Risky Business: 10 Questions on Risk Management for the New Decade

For the last decade, risk governance and risk management have been on the ascendancy. Early in the decade, Enron and its ilk helped to propel a sense of urgency and crisis, driving the completion of the Enterprise Risk Management framework of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (2004). But the recent financial crisis, compounded by snowballing sustainability issues such as climate change and product toxicity, made it clear that risk management is a work in progress. Far more must be done to turn the patchwork of risk management approaches into viable public policy and corporate governance solutions.

From my perspective as counsel to investors who are typically concerned with both the financial and societal risks associated with their portfolio companies, here I will offer my perspective on 10 key questions on risk management likely to be answered over the next decade:

1. Will the major environmental and social risk disclosure loopholes be closed by the SEC and FASB?

Numerous organizations and investors have communicated to the Securities and Exchange Commission the need for clearer guidance on disclosure to investors of environmental and social risks, including climate risk, human rights, labor impacts, and other so-called ESG performance issues. See, for instance, communications to the SEC by the Investor Network on Climate Risk and the Social Investment Forum.

In addition, as we wrote last year in our report for the Investor Environmental Health Network, Bridging The Credibility Gap: Eight Corporate Liability Disclosure Loopholes That Regulators Must Close, the system of disclosure to investors regarding potential and pending corporate liabilities overseen by the SEC and the Financial Accounting Standards Board is seriously broken. It remains to be seen whether either agency will have the backbone needed to repair the flaws. Practically speaking, action by those agencies depends on whether the affected constituencies, especially investors, make their voices heard on these issues.

2. Will “sustainability risk” become an operative principle of corporate decision-making?

As demonstrated in the Chartered Accountants of Canada 2009 report on Sustainability, Risk and Opportunity, the word sustainability has at least two meanings: it can mean the ability of a business to continue to “sustain” itself financially, or it can mean essentially an environmental evaluation- whether a particular activity undermines or supports the needs of future generations living on our planet. The new term “sustainability risk” attempts to embody both concepts, but may in the end prove confusing. Other terms, such as “climate risk” or even “long-term risk” may prove clearer in framing disclosure and risk management discussions and policies.

3. Will compensation structures be linked to long-term views of risk and performance?

Compensation watchdogs, such as Nell Minow of The Corporate Library and Prof. Lucian Bebchuk of Harvard Law School, have asserted that as long as the corporate insiders who hold major quantities of stock can benefit by temporarily pumping up a firm’s short-term financial performance, incentives will be skewed towards short-term over longer-term performance and risk.

A resolution filed by Harrington Investments at Goldman Sachs for the 2010 shareholder meeting would require the top five executives to hold 75% of their future stock bonuses until three years after their retirement, effectively creating an incentive to maintain the long view.

4. Will board risk governance committees catch on?

Senator Charles Schumer’s “Shareholder Bill of Rights Act of 2009” would require all public companies to establish risk committees of their boards, to “be responsible for the establishment and evaluation of the risk management practices of the issuer.” Some expert observers and commentators regarding corporate governance assert that such a uniform requirement for board risk committees is ill-advised. They assert that risk management oversight is a core responsibility of the entire board, and not a role that can be delegated to a subgroup of board members through a committee.

Yet, there are so many issues involved in ensuring the integrity of a firm’s overall risk management framework, that the greater focus brought by a separate committee does seem appropriate, at least in reviewing the integrity of the risk management systems that are put in place, and identifying risk issues which should be given priority attention by the board in its entirety.

Shareholders concerned with risk governance at their portfolio companies have begun to follow the lead of the Schumer bill in resolutions filed for the upcoming season. For example, a resolution filed by Northstar Asset Management at Western Union requests that the company form a risk governance committee independent of the existing audit and finance committee. Similarly, a resolution filed at ConocoPhillips asks the company to disclose the board’s risk governance practices, and to explore whether a separate board risk governance committee is needed.

