Raymond Fisman is Slater Family Professor in Behavioral Economics at Boston University. This post is based on a recent paper, forthcoming in the Quarterly Journal of Economics, by Mr. Fisman; Marianne Bertrand, Chris P. Dialynas Distinguished Service Professor of Economics at the University of Chicago Booth School of Business; Matilde Bombardini, Professor at the University of British Columbia Vancouver School of Economics; Brad Hackinen, Assistant Professor in Business, Economics and Public Policy at the University of Western Ontario Ivey Business School; and Francesco Trebbi, Professor of Business and Public Policy at the University of California, Berkeley Haas School of Business. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).
Public officials face an inherent tension in getting feedback on proposed rules and regulations—the best-informed parties are also very likely those with an interest in seeking particular outcomes. If you’re interested in, say, the costs and benefits of green energy requirements, utility companies could surely provide expert advice on the costs and benefits of such rules. The very same experts, however, might be tempted to minimize the benefits and overstate the costs, in an effort to minimize the regulatory burden imposed on their businesses. Relative to private companies, non-profits and research institutions may be seen as more impartial or even adversarial to corporate perspectives. If regulators hear the same message from, say, both utility companies and non-profits like Greenpeace or Earthjustice, they might give more weight to their suggestions.
This captures, in theory, the process by which regulators in the U.S. elicit feedback from the public on proposed rules, and adjust final regulations in response to a slate of public comments from wide-ranging sources. This feedback, submitted by any interested party—for-profits, non-profits, lawmakers, and individuals—can be weighed by rule makers taking into account both the expertise and potential bias of the commenter.
In our paper, forthcoming in the Quarterly Journal of Economics, we show how financial ties between companies and non-profits—possibly unbeknownst to regulators—can subvert this process of information acquisition and lead to regulations that favor the interests of companies rather than the general public. Non-profits receive donations from corporations or their foundations, and lend their support to companies’ regulatory agendas in return.
Comment on Climate Disclosure
More from: Nell Minow, ValueEdge Advisors
Nell Minow is Vice Chair of ValueEdge Advisors. This post is based on her comment letter to the U.S. Securities and Exchange Commission. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).
The accountability processes of government and business are each ideal for optimizing different policy issues, and we get into trouble when we let one take on the role of the other. What has made the US capital markets the most robust and respected in the world is the combination of market- and government-based structures and especially the comprehensive transparency of our public companies. The nature of capitalism is to maximize profits, and it is up to the government to make sure that happens without externalizing costs onto the public who have no capacity to provide a market-based response. Corporate executives would always prefer less disclosure. Investors would prefer more. Because of the collective choice problem, there is no way for investors to make a market-based demand for more information as effectively and efficiently as having the government set the floor for what must be disclosed.
It is within this context that the questions will always arise about when it is time to add more to the already extensive information that issuers must provide to investors. As the request for comments and Commissioner Lee’s outstanding presentation on materiality suggest, that time has come for ESG. The reason it is the fastest-growing sector of investment vehicles [1] is a reflection of increasing concerns about the inadequacy of GAAP numbers in assessing investment risk. Let me emphasize that; ESG and climate change disclosure concerns are entirely and exclusively financial. That is what makes them a have-to-have, not a nice-to-have.
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