• Beware of the Self-Anointed Standard Setters - Like the SASB
  • December 20, 2013 | Author: W. Brinkley Dickerson
  • Law Firm: Troutman Sanders LLP - Atlanta Office
  • ISS, GRI, COSO, CDP, OECD, IIRC . . . . All would seem to be simple acronyms for well-intentioned organizations. But each has its own agenda, and there is a new one, SASB, just around the corner. Let's look first at the well-established ones:

    • ISS, or Institutional Shareholder Services, is the self-appointed, and for-profit, arbiter of good governance and executive compensation. It has developed a rating system and voting guidelines and sells its recommendations to investors at the same time that it sells consulting services - on how to secure its recommendations - to companies.
    • GRI, or Global Reporting Initiative, is one of the self-appointed authorities on sustainability reporting. Its standards are widely recognized, and various constituencies have pressed companies - 2,500 or so at this point - to publish annual reports reflecting compliance with those standards. It recently introduced a new generation of standards, known as G4, that expands on the standards currently being followed.
    • COSO, or the Commission of Sponsoring Organizations of the Treadway Commission, also self-appointed, gave us, well, the original internal controls over financial reporting in 1994 and the new and improved version this year. Technically, most of the work was done by an auditing firm, but the final work product belongs to COSO.
      CDP, or Carbon Disclosure Project, again self-appointed, runs the Climate Disclosure Standards Board, an entity "dedicated to the integration of climate change disclosure into mainstream corporate reporting." CDP itself presses companies to say more about their carbon usage.
    • OECD, or Organization for Economic Co-operation and Development, has a broad-based and well-respected track record of helping to improve conditions in third-world countries. Among securities lawyers, it currently is best known for its positions on so-called "conflict minerals." In particular, its Due Diligence Guidelines for Responsible Supply Chains, as the only "nationally or internationally recognized due diligence framework" (the SEC requirement), is the standard to which public companies must adhere in their conflict minerals reporting.
    • IIRC, or International Integrated Reporting Council, self-appointed as well, is a "global coalition of regulators, investors, companies, standard setters, the accounting profession and NGOs [that] shares the view that communication about value creation should be the next step in the evolution of corporate reporting." We doubt that it is coincidence that one of its eight directors is the CEO of GRI. While the enhanced reporting that it is advocating is broad, the clear focus is sustainability, and its general objective appears to be to take GRI-type reporting to the next level.

    We are confident that each of these organizations is well-intentioned with a passionate belief in its objectives. What concerns us, however, is that some of these organizations set standards that initially are advocated by supporters as being a better, optional alternative, but subsequently are imposed upon companies by special-interest investors and other groups through effectively threatening companies with adverse publicity and other consequences in the event of non-compliance. And their standards, as well as the standards by some of the more traditional groups, have not had the public exposure of, say, a proposed SEC or EPA rule and are not beneficiaries of the protections embodied in the Administrative Procedures Act. They may well have been adopted under an ANSI-compliant system, but not with the public recognition of their potential import.

    Against this backdrop, there is another organization that we want to tell you about. And from our perspective it is one that every major company in the U.S. should get involved with so that they at least have the opportunity to influence the outcome. That organization is the SASB, or Sustainability Accounting Standards Board. In general, the SASB advocates the inclusion in SEC filed reports - primarily Form 10-Ks - of additional information regarding "sustainability." But, "sustainability" in this context does not have the meaning that you normally might ascribe to it. To the SASB, sustainability includes how companies manage social capital, human capital, business model and innovation, leadership and governance, and, of course, environmental issues. It is their belief that issues such as these can constitute "known trends and uncertainties" and, consequently, if material can trigger disclosure in MD&As. They also appear to be looking for linkages between these items and financial performance or investor sentiment to support inclusiveness within the concept of "materiality."

    SASB's most immediate objective is to establish quantitative metrics by which various aspects of these issues can be reported or, where quantitative metrics are not practicable, qualitative disclosure requirements that would be authoritative. It then believes that companies, under a separate caption in their MD&As entitled "Sustainability Accounting Standard Disclosure," should provide appropriate disclosure that, in turn, should be subject to auditor attestation under, for example, AT Section 701.

    To implement this approach, SASB published a Conceptual Framework outlining its objectives and approaches. It divided all industries into ten sectors, and it then divided each sector into subsectors. Every public company in the U.S. - from consulting firms to manufacturers - will fall into one of the subsectors based upon its "SICS" classification, a classification system that SASB developed. For each of the subsectors, SASB is developing a Sustainability Accounting Standard. So far, SASB's work on the health care industry is the furthest along, with the final Standards having been published in August 2013.

    Using the pharmaceutical subsector of the health care sector as an example, the Standard requires disclosures in eleven areas, including, for example, Affordability and Fair Pricing and Employee Recruitment, Development and Retention. Under Affordability and Fair Pricing, for example, a company would be required to discuss the ratio of increases in its prices relative to increases in the CPI. Under Employee Recruitment, Development and Retention, for each classification of employees, a company would have to provide the number of employees and the rates of voluntary and involuntary turnover. We picked simple items as examples, but most of the required 30 disclosure items for the pharmaceutical sector are much more elaborate and invasive. The Standard also reflects an implicit view that each of the 30 disclosure items is per se material.

    The work on other Standards is progressing. Technology & Communications, Transportation and Financials are underway. The others are scheduled to start in 2014.

    As an initial matter, we do not think that the SEC will embrace SASB's industry-based standards (particularly since the SEC jettisoned industry-based standards as part of the adoption of the current integrated disclosure system) or overhaul its disclosure regime to match what SASB is seeking. We simply do not view it as good disclosure, and we think that it is completely lacking in perspective with respect to materiality and the practicalities of being a public company. We also are concerned that SASB's objectives would worsen the current disclosure overload problem.

    But you never know what will happen, and the political winds could shift. Clearly the environmentalists and labor groups are going to be squarely behind SASB the whole way. More critically, if the SEC is pressed to expand its disclosure regime, as we learned from conflict minerals and the ill-fitting OECD guidelines, it can turn to self-appointed standard setters instead of doing the heavy lifting itself. But most critically, we would expect activist investors with their own agendas to seize upon the new SASB standards and advocate them loudly, much as they have done with GRI reporting.

    The work of SASB is potentially significant enough that we believe that every trade association and every major company in the U.S. should be taking an active role in influencing the content of the Standards. We intentionally have picked disclosure items that were not overly politically charged, but to use another example, do you really think that companies should disclose in their MD&A - in an auditor attested paragraph - quantitative details on "management of labor relations in industries that rely on economies of scale and compete on the price of products or services"?

    So, take note and beware.