5. Will directors face liabilities for poor risk oversight?

So far, it is unclear whether boards of directors will be held liable for poor risk oversight. The recent Delaware Chancery Court decision in In Re Citigroup Inc. Shareholder Derivative Litigation, 964 A. 2d 106 (Del. Ch. Feb. 24, 2009) (see good discussion here) demonstrates that the courts may be willing to grant a wide berth around board discretion in risk decision-making, based on the business judgment rule which protects board members from liability in exercising ordinary business judgment. Shareholders had filed a derivative action on behalf of Citigroup alleging that the company’s officers and directors had breached their fiduciary duties by, among other things, failing to monitor and manage the risks associated with subprime lending. The Court noted, “Oversight duties under Delaware law are not designed to subject directors, even expert directors, to personal liability for failure to predict the future and to properly evaluate business risk.”

Nevertheless, there are cracks in the wall that may eventually lead to board liability. For instance, in discussing the Securities and Exchange Commission’s recently established requirements for disclosure of risk management credentials of board members, Arthur C. Delibert of the law firm of K&L Gates LLP recently cautioned against too aggressively stating a board member’s qualifications to avoid expanding his or her liability.

…registrants should bear in mind that individuals with expertise in relevant areas may be subject to heightened standards of liability under federal and state securities laws. When the Commission in 2003 adopted the requirement that registrants disclose whether their audit committees include at least one “audit committee financial expert,” it also provided relief from some forms of potential liability to which such “experts” might otherwise be subject. The new disclosure requirements provide no such relief, despite comments from several organizations having raised concerns about such liability. Accordingly, registrants may wish to be circumspect in their descriptions of director qualifications, while honoring the requirement that disclosure be complete in all material respects.

The potential liability of board members for poor risk oversight remains a contested territory, and will no doubt be an interesting topic of litigation during the new decade.

6. Will Enterprise Risk Management protect investors and society, or merely insulate management and boards from potential liabilities?

Enterprise Risk Management involves determining how much uncertainty is acceptable within an organization, and then identifying a strategy consistent with that risk appetite. As an article published by the accounting firm of Grant Thornton recently noted, by adopting ERM,

a company gains the ability to align its risk “appetite” and tolerance with business strategy. As a result, management can better manage risk “opportunistically”–they can identify events that could have an adverse effect, determine whether the benefits outweigh the risks and develop an action plan to manage them. In other words, proper risk management allows organizations to examine and evaluate opportunities and create value by taking risks carefully.

It remains to be seen however whether the existence of ERM programs will result in better choices about risk, or principally provide an evidential baseline for asserting that officers and directors had not neglected their fiduciary duties to manage risk.

7. Will corporate risk managers apply the precautionary principle to potentially catastrophic risks to society?

In a dialogue at The Conference Board that I participated in during the summer of 2009, several board members of major corporations stated unequivocally that when it comes to sustainability and a company’s risks to society, the bottom line for them is simply whether the way the company handles an issue helps to maximize profitability. This approach is consistent with the COSO guidelines for Enterprise Risk Management, under which risk management means of choice among various strategies. Although a baseline of legal compliance may be inferred, taking other voluntary action to reduce risks to society posed by the firms activities is weighed against other approaches to the risk, including buying insurance or choosing to simply shoulder the risk.

In contrast to that view, some companies do appear to take the position that any potentially catastrophic risks to society posed by corporate activities are to be minimized or avoided, regardless of the potential returns or availability of insurance. For instance, forward-looking companies such as Dell, Samsung and Bristol-Myers Squibb which have adopted the Precautionary Principle, which would require them to minimize certain risks with potentially severe implications for society. Taking action to reduce the risks is the priority, and not coequal with other risk management options such as insurance.

The issue of risks to society has been amplified by recognition of systemic risks – errors repeated across companies and sectors – where only strong government oversight seems sufficient to the task of controlling the broader implications of many individual corporate risk decisions.

