Increased transparency regarding the activities of institutions, and in particular regarding profits made, taxes paid and subsidies received, is essential for regaining the trust of citizens of the Union in the financial sector. Mandatory reporting in that area can therefore be seen as an important element of the corporate responsibility of institutions towards stakeholders and society.” (Recital 52)
Non-financial statements (Directive 2014/95/EU)
“[T]he European Parliament acknowledged the importance of businesses divulging information on sustainability such as social and environmental factors, with a view to identifying sustainability risks and increasing investor and consumer trust. Indeed, disclosure of nonfinancial information is vital for managing change towards a sustainable global economy by combining long-term profitability with social justice and environmental protection.” (Recital 3)
“In this context, disclosure of non-financial information helps the measuring, monitoring and managing of undertakings’ performance and their impact on society. Thus, the European Parliament called on the Commission to bring forward a legislative proposal on the disclosure of non-financial information by undertakings allowing for high flexibility of action, in order to take account of the multidimensional nature of corporate social responsibility (CSR) and the diversity of the CSR policies implemented by businesses matched by a sufficient level of comparability to meet the needs of investors and other stakeholders as well as the need to provide consumers with easy access to information on the impact of businesses on society.” (Recital 3)
“Diversity of competences and views of the members of administrative, management and supervisory bodies of undertakings facilitates a good understanding of the business organisation and affairs of the undertaking concerned. It enables members of those bodies to constructively challenge the management decisions and to be more open to innovative ideas, addressing the similarity of views of members, also known as the ‘group-think’ phenomenon. It contributes thus to effective oversight of the management and to successful governance of the undertaking. It is therefore important to enhance transparency regarding the diversity policy applied. This would inform the market of corporate governance practices and thus put indirect pressure on undertakings to have more diversified boards.” (Recital 18)
Supply chain due diligence (Regulation 2017/821/EU)
“This Regulation, by controlling trade in minerals from conflict areas, is one of the ways of eliminating the financing of armed groups. The Union’s foreign and development policy action also contributes to fighting local corruption, to the strengthening of borders and to providing training for local populations and their representatives in order to help them highlight abuses.” (Recital 7)
“Union citizens and civil society actors have raised awareness with respect to Union economic operators not being held accountable for their potential connection to the illicit extraction of and trade in minerals from conflict areas. Such minerals, potentially present in consumer products, link consumers to conflicts outside the Union. As such, consumers are indirectly linked to conflicts that have severe impacts on human rights, in particular the rights of women, as armed groups often use mass rape as a deliberate strategy to intimidate and control local populations in order to preserve their interests. For this reason, Union citizens have requested, in particular through petitions, that the Commission make a legislative proposal to the European Parliament and to the Council to hold economic operators accountable under the relevant Guidelines as established by the UN and OECD.” (Recital 10)
“Public reporting by an economic operator on its supply chain due diligence policies and practices provides the necessary transparency to generate public confidence in the measures economic operators are taking.” (Recital 13)
Panel B: United States
Climate change (SEC Interpretation, Release Nos. 33-9106; 34-61469; FR-82)
“Scientists, government leaders, legislators, regulators, businesses, including insurance companies, investors, analysts and the public at large have expressed heightened interest in climate change.” (Section I. A.)
“There have been increasing calls for climate-related disclosures by shareholders of public companies. This is reflected in the several petitions for interpretive advice submitted by large institutional investors and other investor groups.” (Section I.B.3.)
Mine safety (SEC Final Rule, Release Nos. 33-9286; 34-66019)
“Our rule and form amendments specify for issuers how, in what form, and when to report the mine safety information required by the Act. These rules are designed to facilitate compliance with the new statutory requirements. We believe this should simplify the disclosure obligation, promote comparability and consistency of disclosure across issuers and time periods, and make the information more accessible for users, which will benefit investors in their consideration of information about issuers’ mine health and safety matters.” (Section IV. B)
Conflict minerals (SEC Final Rule, Release No. 34-67716)
“As reflected in the title of Section 1502(a), which states the “Sense of the Congress on Exploitation and Trade of Conflict Minerals Originating in the Democratic Republic of the Congo,” in enacting the Conflict Minerals Statutory Provision, Congress intended to further the humanitarian goal of ending the extremely violent conflict in the DRC, which has been partially financed by the exploitation and trade of conflict minerals originating in the DRC.” (Section I. A.)
“The legislative history (…) reflects Congress’s motivation to help end the human rights abuses in the DRC caused by the conflict.” (Section I. A.)
Extractive payments (SEC Final Rule, Release No. 34-78167)
“Based on the statutory text and the legislative history, we understand that Congress enacted Section 1504 to increase the transparency of payments made by oil, natural gas, and mining companies to governments for the purpose of the commercial development of their oil, natural gas, and minerals. As discussed in more detail below, the legislation reflects U.S. foreign policy interests in supporting global efforts to improve transparency in the extractive industries. The goal of such transparency is to help combat global corruption and empower citizens of resource-rich countries to hold their governments accountable for the wealth generated by those resources.” (Section I. A.)
CEO pay ratios (SEC Final Rule, Release Nos. 33-9877; 34-75610)
“Congress did not expressly state the specific objectives or intended benefits of Section 953(b), and the legislative history of the Dodd-Frank Act also does not expressly state the Congressional purpose underlying Section 953(b).10 As discussed below, based on our analysis of the statute and comments received, we believe Section 953(b) was intended to provide shareholders with a company-specific metric that can assist in their evaluation of a registrant’s executive compensation practices.” (Section I. A.)
“We believe that Section 953(b) should be interpreted consonant with [the] general purpose of further facilitating shareholder engagement with executive compensation.” (Section I. A.)
“Finally, some commenters asserted that the registrant-specific information about the median employee compensation may be used to address a broader public policy concern relating to income inequality and income mobility, which they suggest is exacerbated by increasingly high levels of CEO compensation relative to other workers.” (Section III.C.)
This table presents quotes from statutory sources reflecting the rationale for recent regulations where targeted transparency has been implemented via corporate disclosure regulation in the E.U. (Panel A) and the U.S. (Panel B)
 
