Some Companies Are About to Get Exposed
One of the major benefits the Securities & Exchange Commission (SEC) offers is its mandated disclosure of essential information for investors. Information is power, after all, and plenty of powerful corporate intelligence is packed into SEC filings.
Some new or proposed disclosure requirements will give investors even more information to weigh when they assess their potential investments. Corporate managements aren't thrilled, but investors should be grateful for more grist for the analytical mill.
Is there too much conflict in your portfolio?
Soon many well-known companies that make the public's favorite electronic gadgets will have to provide more information about their use of "conflict minerals." Conflict minerals are extracted from war-torn African regions, most notably the Democratic Republic of Congo.
Columbite-tantalite, cassiterite, wolframite, and gold are four minerals that can be found in just about every electronics product, and even in other common products like coffee cans, lightbulbs, and of course, jewelry.
Unfortunately, Congo's role as a supplier of these highly coveted minerals masks a tragic humanitarian crisis. Congolese militia groups have taken over the mining industry, and many populations are forced into submission through violence, murder, rape, and other terrifying extortion tactics used to control the mines. Other humanitarian issues in Congo include genocide and child labor.
Given the huge market for smartphones and other gadgets, the issue represents hidden costs and human tragedy associated with some of the most popular products we buy. Even worse, many of the minerals are traded illicitly; in 2010, The Financial Times reported that as much as 80% may be smuggled, and about $1.2 billion per year in contraband gold is exported every year by the Congolese army and former rebels who have a chokehold on the industry.
Although the SEC is still wrangling to make the disclosure of conflict minerals officially required, the hint of coming regulation is already having some positive impact on Eastern Congo. The New York Timesreported that there's an unofficial embargo on traders and mines in the region. Furthermore, companies like Intel (NAS: INTC) , Motorola, and Hewlett-Packard (NYS: HPQ) have voluntarily begun better vetting their supply chains to avoid the most injurious sources of conflict minerals.
The ratio that terrifies corporate managements
Here's one closer to our own backyard. Another disclosure requirement proposed by Dodd-Frank but not yet codified by the SEC would require companies to reveal their specific CEO-to-worker pay ratio.
Given the fact that in 2010, the ratio of average U.S. CEO pay to that of the average worker was 325 to 1 (compared to 42 to 1 in 1980), investors certainly might be curious how much specific chief executives make compared to the pay of their average workers.
Some companies already have policies in place that voluntarily cap how much those in the executive suite make compared to average workers. At Whole Foods Market (NAS: WFM) , compensation (including wages and bonuses) is capped at 19 times that of the average worker's salary. Whole Foods' workers' average annual wage was $37,947 last year, and the company's proxy statement cites executives' forfeited compensation according to the stipulations of the salary cap.
The SEC is being urged to move forward on this requirement two years after Dodd-Frank, but many companies are fighting the rule. Business interests claim this is a complicated and onerous mandate, given challenges such as numbers of workers laboring abroad, part-time workers, and employees related to joint ventures, for example.
However, let's face it: Many companies with extremely high-paid chief executives might not want to deal with the sheer embarrassment of how imbalanced pay scales are at their companies. Plus, the fact that such knowledge could ruin their own employees' morale means they're doing something wrong, not doing something right by hiding the truth.
Let the light in
Obviously, companies can voluntarily choose to do the right thing and offer full transparency on such topics, but many don't. In some ways, both of the disclosure requirements named above might force companies' hands when it comes to revealing how they run their business and why they're as profitable as they are.
Some of these revelations clearly might not be very pleasant. Such ugly public knowledge could include reliance on extremely low worker wages or even slave labor overseas, or management-centric cultures that reward their chief executives far, far more than the regular rank-and-file employees that keep the corporate machines running smoothly.
It even might reveal companies that have grown so big they aren't even quite sure what the heck's going on in portions of their business. The New York Times article on conflict minerals disclosure mentioned Kraft's (NYS: KFT) 40,000 products relying on 100,000 suppliers, describing a "Herculean" task to closely audit supply chains on the conflict mineral issue. What other issues might be too "Herculean" to specifically address at large, bureaucratic companies? That's a question worth asking. CEO pay isn't the only thing that's careened out of control in our society.
In my opinion, increased disclosure is always a good thing. The more information investors have at their disposal, the better. Furthermore, information can lead to better-run organizations of all kinds. Justice Brandeis once famously said, "Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants, electric light the most efficient policeman."
In other words, disclosure is illuminating. Lights on!
Check back atFool.comevery Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.
At the time this article was published Alyce Lomax owns shares of Whole Foods Market. The Motley Fool owns shares of Whole Foods Market and Intel. Motley Fool newsletter services have recommended buying shares of Whole Foods Market and Intel. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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