8. Will the attention to "Black Swan" risks -- those considered largely unpredictable -- lead to disempowerment, or action to avoid and plan for the worst consequences?

The financial crisis has brought a great deal of attention to the concept of the “Black Swan” event, the improbable event that defined calculation of probabilities. In a recent article in the Harvard Business Review, the author of the book The Black Swan: The Impact of the Highly Improbable cowrote an article in which the number one mistake made by executives in risk management is to fail to shift the focus from predicting when the severe incidents might happen to preparing for the eventualities.

There is a danger in the present environment that risk managers will be disempowered by the notion of risks that they cannot predict, and pay too little attention to reducing the potential consequences for the firm and society. For example, even though it is difficult to calculate the odds of health impacts, we already know enough about some nanotechnology hazards to public health to suggest that greater attention, prevention and disclosure is prudent.

9. Will Web 2.0 bring radical transparency to corporate risks?

Web 2.0 technologies such as Reframeit have already made it possible for corporate annual reports to be annotated by any member of the public. It is only a matter of time until such tools are applied in a manner that brings much more information into the hands of the investing public. Websites that emerged in 2009 like MoxyVote.com and Shareowners.org are a promising vanguard of such an approach, and new requirements of the Securities and Exchange Commission for companies to uniformly encode their annual reports (in XBRL) may help to enable this trend.

10. Will shareholders use their growing powers to ensure transparency and accountability on risk?

In 2009, it became clear that shareholder rights are on the ascendancy. There is momentum for shareholders to win stronger rights to nominate and elect directors of their companies. In addition, the SEC restored the right to file shareholder resolutions seeking disclosure of hidden financial and sustainability risks. Already, dozens of resolutions have been filed for 2010 asserting those restored rights.

Nevertheless, it remains to be seen whether the broader community of all shareholders will effectively assert those rights to secure better risk management in the coming decade.

The author is a legal advisor to investors focused on financial and societal risks associated with portfolio company issues such as sustainability, public health, and human rights. He is counsel to the Investor Environmental Health Network as well as many of the funds and investors mentioned in this blog post.

Share Owners Win Public Policy Victory at SEC! Financial and environmental risks to be allowed in Resolutions

Today shareholders scored a major victory at the Securities and Exchange Commission, winning a reversal of the Bush administration policy that had allowed companies to exclude shareholder resolutions requesting information on the financial risks associated with environmental, human rights and other social issues facing companies. In Staff Legal Bulletin 14E issued today, the Division of Corporation Finance announced that from this point forward shareholder resolutions will be evaluated based on whether they raise a major social policy issue, not whether they inquire as to financial risks associated with such issues.

The issuance of the bulletin at this time means that many shareholder resolutions, most of which are filed in November, can now expressly inquire into the issues of greatest concern and interest to investors, namely the financial risks associated with an array of issues, from climate change, to subprime lending, to other major social and environmental issues.

The bulletin also states:

In addition, we note that there is widespread recognition that the board's role in the oversight of a company's management of risk is a significant policy matter regarding the governance of the corporation. In light of this recognition, a proposal that focuses on the board's role in the oversight of a company's management of risk may transcend the day-to-day business matters of a company and raise policy issues so significant that it would be appropriate for a shareholder vote.

Shareowners will still need to surmount various hurdles under other the existing shareholder resolution rules, including the sometimes vexing problem of demonstrating to SEC staff that the issue being raised is a large enough social policy issue to surpass "ordinary business". Investors will also need to ensure that resolutions are drafted to surpass various other hurdles in SEC rule 14a-8, such as micromanagement, duplication, and substantial implementation.

