Required Disclosure and Corporate Governance

Abstract

One of the most distinctive features of U.S. business law is the stringent requirements of ongoing disclosure imposed on issuers of publicly traded securities. This scheme usually has been justified as necessary to protect investors from making poor trading decisions as a result of being uninformed. Little scholarly attention, however, has been paid to the corporate governance effects of such required disclosure. In analyzing these effects, this article concludes that required disclosure can improve corporate governance in important ways. Indeed, improving corporate governance, not investor protection, provides the most persuasive justification for imposing on issuers the obligation to provide ongoing disclosure. Before delving further into this topic, it is important to define more precisely the terms "required disclosure" and "corporate governance." "Required disclosure," as used in this article, means any legal obligation that requires an issuer's management to provide, on a regular basis, information that it otherwise might not be inclined to provide. In the United States, the primary source of required disclosure is the periodic disclosure requirements imposed on publicly traded companies under the Securities and Exchange Act of 1934 ("Exchange Act"). Other sources of required disclosure include the law of the issuer's state of incorporation, the rules of the stock exchange on which the issuer's shares are listed, and the issuer's articles of incorporation. The term "corporate governance" refers to the myriad mechanisms that shape the structure of incentives, disincentives, and prohibitions under which an issuer's management makes decisions. This inquiry will be confined in two respects. First, while disclosure can influence corporate governance in ways that impact a variety of interests — including labor, environmental quality, and the local community in which the issuer operates — the focus here will be exclusively on shareholder welfare. Second, the concern here is with the corporate governance of ...