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Harmonious, Holistic Disclosure Key To Reducing Liability Risk

Martinek Paul J. | May 17, 2005

Companies may be treading dangerously by failing to coordinate the various environmental disclosures they make throughout the year, some experts tell Compliance Week.


According to Kevin Ewing, a partner in the Washington, D.C., office of the law firm Bracewell & Giuliani, the passage of The Sarbanes-Oxley Act of 2002 and other recent events have created “new and more differentiated expectations” about the disclosure of environmental liabilities, risks and effects. Ewing notes that companies often have three internal groups overseeing environmental issues—accountants, those focused on Securities and Exchange Commission matters, and environmental experts—and that each of these entities may be working independently of the others.

“Companies all too often do not take a holistic and integrated approach to developing and disseminating environmental disclosures,” says Ewing. “They fail to recognize that they are developing three different sets of disclosures in three different contexts—with all three being read by essentially the same audience.”

According to Ewing, a “holistic” approach is one that “takes the viewpoint of the ultimate recipient of the information—shareholders, investors, etc."

It's also a viewpoint that enables companies to streamline and make more efficient their disclosure procedures. "Once taken," he says, "that outsider’s perspective [puts companies] in a position to reassess the disclosure [process]. It is not holistic to develop your accounting disclosures separately, with different personnel and with little intersection of the disclosure staff efforts.”

Gregory Bibler, a partner with the Boston law firm Goodwin Procter, agrees that dangers exist for companies that don’t put out information that is consistent.
“If you don’t manage it—if you are giving inconsistent disclosures in different places—you are running a risk of liability depending on what you say in each disclosure,” says Bibler.


But the problem may not be widespread.
Sheila McCafferty Harvey, for example, a partner with Pillsbury Winthrop Shaw Pittman in Washington, D.C., says that, in her experience, most companies do coordinate environmental disclosure efforts effectively. “Maybe we’re just lucky,” she says. “By and large, I think our clients do a pretty good job [of having] an integrated compliance function—they all work together.”

Added Dangers

Ewing at Bracewell & Giuliani stresses that the challenge in dealing with environmental disclosures “is not regulatory—it’s internal.”

The starting point for a company, he says, is to conduct a reassessment of the regulated-disclosure program. “Just as one needs to look at the accounting side," he says, "you need to look at the program for dealing with textual disclosures." Doing so can help companies unify disclosures through procedural changes. "Then you’re in a much better position to recognize where differences lie, where incongruities rest and how best to ameliorate those differences by internal restructuring concerning how those respective disclosures are prepared,” adds Ewing.

Once that is accomplished, a company has “laid the foundation” to address voluntary environmental disclosures.

And that foundation is critical, adds Ewing, because voluntary disclosures need to be held to the same standards as regulatory matters. According to Ewing, there is a misperception within some large companies "that voluntary disclosures are not subject to the same rigorous standards [as regulated disclosures],” Ewing said. “If rigorous standards [are not] brought on those disclosures—companies are at some risk [of] discrepancies that could be considered to have tainted the disclosures of the company for regulator purposes.”


Bibler agrees that there is “added danger” where voluntary reports, which are often made in the context of sustainability reporting, are concerned. “If the company is trying to send a positive message, trying to give the company a good reputation in the community, it is possible that you get public relations and shareholder/investor relations people [involved] who may have a different or more optimistic view of life,” he says. “It’s possible they will be less guarded and more optimistic about their projections about what the company can achieve.”

One way to guard against that, says Bibler, is to “have the same people who are reviewing environmental disclosures in 10-Ks and 10-Qs [be the ones] reviewing disclosures in voluntary reports.” According to Bibler, many companies are already doing that. “Companies are pretty sensitive in the post-Sarbanes-Oxley [era] to make sure they are managing information that is consistent.”

Avoiding The Silo Effect

In addition to risking liability if they put out inconsistent information, companies that take a “stove-pipe" approach to environmental disclosures, rather than a holistic one, are foregoing some tangible benefits, adds Ewing. “When you have a harmonious, consistent and well-thought-out communication, [it is] effective for all stakeholders in the company. Clear and harmonious communication is a real benefit.”

In addition, some argue that there is questionable value in swamping investors with too much information, anyway. According to Ewing, there have been some interesting papers "about the problem of just overwhelming the reader with detail and losing the essence of the communication." In other words, volume of information is not better than the quality and digestability of the information.

According to Bibler of Goodwin Procter, “the most important thing is to establish good communication between the environmental people who have the direct technical expertise in management of projects, the accounting people who have learned the accounting standards and the SOX requirements for internal controls, and the lawyers who can apply the legal standards applicable from the financial control side.”


Warren Lehrenbaum, a partner in the Washington office of Pillsbury Winthrop, says that “what works particularly well is where companies have environmental auditing policies in place—freestanding audit policies—and they incorporate a mechanism for shunting over to the SEC compliance [people] information they’ve received pursuant to their environmental audit function.”

Harvey, also of Pillsbury Winthrop, adds that the key is to ensure the “management structure doesn’t have a silo effect. … At some juncture [each of the functions] has to reach a common point.”

It’s “not sufficient,” says Ewing, “to simply issue a fiat that the left hand has to shake with the right hand. It requires, at multiple levels, a recognition that the desired objective is harmonious disclosure. It doesn’t mean everything has to be the same, just that there’s cross-resonance and that it’s intended.”