The policy in question was adopted informally early in the Bush administration in a series of staff decisions which excluded shareholder resolutions on environmental and social issues based on the theory that they asked the company to "evaluate risk." The policy was later formalized in staff legal bulletin 14 C, Jun. 28, 2005. Today's bulletin is viewed by investors as an override of the limitations of 14C. The change came after a concerted effort by shareowners to reverse this staff policy. In December 2008, a group of 60 investing organizations wrote to then President-Elect Obama urging him to make a priority of reversing the impediment to shareholder resolutions seeking disclosure of financial risks.On September 22, 2009 a group of investor representatives met with the new director of the Division of Corporation Finance, Meredith Cross, and asserted that this staff ruling deserves priority attention for reversal.

In a meeting with the staff of the SEC Division of Corporation Finance on September 22, an array of shareholder representatives from institutional, pension and socially responsible funds expressed dissatisfaction with aspects of the current SEC process. The meeting was chaired by Meredith Cross, the newly instated Director of the Division of Corporation Finance.

In preparation for the meeting, the author collaborated with several investor organizations including the Social Investment Forum, the Interfaith Center on Corporate Responsibility and Shareowners.org to conduct an internet survey of 40 shareholders, most of whom identified themselves as frequent filers of shareholder resolutions. 80% of respondents said they found the no action letter process to be frustrating or extremely frustrating. Strikingly, 85% of the respondents disagreed with the statement "the staff no action letter process is transparent and accountable" and 81% of the respondents disagreed with the statement "the staff provides sufficient information and justifications for individual decisions."

Principal among the shareowner objections to the current process was Staff Legal Bulletin 14C issued by the SEC staff during the Bush Administration declaring that the SEC would allow companies to exclude shareholder resolutions that ask companies to disclose financial risks associated with environmental issues. The same so-called risk evaluation exclusion has since then also been applied to human rights, public health, climate, and even subprime lending issues.

Most of the 15 or so investor representatives who participated in the September 22 meeting with SEC staff criticized this so-called risk evaluation exclusion. We referred to the letter from 60 investors sent December 11, 2008 to then President-elect Obama, hoping for change in this area. That letter noted:

The adoption of this new bar on resolutions requesting “risk evaluation” represented a significant departure -- disregarding the reasonable and principled approach that had governed at the SEC for decades, and replacing it with a radical interpretation of the rules. The result has been to limit shareholder resolutions to questions about the impact that companies are having on society in general, excluding vital questions about the impact that any of these issues may have on the company’s future finances. Institutional investors, especially those that hold long-term stakes in the marketplace, have expressed interest in being able to monitor the financial impacts that various issues pose on their portfolio holdings.

Notably, 90% of the respondents to the shareowner survey stated that they had been forced by staff rulings to write resolutions to avoid asking for disclosure of particular financial risks that they were concerned about. This is a vexing matter of censorship of investor inquiry for an agency that has been accused of botching its handling of Bernie Madoff and other recent disasters.

Contacts for media comment:
Sanford Lewis, Investor Environmental Health Network 413 549-7333
Jonas Kron, Trillium Asset Management 503-592-0864
Adam Kanzer, Domini Social Investments 212-217-1027
Tim Smith, Walden Asset Management 617-695-5177

Step Right Up! Part 3: Will SEC and FASB regulators leave improved liability accounting to the courts?

In the first two segments of this three part series, we examined the article by C. Gregory Rogers, Attorney and CPA, describing the "flexibility" of existing environmental accounting rules, which grant enormous latitude to companies on whether and how to investigate, estimate and disclose many environmental liabilities. We then assessed whether the broad legal duties of directors and officers for fiduciary oversight and fraud avoidance may require some companies to estimate and disclose more. Our conclusion was that in certain circumstances those duties apply, but that the practices engendered by existing accounting rules make it unlikely that most companies will generally do the work needed to satisfy information needs of investors. Honest accounting still appears to be largely voluntary. Today, the final installment.