10
By contrast, the previous definition used by the Commission emphasized the voluntary nature of CSR (in excess of what firms are legally required to provide).
 
11
Specifically, the Directive applies to certain large undertakings so that the scope does not strictly depend on firms’ listing status. De facto, many of the affected firms will, however, be public.
 
12
See, for example, Humbert (2019).
 
13
“It is therefore anticipated that, by increasing the quantity of and quality of information available, a disclosure requirement would also positively affect the way companies are perceived in terms of their accountability towards society. More and better reporting could increase consumers’ trust and have a positive effect on the demand side, creating new entrepreneurial opportunities and better management of externalities” (European Commission 2013, p. 38).
 
14
“The direct impact of the proposal cannot be estimated with precision, however the result of the public consultations as well as consolidated research suggest that more transparency and better quality of information on companies’ environmental performance could increase the level of environmental awareness and, as a consequence, contribute to better environmental performance” (European Commission 2013, p. 41).
 
15
“It is estimated that the preferred options would have a beneficial impact on fundamental rights as they would encourage EU companies to regularly review their policies and internal procedures in various aspects, mainly due to larger public scrutiny” (European Commission 2013, p. 41).
 
16
The Extraction Payments Disclosure Rule was repealed in early 2017.
 
17
For a discussion on the complementary role of ‘social’ disclosures in private law, refer to Choudhury (2015, pp. 202–04).
 
18
“Most obviously, whether one views the SEC as a disclosure agency or an enforcement agency, sociopolitical issues such as conflict minerals and extractive resources, while perhaps worthy of attention by the right entities, should not be part of the SEC’s agenda. Rulemakings for such issues contribute neither to the maintenance of fair, orderly, and efficient markets, nor the facilitation of capital formation, nor investor protection” (Securities and Exchange Commission 2014).
 
19
Langevoort and Thompson (2013) and Dombalagian (2016) provide further discussions on the appropriate scope of securities regulation, including whether and how firms’ ‘publicness’ should depend on their impact on society.
 
20
Whereas we focus on a causal chain that is consistent with the regulatory rationales described in Sect. 2, we acknowledge that targeted transparency regulation might matter for firms’ actions in many different ways. For example, the disclosed information could be used strategically by competitors (Rauter 2017) or enhance monitoring by investors with purely monetary preferences (Amel-Zadeh and Serafeim 2017). In these cases, the costs and benefits of targeted transparency regulation are similar to those of ‘traditional’ disclosure regulation and have been reviewed elsewhere (Leuz and Wysocki 2016).
 
21
See, e. g., the rationale for the E.U.’s CSR Directive discussed in Sect. 2.2.1.
 
22
For a similar argument and pertaining empirical evidence, refer to Bischof and Daske (2013).
 
23
In Duflo et al. (2013), treatment firms are exposed to enhanced auditing because of random auditor assignments, fixed pay from a central pool, backchecks of the audit, and incentives pay.
 
24
As explained in the previous subsection, targeted transparency regulation can also matter because it enhances firms’ internal information sets (Steinmeier and Stich 2018). We do, however, not focus on this mechanism, as the link between firms’ internal information and the specific corporate actions typically targeted by regulators is more subtle. For example, it is not clear a priori how an increase in firms’ internal CSR-related information affects their level of investment in CSR-related activities.
 
26
Firms engaging in social media monitoring and appointing Chief Listening Officers is consistent with this notion.
 
27
We note that our review is necessarily selective and subjective. Generating a complete picture is complicated by the fact that research on targeted transparency regulation is rapidly emerging as well as dispersed across a broad range of publication outlets that cater to researchers in diverse academic fields with little overlap.
 
28
It has to be noted that Fiechter et al. (2018) dependent variable (the ASSET4 CSR score), while not being a direct measure of ‘real’ CSR activities, is assumed to be directly related to these activities (Fiechter et al. 2018, p. 14).
 
29
Notably, some studies try to circumvent this problem by relying on pre-existing proxies (e. g., broad CSR ratings), presumably at the expense of measurement accuracy. Ironically, if the information of interest were already available before the treatment, the justification for the disclosure requirement would be unclear.
 
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Metadaten
Titel
Shaping Corporate Actions Through Targeted Transparency Regulation: A Framework and Review of Extant Evidence
verfasst von
Katharina Hombach
Thorsten Sellhorn
Publikationsdatum
20.12.2018
Verlag
Springer International Publishing
Erschienen in
Schmalenbach Business Review / Ausgabe 2/2019
Print ISSN: 1439-2917
Elektronische ISSN: 2194-072X
DOI
https://doi.org/10.1007/s41464-018-0065-z

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