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Corporate Disclosure: The Stage, the Audience and the Players

Commissioner Elisse B. Walter

U.S. Securities and Exchange Commission

Stanford Directors College, Palo Alto, CA

June 25, 2013

Thank you, [Joe], for your kind introduction. Joe and I have much in common — the same alma mater and a working relationship at the SEC more years ago than either of us would like to admit. That adds to my pleasure at being here today at the 19th annual Stanford Directors College.

As many of you know, I am nearing the end of my tenure as a Commissioner at the Securities and Exchange Commission. As a Commissioner, as Chair and as an SEC staffer, jobs spanning over two decades, I have delved into every aspect of the agency’s mission. And, looking back, it was my years in the Division of Corporation Finance that may have taught me the most important lesson: the cornerstone of securities regulation and investor protection is the timely disclosure to investors of accurate and complete information.

And by disclosure, I mean more than the numbers in the financial statements. I mean the information investors need to put those numbers into context — not just the “what?” and “how much?” but the “why?” And so today, in what may be one of the last speeches of my public career, I’d like to return to a subject that is an old favorite of mine: Management’s Discussion and Analysis, or MD&A. And I want to do that because I believe that you, as directors, need to take an active role in the company’s disclosure, and particularly the MD&A, and are in a special position to do so.

But before I get started, I do need to remind you that the views I express today are my own, and not those of the Commission, my fellow Commissioners or the Commission’s staff.1

Comprehensive corporate disclosure is critical to maintaining and improving investor confidence in the markets. And investor confidence in the quality of financial disclosures is what makes our markets work.

As directors of public companies, you serve a critical function as stewards of the robust, transparent communication with your company’s shareholders that builds this confidence. This is not only a responsibility, but also an opportunity. As I’ve said many times, you should not view disclosure as an obligation; instead, view it as a chance to tell your story.

“Mend your speech a little, lest it may mar your fortunes.”2 William Shakespeare wrote that sometime between 1603 and 1606 in his famous work, King Lear. Unfortunately, that approach to disclosure about affections didn’t work out so well for King Lear or his daughter Cordelia. And I certainly don’t mean for you to take King Lear’s approach in order for your considerations about corporate disclosure to be respected. Rather, my strongest desire is that companies and their shareholder-owners truly engage in an honest dialogue.

So, inspired by the Bard, I’d like to give you three things to think about when considering MD&A. First, set the stage. Second, know your audience. And finally, know your players.

“All the world’s a stage….”3 Shakespeare wrote that too. And I’m not even going to mention the one about lawyers.

When we talk about disclosure, SEC regulations merely set the stage. But they aren’t designed to tell the whole story. That’s where you and the managers you oversee come in — enter stage right.

Regulations are the floor but not the ceiling. They tell companies what, at a minimum, should be covered, but it’s up to the company to make sure the story gets told. That’s where MD&A becomes a real opportunity for the company to tell shareholders what’s really going on. And if the company’s management isn’t doing that, or isn’t doing it well, it’s up to the directors to ask questions, suggest changes, and require more information.

You should take this role very seriously. You are the investor’s voice and advocate, and they deserve a good story. Now, a good story may not always be a happy story. Shakespeare was a master of both tragedy and comedy. But the real story — and by that I mean the whole story — is the one that needs to be told.

I’m going to read you a comment that was actually issued by the staff of the Division of Corporation Finance to an issuer regarding its MD&A. Bear with me, it’s a little long:

We believe your current disclosures are too general in nature and do not provide your investor with a complete picture of your enterprise by segment and as a whole. In this regard, for each period presented and for each of your reportable segments, revise to:

  • Clearly disclose and quantify each material factor that contributed to the change in revenue and operating income, indicating the impact by geographic area;
  • Provide insight into the underlying business drivers or conditions that contributed to these changes;
  • Describe any other known trends or uncertainties that have had or you expect may reasonably have a material impact on your operations and if you believe that these trends are indicative of future performance.

This is not a comment a company (or a board) should be happy to see. This comment outlines very basic things that should have been covered by this MD&A, but weren’t — it reflects a play that no one would want to see because the stage has not been properly set.

No MD&A should be merely a recitation of the financial statements. Give investors the when, the where, the why and, perhaps most importantly, the what’s next.

Here’s another comment:

We note that you identify and quantify various factors that impacted the year to year trends of your results of operations and the related financial statement line items … but did not discuss the business developments or external events that underlie these factors. Please expand your MD&A to explain in greater detail what gave rise to the factors that you have identified, and indicate whether or not you expect them to have a continuing impact on your results of operations in the future.

