February 2010

Explicate and educate, don't legislate

The Ontario Securities Commission recommends ways to enhance corporate governance and environmental disclosure

By B. Wylie

Current provincial regulation and requirements are adequate — if they are followed — and additional legislation of the reporting of corporate social performance is not needed. These were the recommendations the Ontario Securities Commission gave to the Ontario Ministry of Finance in December.

The need for the report was brought on by the unanimous decision of a private members’ resolution introduced by the Honourable Laurel Broten (MPP for Etobicoke-Lakeshore) in the Ontario Legislature last year. Upon the passing of her proposed resolution, Broten remarked, “With the current economic downturn, it is more important than ever to enhance disclosure in an effort to provide greater confidence and protection for individual investors….” The Legislature then tasked the OSC with re-evaluating existing corporate reporting standards and recommending ways to improve disclosure to investors.

The process leading up to the report had included an OSC review of existing disclosure requirements as well as roundtable consultations with security-issuing companies, shareholder groups, the academic community and corporate social governance experts. In the course of these reviews and consultations, it was found that poor compliance with existing disclosure requirements is the primary cause of inadequate levels of disclosure.

Issuing corporations contended that the biggest obstacle to corporate social responsibility reporting is the failure to understand precisely what must be disclosed. This is particularly complicated, given that many companies operate across borders and legal jurisdictions. They cited other challenges ranging from a lack of clear-cut and standardized measures to a constant sense of pressure to keep reports up-to-date and forward-looking.

Difficult as they are, it is in companies’ interests to resolve these challenges. A pair of studies has shown that issuing companies with a proactive strategy to manage disclosure requirements have fared well in the market. A 2006 report by the United Nations Environment Programme’s Asset Management Working Group found that environmental, social and governance (ESG) issues are material to shareholder value and that their impact on share price is quantifiable.

In a narrower scope, these results were echoed by a 2008 paper published by the Chartered Financial Analyst Institute, which states that “a prudent investor ought to consider ESG issues in his or her analysis because these factors can have an impact on investment performance.”

The OSC report, too, suggests that issuers neglect corporate social responsibility concerns at their peril. “A reasonable investor’s investment decision has shifted in recent years to include a greater scope of corporate governance and environmental matters,” the report notes.

Informed by the review and discussions it conducted, the OSC made four key recommendations to Ontario’s Ministry of Finance. Notably, three of its recommendations put the onus on the OSC itself to refine its future role in the disclosure process. To enhance corporate governance and environmental disclosure, the OSC recommended a followup compliance review that will begin this spring and be completed by the end of the year; continued educational outreach to issuers, with the cooperation of Toronto Stock Exchange staffers; the development of additional general and industry-specific guidance for issuers on existing environmental disclosure requirements; and improved training of OSC staff on the details of environmental disclosure.

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