Full Corporate Disclosure

Dr. Meir Tamari

Perhaps the most essential prerequisite of ethical framework for a business or for that matter, for any economic activity, is the provision of maximum information regarding all factors involved. It is possible to protect consumers against price gouging and the supply of defective goods, only if they have access to information regarding comparative prices, the quality of the goods bought, and possible alternate sources of supply. Shareholders require knowledge of the financial status of the corporation, and conflicts of interest confronting the executive officers, and the potential difficulties or strengths facing the corporation. Creditors and investors cannot make viable decisions unless they possess details of all the liabilities, the liquidity of assets and the profitability of their debtors or potential investments.

In these and other cases, when one party to a transaction provides incorrect information or withholds relevant data, they often gain financially, while the other party may suffer severe losses, mental anguish, and physical pain or loss of life.

Sometimes the lack of disclosure may be deliberate and fraudulent, while at other times it may be in good faith. Nevertheless, the damage or loss still occurs. The market requires therefore, both education towards full disclosure and some tools to protect itself against the lack of such disclosure. It would seem that we are able to distinguish four proposed methods of achieving this.

1. Enlightened Self Interest

Drawing on Adam Smith, many free marketeers would argue that, since all parties to a transaction wish to continue to operate in the future, they therefore have an economic stake in an ethical economic framework. It is this enlightened self interest which will ensure maximum protection against fraudulent reporting, misrepresentation, and deceptive packaging. While such self interest does exist, its efficiency in providing a moral marketplace is limited. In real life, man’s innate struggle between his lust for wealth and his moral self is so constant, that considerations of future gain, mutual benefits, and personal integrity are often overwhelmed.

The limitations of enlightened self interest lead to various forms of regulation and legislation, which differ from each other in their intent, scope and authority.

2. Self Regulation

External regulations can often become excessive, arbitrary, and bureaucratic, leading to ineffective markets and economic stagnation. Therefore professional organizations, financial institutions and economic bodies have argued that they are able to prevent abuse through the self regulation of their members or constituent bodies. A recent example of such regulation was proposed by the Cadbury Commission in the United Kingdom, as an alternative to an American-style Securities and Exchange Commission. Listed corporations were required to publicly declare their adherence to the disclosure forms accepted by the Stock Exchange. Such adherence would be regularly reaffirmed while failure to do so would bar the corporation from the market.

3. Public Sector Regulation

Self regulation is essential to the moral operation of the market and indeed, without the ethical consensus which underlies it, it is doubtful if any external regulation or supervision is even viable. At the same time, the experience of thousands of years of economic activity in various societies, has shown that this is often the case of putting the cat to guard over the cream. It is often insufficient protection against minor and major frauds, resulting from insufficient disclosure of physical defects in goods traded, or deliberate concealment of such defects, or from similar actions regarding financial data or legal obligations.

Practical experience has therefore led to public sector supervision and to legislation. A prime area of such government activity has been consumer protection regarding quality of goods, truth in advertising and fair pricing. More recently, it has included disclosure of health hazards, interest rates, and legal obligations. The corporate world is particularly affected by regulation in regard to the veracity of financial reporting, directors’ responsibility, and renumeration and revelation of potential areas of conflict of interest.

4. A Jewish Perspective

Many of the above mentioned aspects of public regulation parallel the treatment of disclosure in Jewish sources. Yet at the same time, these sources seem to be even more demanding and encompassing. Judaism rejects the “let the buyer beware” concept. Rather, the insistence is on the “let the seller beware” that what he is selling or what service he is offering, should be exactly what it purports to be.

The assumption that there exists free flow of information and the full disclosure of all relevant data is basic to efficient markets, yet in real life one party, usually the seller, has better knowledge, giving him an unfair advantage. So halakha places the responsibility on that party, not only not to cover or hide defects or relevant information, but to make full disclosure thereof. Failure to do so is considered a form of theft, literally stealing the minds of others – “genevat da’at”. Legally, it gives rise to the “mekher ta’ut” – erroneous sale – which can be canceled, exempt from many halakhic restrictions regarding other forms of theft or fraud. Furthermore, there is no necessity for fraudulent intent, even transactions conducted in good faith may be canceled.
Dr. Tamari is the former chief economist of the Office of the Governor at the Bank of Israel, and the founder of the JCT Center for Business Ethics and Social Responsibility.