On disclosure: Hands-tying

Cite this Article
Geoffrey A. Manne, On disclosure: Hands-tying, Truth on the Market (February 20, 2006), https://truthonthemarket.com/2006/02/20/on-disclosure-hands-tying/

Dale Oesterle has called Gretchen Morgenson a “national treasure.” Today Larry Ribstein exposes the treasure for fool’s gold. I’m with Larry on this one.

Morgenson’s article on executive compensation is yellow journalism at its worst (well, at least a far as business journalism goes. And really — what else is there?).

As Larry suggests, hatchet jobs like Morgeson’s can be quite costly:

To what extent do stories like this shape misguided public policy like the SEC’s recent compensation disclosure rule? What is the social cost of the useless reshuffling firms must do to minimize damage from sensationalist stories like this?

Excellent questions. To me this sort of story highlights one of the dangers of mandatory disclosure: That the information might actually be used. We’re all accustomed to thinking that shareholders are rationally apathetic, but rationality means nothing if it doesn’t mean that shareholders will be less apathetic [does that make them more pathetic? — ed.] when the cost of action goes down. It is, after all, the fundamental grounding for our securities regulatory regime.

thomas schellingAnd this may be bad. The problem is that forced, Plain English disclosure of pay packages along with Ms. Morgenson’s finely-honed commentary (“it’s outrrrrrrrrageous!”) may induce shareholder action — in precisely the sort of situation in which the shareholders’ collective best interests are served by specialized decision-making by the board and seriously-limited or no shareholder second-guessing of business decisions. When, that is, their hands should be tied.

One of the great strengths of our system of corporate governance is that it permits corporations to control the level of shareholder participation in the firm — which is to say, the exent to which shareholders may harm themselves. They are routinely denied access to proxies, constrained in their voting, and, of course, completely absent from all regular business decisions. It makes sense that firms should be permitted to select the appropriate level of shareholder action, to the extent it can be controlled. So why shouldn’t boards be permitted to control the flow of information, as well? To the extent that making information more costly functions just like restricting access to corporate proxies in constraining shareholder participation, isn’t it appropriately in the board’s control? Firms can’t always control what shareholders — or journalists — do with the information they disclose, but they can control the disclosure in the first place.