Question. Which government agency rejects the most requests for information about what it’s doing?
It’s not the CIA. It’s not the Pentagon, either.
It’s the Securities and Exchange Commission -- the same SEC that promotes unflinching commitment to corporate transparency, that investigates and sanctions hundreds of companies for hiding information of material interest to the public.
Bloomberg News reported this week that in 2004 the SEC responded to only seven of every one hundred information petitions received from investors, lawyers, journalists and others. And of those, the agency granted only 34 percent – only 1,302 out of more than 9,000 requests for information.
By contrast, the CIA and Defense Department routinely grant at least half of such requests.
Many of those information requests, by the way, are from companies trying to figure out the reasons behind SEC actions and rulings.
Understandably, the SEC’s communications challenge results partially from growing information demands since the Enron-era accounting scandals. But there’s also an institutional attitude behind this, as underscored by former SEC commissioner Edward Fleischman, who said “The SEC has never applied the same standards to itself that it applies to the companies it regulates.”
Whether by design or by default, the result is that even innocent companies and investors pay a hefty price for the SEC’s lack of public disclosure and education about its methods.
Keep in mind that the large majority of SEC investigations result in no action being taken against the company in question. Yet even the mere mention of a potential government investigation in a company news release or a blog can send stock prices, employee morale and customer confidence headed south.
One researcher at New York University’s Stern School of Business calculated that announcing an SEC investigation causes a company’s market value to drop immediately by at least six percent. Many cleared companies – especially small ones – never recover.
Considering that most of the SEC’s targets come out clean -- even by the often Gnostic interpretations of Sarbanes-Oxley and other laws – it would seem imperative that the agency tasked with protecting shareholder interests would not let itself be the arbitrary cause of so much shareholder loss.
I couldn’t agree more with Small Business & Entrepreneurship Council CEO Karen Kerrigan, who last May suggested to an SEC advisory committee that the agency has a “role to play in educating shareholders about what investigations actually mean.”
Hopefully the SEC will eventually make disclosure parity a priority. But in the meantime, corporate communications and investor relations execs need to keep screaming for big picture data to help put SEC actions in accurate, real-world context.
It would be spiffy, for example, if the SEC reported annually on how many companies were investigated, for what reason, what triggered the whole deal and what happened as a result. Good stuff to know, yes?
Might even prevent some of the costly, unnecessary hyperventilating.
Corporate communications and legal counsel should also strategize well in advance of any SEC investigation, or hints that one might be imminent. In cooperating with the SEC, for example, companies should at least try to get agreement as to how both sides will manage communications to avoid unrealistic, exaggerated reactions by employees, shareholders, the media and others.
There should be agreement, for example, that companies won’t be near-convicted in newspaper stories where SEC officials say it’s up to “the prospective defendant” to “convince us we’re wrong.” (The investigation on this company was later dropped.)
A company could also insist that the government agree to issue the press release if a formal investigation is terminated without ruling – rather than leaving lingering doubts by forcing the company to disclose that “has been notified by the SEC.”
And most importantly, I think companies should also ask for assurances that they won’t be penalized for accurately and fully explaining the mechanics and trends related to an SEC investigation.
Having government fingers pointed at your company is exactly the worst time to go dark.
(Note to companies that are guilty as sin and know it: Don’t bother. )
