University of Southern California

Cox Knocks Goopy Language in Disclosures
SEC Chairman Calls for More Understandable Corporate Information
March 26, 2007 • by David Bloom

Does an "80-page doorstop" filled with nearly impenetrable legalese and leaden gobbledygook count as adequate disclosure of corporate financial information to investors?

It doesn't to Christopher Cox, and his opinion matters: for the past two years, he has been chairman of the U.S. Securities and Exchange Commission, which is charged with regulating the quality and nature of financial information disclosed by publicly held corporations to investors and others.

And Cox, in back-to-back speeches at two events connected to the USC Marshall School of Business, said the SEC already is doing a lot to clear the crud from required proxy statements and other required financial-information disclosures. But it's not enough, he said, and the SEC will be doing still more by June, so investors, especially small-fry retail investors, can more easily figure out what's going on with the companies they've invested in.

"We've been seeking some dramatic changes to the way companies disclose information to shareholders," said Cox, an alumnus of the USC College of Letters, Arts and Sciences and former nine-term congressman from Newport Beach. "From the forms we require to the accounting standards we use, the SEC is waging an all-out war on complexity."

One big change already has taken effect, requiring companies to discuss in a narrative fashion in their proxy statements how they've been doing financially. Cox said he had hoped the narrative rule would free litigation-wary companies to better and more clearly explain the broader import of the numbers they publish.

He noted, however, that a readability analysis of initial proxy statements filed under the new rules from 40 companies was not promising. Under three different measures of verbal complexity and comprehensibility, the companies' filings are still extraordinarily complex and therefore nearly useless to any normal person.

"Most of these fail to meet even the readability standards of state disclosure forms to buy insurance," Cox said. "Fully two-thirds of Americans can't read at this level. No company that seeks to inform the retail investor would draw their attention to an 80-page doorstop. Those documents are too long and too dense and too hopelessly detailed to be of use."

The average length of the proxy narratives is nearly 5,500 words, the longest a New Yorker-esque novella of 13,500 words in length, Cox said. Companies remain concerned that excessive candor will be rewarded with shareholder lawsuits for any misstep.

"Now that we're in proxy season, we're already seeing examples of overlawyering," Cox told an audience of about 200 at Marshall's Corporate Governance Summit, a two-day event at the Davidson Conference Center for members of corporate boards of directors. "I have to say I'm disappointed by the level of disclosure we've seen so far. It's clear many companies are still letting the lawyers have the final say."

Cox's "new, new way" to deal with verbose and unreadable disclosure forms will include not only the jawboning he did at the summit and in an appearance with the Distinguished Speaker series sponsored by Marshall's Center for Investment Studies, but also new interactive tools. Those tools will help investors better understand and access the numbers in disclosures on executive compensation.

Beginning in June, the SEC will modify its online Edgar offerings by adding "metatags" to the filings of several hundred public companies. Those metatags, using the XBRL tagging language, will allow investors to quickly extract similar kinds of information from the filings of multiple companies, in areas such as total CEO compensation, fair market value of stock grant options and other key data.

"Getting good information is the most basic ingredient of good corporate governance," Cox said. "With your help, we can raise the standards for protection of market investors."

Cox had a full day at USC, meeting with President Steven Sample and attending the annual Alumni Awards dinner in the evening at the Galen Center. His Southern California weekend also included a planned trip to Orange County to celebrate the 86th birthday of his father, Charles Cox, also a Trojan alumnus from 1942. To help celebrate, Cox said he planned to stop by the Trojan Bookstore to buy his father some appropriate USC-themed gifts.

About the USC Marshall School of Business
Consistently ranked among the nation's premier schools, USC Marshall is internationally recognized for its emphasis on entrepreneurship and innovation, social responsibility and path-breaking research. Located in the heart of Los Angeles, one of the world's leading business centers and the U.S. gateway to the Pacific Rim, Marshall offers its 5,700-plus undergraduate and graduate students a unique world view and impressive global experiential opportunities. With an alumni community spanning 123 countries, USC Marshall students join a worldwide community of thought leaders who are redefining the way business works.