Corporations on the Couch: Is Therapeutic Disclosure a Kind of Madness?

Abstract

Particularly among academics, corporate disclosure is an increasingly popular solution to a wide variety of social and environmental problems. Regulators around the world have signalled they are prepared to start mandating disclosure about the non-financial impacts of corporations. One of the claims made about this sort of disclosure is that it will have the effect of directly impacting the behaviour of managers. Executives will be forced to confront the environmental and social consequences of their decisions, the gulf between those outcomes and prevailing social norms, and they will experience the shame of revealing their failures to the world.

This paper argues that disclosure is unlikely to have the hoped for therapeutic impact on corporate insiders. Managers are unlikely to learn anything from the process of preparing disclosure, and the nature of corporations is such that insiders are unlikely to feel motivated to change their behaviour. We have tried therapeutic disclosure before in relation to reducing executive pay, increasing board diversity, improving ethical behavior, and reducing corruption. Empirical studies repeatedly provide evidence these disclosure initiatives have not had the effects on firm behaviour that reformers hoped, and because of the public nature of corporate disclosure, the new disclosure rules have often produced perverse results.

Keywords: corporate governance, securities, disclosure, corporate law, ESG, executive compensation, ethics codes, corruption, board diversity

JEL Classification: k22, G30,