4 Steps to Simplify Your Disclosures
Securities and Exchange Commissioner David M. Gallagher made several important points about the need for meaningful disclosure during a speech Dec. 6 at the 2nd Annual Institute for Corporate Counsel. But it was his view on the role that XBRL can play in disclosure reform that caught our attention.
In his speech, Gallagher talked about the need to make critically important information available to investors, routinely and reliably. He also warned that investors can be "blinded by the light" because "too much disclosure can have the same effect as obfuscation" and make it "difficult or impossible to discern what really matters."
XBRL won’t replace the need for thoughtful discussion of disclosure issues. Gallagher explains,
What XBRL does do very effectively is ensure that information is disclosed and presented in a manner that promotes ease of analysis and comparison. So, it seems to me, we must recognize that XBRL was and is a major step forward and must fully realize its potential for improving investors’ ability to analyze corporate disclosures.
With that in mind, the commissioner suggested four issues for the SEC.
- Layer disclosures to focus on the important information
- Streamline 8-K disclosures by peeling back the types of information required It’s possible that investors don’t need some types of information immediately, such as changes to executive compensation plans, when those changes will also be disclosed in the next proxy or 10-Q.
- Target redundancy in filings Explicitly define what must be disclosed and what need not be disclosed. This would also address the concerns about frivolous lawsuits based on immaterial disclosures.
- Streamline proxy statements to eliminate redundant or unnecessary information Basic information in proxy statements might also be a place to start a more standardized, online disclosure system. A new system could be created to hold basic corporate information that would be updated each year.
Some information is inherently material, such as a company’s financial statements. However, the risk of shareholder lawsuits causes companies to prioritize immaterial defensive disclosures over readability for the average investor. Disclosures mandated by Congress to fulfill policy goals are given equal weight with the information investors need to make informed investment decisions. This issue could be addressed by reducing the liability associated with disclosures that aren’t inherently material and considering whether these disclosures could be presented differently to enhance readability.
Making these kinds of changes should be an SEC priority, and practical improvements can be identified by anyone responsible for disclosures. Further, Gallagher said, "The Commission should also reward with our priority attention staff initiatives that advance such practical improvements to our system of corporate disclosure." Staff initiatives such as XBRL should be in line for this special Commission attention.
By cutting through the fog of disclosure overload, XBRL has the potential to be an important source of sunlight for investors.