Broc Romanek recently passed on the following news:
GE starts its proxy statement with a four-page "proxy summary." It's a CD&A Executive Summary on steroids; that is, it summarizes all of the key information from the proxy statement, not just executive compensation information related to its "Say on Pay" proposal. ...
It's also a concrete example of the often-discussed concept of "layered disclosure." While not a substitute for the substantive content of the proxy statement itself, it offers readers an additional way to obtain information about the annual meeting and related matters. I expect that some investors will be perfectly satisfied to rely on this summary as their primary (if not only) source of information.
At the same time, they have access to the full proxy statement for further detail. And, in addition to the full Compensation Discussion and Analysis, they have an Executive Summary for reference (as in past years, GE focuses on the details of its CEO's compensation to illustrate its approach to "ay for performance").
In other words, US proxy disclosures have gotten so complicated that GE felt it necessary to provide not just an executive summary of the CD&A section, but also a summary of the whole proxy statement that includes a summary of the executive summary. Cost? High. Utility, especially to retail investors? Low. Absurdity level? Very high.
Meanwhile, in the UK the Government's latest budget includes a section on corporate governance, in which the coalition government promises to "simplify the reporting framework to enable quoted companies to provide clear and relevant information to investors about strategy, performance and risk in a simpler and more concise report, with supporting information provided on the company's
website." (HT: Goddard)
In my essay, Corporate Governance and U.S. Capital Market Competitiveness, I explained that there has been a significant decrease in new foreign listings on U.S. secondary markets. “Martin Graham, director of the London Stock Exchange’s (LSE’s) market services, said that Sarbanes-Oxley has ‘undoubtedly assisted our efforts’ and emphasized the LSE’s ability to draw new listings from foreign companies.”
Another significant advantage of the U.K., which will be further enhanced by the governments proposals, is the reliance on so-called principles-based approach to regulation, in contrast to the rules-based approach of U.S. securities regulation. This distinction plays out in three key dimensions. First, rules generally are detailed and complex, while principles are broad and abstract. Second, rules are defined ex ante with little scope for ex post discretion, while principles are set out broadly ex ante and are developed ex post for application in a highly contextual way. Third, principles entrust a substantial amount of discretion to regulators to make decisions on a case-by-case basis, while rules do not do so.
Proponents of principles-based regulatory schemes argue that they allow firms to adapt their individual compliance procedures to their own unique business needs and practices. In contrast, ruled-based systems assume one size fits all. In addition, principles-based regulatory schemes are less adversarial and litigious than rules-based ones because regulators in the former tend to focus on guidance rather than litigation.
The Bloomberg-Schumer Report argued that these differences put U.S. capital markets at a significant disadvantage:
Without the benefit of accepted principles to guide them, US regulators default to imposing regulations required by various legislative mandates, many of which date back several decades. These mandates are not subject to major reviews or revisions and therefore tend to fall behind day-to-day practice. This failure to keep pace with the times has made it hard for business leaders to understand how the missions of different regulators relate to their business, and this in turn means that regulators have come to be viewed as unpredictable in their actions toward business. The cost of compliance has also risen dramatically over the last several years. Securities firms reported on average almost one regulatory inquiry per trading day, and large firms experienced more than three times that level. The cost of compliance estimated in an Securities Industry Association report had reached $25 billion in the securities industry alone in 2005 (up from $13 billion in 2002). This increase is equivalent to almost 5 percent of the industry’s annual net revenues. Although there are benefits from an increase in compliance-related expenditures, the report found that “a substantial portion of these increased costs were avoidable, reflecting, among other things: duplication of examinations, regulations and supervisory actions; inconsistencies/ lack of harmonization in rules and regulations; ambiguity; and delays in obtaining clear guidance.”
The problem is not simply the rules-based nature of the U.S. system, but also the sheer volume of regulations with which issuers must comply:
A recent study by the Federal Financial Institutions Examination Council, the coordinating group of US banking and thrift regulators, revealed that more than 800 different regulations have been imposed on banks and other deposit-gathering institutions since 1989. Regulations to implement the legislative requirements of the Sarbanes-Oxley Act of 2002 (SOX) are a good example. They are universally viewed by CEOs and other executives surveyed as being too expensive for the benefits of good governance they confer. Consequently, SOX is viewed both domestically and internationally as stifling innovation. “The Sarbanes-Oxley Act and the litigious environment are creating a more risk-averse culture in the United States,” one former senior investment banker stated. “We are simply pushing people to do more business overseas rather than addressing the real issues head on.”
If the UK goes forward with serious simplification of its disclosure rules, the disadvantage with which our markets struggle will simply get worse and our share of the global capital market will continue to decline.
It's time for our legislators and securities regulators to start seriously rethinking the overly complex, costly, and burdensome disclosure regime.
