SOCIAL TOPICS (Archive): ENVIRONMENT

Published, July 1994

       The time may be ripe for our recommendations to the Glass Ceiling Commission to improve public access to corporate equal employment opportunity data. (See facing page.) Investor demand for better disclosure from companies is growing and has caught the attention of the Securities and Exchange Commission (SEC) which has taken bold steps to require firms to report more fully in another area — environmental liabilities.

       The SEC has issued a clear warning to public companies that scrutiny of environmental disclosures in securities filings will intensify in 1994, and even more in 1995, and that enforcement action may not be far behind. “Some companies will be drawn and quartered by the SEC’s enforcement division for inconsistencies and lack of disclosure of environmental liabilities,” Commissioner Richard Y. Roberts told a spring meeting of financial executives in New York.

       For lack of disclosure, the SEC can stop a company’s stock registrations, ask the courts to force the company to provide more environmental liability data and fine the company up to $500,000 for each violation.

       The backbone of the commission’s initiative on disclosure is SEC issued Staff Accounting Bulletin No. 92 that publicly traded companies must obey. The bulletin makes it clear that companies must disclose considerably more than they generally reveal about their current and potential liabilities.

       Under current accounting rules, companies aren’t required to disclose liabilities of less than 5% of either their profits or assets. However, under the new SEC rule companies will have to disclose some environmental liabilities even if they fall below the 5% threshold. The rule will also prevent companies from using recoveries from insurance to offset environmental liabilities and thus avoid disclosing them to shareholders.

       The SEC’s saber rattling will probably startle most companies. A 1993 Price Waterhouse survey found that 62% of 523 companies responding had not reported known exposure to environmental liabilities in their financial statements. Another survey of the S&P 500 by the Washington-based Investor Responsibility Research Center found that 80% of respondents conduct some type of environmental auditing, but only 6% release summaries to shareholders — on special request.

       Already the SEC’s more aggressive -posture on environmental reporting has -withstood a legal challenge. Last year a U.S. Court of Appeals decision in the Second -Circuit confirmed that a corporation that makes misleading statements and omissions in proxy materials is violating federal securities law.

       In a case against International Paper Company, the court found that the company’s reports to shareholders contained “misleading statements (that) omitted material facts” from its proxy statement to shareholders. The company’s “rather glowing description of (its) environmental spirit, performance and sense of responsibility” was in sharp contrast with the fact that the company had severe environmental compliance problems, the court said.