This is another comment no one should be happy to receive. I’m told that sometimes companies will leave out disclosure and wait to see if the SEC staff will issue a comment. If that’s true, and I worry that it is, I must say that that is entirely the wrong approach. The staff is very good at asking the right questions to require better disclosure, but they are not insiders. They do not know your company the way that you do. Frankly, they should not be doing your job for you, nor should we expect them to.

Sometimes finding the right details to give investors is hard. Predicting the impact, either positive or negative, of a future event is even more challenging. It requires significant judgment and thoughtful consideration. But it’s a task that should be undertaken by the very insiders who have the information to make that call, so that investors have the complete story. The focus should always be on the investors.

And that brings me to my second point: know your audience.

Well, that’s easy enough. Your audience is your investors. And in my view, you should address your investors like they are your business partners, and the MD&A should reflect that perspective. You wouldn’t address a business partner with boilerplate. Your investors deserve the same respect.

They also deserve the whole story. As some of you know, I frequently use the example of my fictional Aunt Millie, the archetype of the retail investor. Well, Aunt Millie has been reading, or trying to read, corporate disclosure for years, and I’m not sure she has ever seen an MD&A that reads quite like one of her Agatha Christie novels — where Detective Hercule Poirot solves each and every mystery step by step. To be honest, I fear that my dear Aunt Millie might just leave this Earth without having ever seen the kind of truly informative and complete MD&A that I have dreamed of for years.

Please don’t let this happen to my dear Aunt Millie! Perhaps you’d even be willing to go back and read one of the more well-known Supreme Court cases about disclosure, TSC Industries. That case gives us the famous concept of evaluating disclosure by looking at the “total mix” of information, but it also says that doubts about whether disclosure is required should “be resolved in favor of those the statute is designed to protect.” 4

I listed in a speech from 2010 (I told you I’d been talking about this for a while) some questions that investors probably still want to know the answers to after reading an MD&A.5 I think they are still quite relevant today:

  • What is the company’s business today?
  • How did it perform?
  • Where is the cash?
  • What are the company’s key business drivers?
  • What are the risks and uncertainties?
  • How flexibly can the company respond to change?
  • What do the company’s future prospects look like?

And of course there may be other questions to answer that are specific to your company. But the MD&A is the place to answer them clearly, thoroughly, and directly.

When I served as the Chairman of the Commission, there was a sign on my office door that read simply “How does it help investors?” It was a reminder that everything the Commission does should be focused on that goal.

Sometimes I think that every board meeting should prominently display a similar sign, one reading “What do investors want to know?” Let it serve as a reminder to everyone in the room that disclosure isn’t driven by what the company wants to disclose but by what the investors want to know. That should be front and center as you review the MD&A.

How the company gets to those answers brings me to my third point today: know your players.

In addition to examining the content of the MD&A, I believe the board should know the people and the processes involved in putting it together. First, what is the attitude of management towards disclosure? If they believe that robust, transparent disclosure is a good thing, then that tone will affect both the employees involved in providing information that is relevant to disclosure and to those designing controls and procedures to ensure that information is evaluated by management in a timely, thoughtful manner.

And I believe directors can influence that tone by being engaged, by reading the disclosure with a critical eye and by holding management’s feet to the fire when they believe there is more to the story that ought to be told. Ask yourself, what do I know about the company’s performance that cannot be reasonably inferred from the financial statements?

You are the investor’s voice and as the company’s stewards, you should also be their advocate as well. You play such a crucial role in ensuring that the company’s true story is told, and that’s the story that investors deserve to hear.

And disclosure has other positive effects. Full disclosure is a hallmark of good corporate governance — which should serve to help create the positive corporate culture that results in effective processes and procedures necessary to reveal the important information that your investors need to know. You can only be successful at good governance if you are also successful at disclosure.

Better disclosure equals better markets. It really can be that simple. I hope, as I conclude today, that you’ll always keep the investor — and of course, especially my dear Aunt Millie — at the forefront of your mind each and every time you embrace your important role in the disclosure process.

Thank you.

1 The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publications or statements by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission, other Commissioners, or the Commission staff.

2 King Lear (I.i.94).

3 As You Like It, (II.vii.139).

4 TSC Industries v. Northway, Inc., 426 U.S. 438, at 448 (1976).

5 Commissioner Elisse B. Walter, Remarks Before WESFACCA (March 5, 2010), available at

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