Endless litigation or workable accounting standards?
Based on the elements of future lawsuits set forth in the Rogers paper prepared for the American Bar Association, we can expect litigation in this area for many years to come. As some companies, boards and CEOs become targets of shareholder suits asserting poor disclosure, a tally of Board and CEO liability losses may ultimately yield fiduciary vigilance and better accounting. This process may take decades to work itself through -- decades of investor injury and recourse.

The system is also not optimal from the standpoint of managing corporations. It creates a decisionmaking environment of extreme uncertainty. Company executives and boards will face an ongoing Catch-22, having to choose between the flexibility that accounting rules allow and the risks of liability for poor oversight and disclosure. This is a distinct contrast from a situation in which the rules are clearly written and a company's officers and auditors can know with certainty whether systems and disclosures are in compliance.

In short, the current system is not preventive, not protective of investor interests in information on value, complicates corporate decisionmaking, and in the end, is possibly only good for coffers of the legal profession.

Shouldn't we ask, in this time of financial regulatory reform, whether there are fixes available for the Securities and Exchange Commission and the Financial Accounting Standards Board to adopt now to bring about orderly, broad compliance sooner, at less cost?

The Financial Accounting Standards Board actually proposed changes pointing in such a direction in 2008, when it published an exposure draft for revisions of the standards for contingent liability disclosures. This draft generated a great deal of opposition from the corporate and defense bars, with aggressive assertions that the proposal would require companies to disclose prejudicial information that could undermine companies' position in pending or future litigation. The corporate defense bar asserted, in essence, that the proposed FASB revisions would upset the delicate arrangement of the existing accounting rules, in which the goal of providing accurate disclosures of contingent liabilities for investors was balanced against the notion that investors do not want their companies to suffer additional litigation losses as a result of such disclosures.

In practice, the existing system has not proven very workable from the standpoint of investors, but has instead ensured enormous gaps in disclosure and estimation of liabilities. In many instances, such as asbestos cases and some environmental remedial liabilities, the amount of undisclosed liabilities have even surpassed everything else on the corporate ledger. In a time when restoring investor confidence in corporate disclosures is a priority, this is an issue that remains to be cleaned up.

Opposition to all "prediction" is inconsistent with judicial principles: "Prejudicial" concerns must be balanced against their "probative" potential
The position taken by the defense bar in opposition to the FASB proposal was not terribly nuanced. A plethora of lawyers essentially asserted that any requirements for new predictive disclosures would be prejudicial and should not be required by the FASB.

This is strikingly different approach from the principled approach taken to "prejudicial" information in the courts, where a balancing test is used to weigh how prejudicial and how useful information will be. Under federal and state rules, evidence which might be considered prejudicial will nevertheless be found to be admissible in evidence if it is "more probative than prejudicial."

A similar balancing test should be applied by accounting and securities rulemakers in considering the types of required disclosures to support the needs of investors.

At one extreme would be rules that would require disclosure of privileged information, such as disclosure of a lawyer's advice to his or her client. Requiring lawyer or client to waive attorney-client privilege is an extreme encroachment on that relationship. Arguably, this ought to be off-limits unless such a privilege is being abused by lawyer or client.

In contrast, there is an array of possible information which arguably might yield information for which the probative value for investors outweighs any concerns about prejudice. Existing accounting and investor disclosure rules already strike such a balance in some instances; the question is whether regulators will extend the logic to current needs and shortcomings of existing rules.

Below we will give examples of such information, first, in the realm of "narrative" disclosures, as found in the Management Discussion and Analysis, and second, in liability estimates as required under existing and proposed financial accounting standards.

The Management Discussion and Analysis: Potentially prejudicial, but required for its probative importance to investors
Already, existing Securities and Exchange Commission regulations require the management of a company to discuss and analyze pending issues that may affect the company's financial prospects. Regulation S-K item 303 requires disclosure of known trends or any known demands, commitments, events or uncertainties that are reasonably likely to affect liquidity, capital resources or results of operations. The SEC has also interpreted this to mean that if there is a reasonable likelihood but some uncertainty about the probabilities regarding such trends, demands, commitments, events or uncertainties, a reporting firm should err on the side of disclosure.

