Most companies that are hit with large environmental sanctions fail to disclose this information to the Securities and Exchange Commission, as required by law, a researcher at the University of Arkansas has found.
Andrea Romi, a doctoral candidate at the university's Sam M. Walton College of Business, examined the SEC filings of 309 companies that received notice from the Environmental Protection Agency between 1996 and 2005 that they should expect to pay at least $100,000 in fines – the minimum amount required for disclosure by SEC Regulation S-K, Item 103. Romi found that about 72 percent of these companies omitted this information on their filing forms, a violation of federal law.
The likely reason for this recalcitrance? Those who properly disclose their fines are punished by the stock market. Ms. Romi found that companies that publicly announced the EPA sanction saw the value of their stock fall by an average of 1.6 percent.
What's more, those that omit the information are unlikely to suffer any consequences.
In a telephone interview, Romi described the SEC's laissez-faire approach to its own reporting requirements. "It's not voluntary," she said, "but because the level of enforcement becomes so small, it almost becomes voluntary."
In a press release on the University of Arkansas website, Romi says that this arrangement provides perverse incentives for corporations.
“This finding was disturbing not only because it revealed a direct and intentional violation of federal regulations, but also because it provided support for the existence of so-called ‘greenwashing,’ the marketing of good environmental news and the obscuring of bad news.”
Romi's study, which she will submit to a peer-reviewed accounting journal later this year, supports a 1998 internal study by the EPA's Office of Enforcement and Compliance Assurance that found that 74 percent of corporations failed to comply with this requirement.
Romi won't name names. She says that many companies were excluded from her sample because they did not make their financial data publicly available. Therefore, any list of offenders she could offer would be selective. Also, Romi believes that, given the pervasiveness of this violation, responsibility resides ultimately with the SEC.
The problem is there is no easy solution. Without disclosing this information to the public, writing a check for $100,000 or $200,000 is basically a slap on the wrist for many large corporations. Entities with such large environmental sanctions deserve the public flanking, but if there is little regulatory action and punishment, and no incentive to report, how many businesses will choose to risk negative publicity? Perhaps the best solution is for the government to automatically disclose all corporations that receive environmental sanctions of $100,000 or more, instead of leaving it up to the businesses, because disclosures of corporate social responsibility and environmental records are still voluntary.