If one were to apply the logic of "prejudicial" concerns expressed by the defense bar even to the existing Management Discussion and Analysis regulation, we could easily see arguments being made that some of the information included in such an analysis could be used by plaintiffs suing the company over particular issues discussed in the MD&A. Indeed, these analyses are certainly referenced from time to time as evidence in lawsuits. But despite the potential for use of this information by plaintiffs, the judgment of regulators has been that this information is sufficiently "probative" (i.e., "useful") to investors, that it should be required to be disclosed regardless of the potential uses to plaintiffs.

Clarifying the Management Discussion and Analysis
A group of investors recently asserted that the information contained in the Management Discussion and Analysis should be updated with an interpretive guidance that ensures that relevant environmental and social information is integrated. In July 2009, a group of 80 funds, coordinated by the Social Investment Forum, wrote to the Securities and Exchange Commission recommending the issuance of an interpretive guidance clarifying that issuers must disclose short and long-term sustainability risks as part of the MD&A.

The concern of the investors is that even though the existing MD&A requirements arguably include such information as among the "trends, events and uncertainties", in practice they are not well disclosed and discussed by many reporting companies, especially if they are emerging concerns (e.g., public-health risks of nanomaterials). Clearer guidance regarding the materiality of such trends is needed to ensure proper disclosure.

To be sure, the types of disclosures that these investors seek are also among those issues with respect to which companies will sometimes become defendants, such as "any significant developments at a company that might negatively affect public health or the environment, involve ethical lapses or labor human rights abuses, be harmful to the company's brand or reputation, result in legal liabilities are otherwise detract from shareholder value."

The investors have framed their interpretive request in a manner that emphasizes the probative nature of the information needed from companies. The letter goes on to state some criteria that could require companies to disclose more, regardless of the management's predilections to conceal. These include:

* Discuss the relevant trends or developments such as trends or significant developments in scientific studies that may relate to public health or environmental risks associated with products or activities. The disclosure of these significant developments should be required even if there is scientific debate or uncertainty, such as some studies finding a lack of such impacts.

* Describe the severity and scale of the problem, such as the percentage of the company's expected sales volume that a potentially problematic product comprises, the potential extent of workplace exposures where materials are used in the fabrication of goods, or overall potential human health effects and to the greatest extent possible qualitatively or quantitatively describe the magnitude of potential liabilities or opportunities associated with the issue.

* Review measures being taken to minimize adverse impacts or maximize business opportunities associated with the issue. Examples could include consumer education, research, materials modification or substitution, development of new products or services, exposure reduction, public policy efforts, fieldwork, third-party auditing, adoption of new codes, insurance, employee training or other actions.

This is all information of great importance to many investors because it can allow them to assess risks, value and prospects, and ultimately to decide whether a stock belongs in their portfolio. Each of these items is reasonably objective; rather than requiring "admissions" of liability, they seek disclosure of facts that are germane to understanding the magnitude of financial risks associated with the conditions in which the company is functioning. None of these disclosure items requires the company to tip its hand with regard to trade secrets, privileged information, or internal business strategy. Instead, information that is owing to investors can be expressed at a level of generality that allows the company to both inform the investors of the relevant issues while avoiding disclosure of confidentialities. In short, it is more probative than prejudicial.

In our report, Bridging the Credibility Gap: Eight Corporate Liability Accounting Loopholes That Regulators Must Close, we essentially applied the criteria of the proposed MD&A interpretive guidance to emerging health and financial risks associated with nanomaterials, and demonstrated how such a set of disclosure requirements would lead to more robust disclosures than are currently provided by nano producers.

Doing the Numbers, Beyond the Known Minimum
While the above example relates principally to narrative disclosures, our second example relates to development and disclosure of quantitative estimates that would nevertheless be more probative than prejudicial, and therefore merit mandatory disclosure rules.

The existing guidance from the Financial Accounting Standards Board (FASB Interpretation 14) requires companies to estimate the range of their potential liabilities associated with a claim, but if no single amount within that range is considered more probable than any other amount within the range, it instructs them to record the low end of the range ( the "known minimum)." This is a widely used and abused practice, which results in companies commonly disclosing only the lowest possible projection of liability - often orders of magnitude lower than the eventual end liability. In Bridging the Credibility Gap, we depicted how Johns- Manville and Kaiser Aluminum delayed a realistic estimate until the moment they declared bankruptcy, and shareholders lost billions.

In its exposure draft for revision of contingent liability reporting requirements, the FASB has proposed requiring companies to disclose either a worst-case liability range, or if the company prefers, a probability weighted estimate of the liabilities. This is one of the issues that the defense bar vigorously objected to. However, it is worth breaking down the different elements of such a proposed disclosure requirement, because not all options and elements are equally "prejudicial."

The most prejudicial aspect of the proposal is the prospect (optional under the FASB proposal) of disclosing a probability-based estimate of the total amount of liability. The likelihood of success in litigation is best known by the attorney handling the case. This would take strategic information - from the mind of an attorney representing the company in litigation, and highly relevant to negotiations -- and could require that it be placed on the record. Such a requirement for disclosure of an attorney's mental impressions could indeed violate the fundamental integrity of the judicial system.

In contrast, information on the range of potential liabilities, severed from the question of the likelihood of specific outcomes, can in many instances be disclosed in a manner that is less prejudicial.

For example, one possible scenario for a company to identify and disclose the range of possible liabilities may be derived by benchmarking the number of cases pending at a company against similar suits that have been resolved at other companies. This allows a prediction of the possible range of liabilities, and is not prejudicial because it is based on a simple application of mathematics to publicly available information. Dow Chemical performed such an analysis to disclose a previously unestimated $2.2 billion asbestos liability at Union Carbide, a company it had acquired a few years earlier; many other companies can and should have offered similar information to investors to fairly inform them regarding pending liabilities. But in the absence of rules requiring it, many hold back and resort to the "known minimum." Requiring such disclosures and projections would clearly be more probative than prejudicial.

Another scenario would involve calculation of the range of liabilities through the use of external consultants, who produce their estimates using public information and without access to any privileged information. Such estimates can build upon benchmarks and other publicly available information. Again, even though plaintiffs might point to such figures, the probative value of such data to investors (and the potential to avoid costly duplicative consulting work of this kind across the investing economy) would exceed any prejudicial impacts.


Conclusion
While fixes are being applied in some areas of financial regulation, the Rogers article documented well that when it comes to accounting and disclosure of environmental liabilities, the system is still fundamentally flawed. Waiting for a flood of lawsuits to punish directors and officers into doing the right thing is not a preventive solution; it does not solve the problem of hidden liability risk that faces today's investors; it only offers the prospect that conflicting signals and costly litigation may improve corporate disclosures over the course of decades.

By contrast, the opportunity exists today for the regulators at the Securities and Exchange Commission and the Financial Accounting Standards Board to apply the reforming spirit to this policy area, protecting investors now.

Update
Following up on this blog post, I wrote to the FASB Board members on October 22, 2009 on behalf of the Investor Environmental Health Network. Contingent liability predictions should be "more probative than prejudicial"; they should not avoid prediction entirely. http://tr.im/CEAy



References and Links

Part 1 of the Series

Part 2 of the Series

Bridging the Credibility Gap: Eight Corporate Liability Accounting Loopholes that Regulators Must Close, Investor Environmental Health Network

C. Gregory Rogers paper on Corporate Environmental Disclosure Policy

July 2009 Letter on Sustainability Disclosure to SEC from 80 Investor Groups

FASB Exposure Draft on Loss Contingencies

FASB Loss Contingencies updates page