The Securities and Exchange Commission (SEC) has had a rough decade. The scandals that ensnared companies including Enron, MCI, and Adelphia–which led to the demise of the accounting Arthur Andersen—resulted in the Sarbanes-Oxley Act of 2002. That legislation set new accountability standards for public companies’ boards of directors and management as well as for accounting firms.
The ordeal over Bernie Madoff’s Ponzi scheme, however, revealed the SEC’s shortcomings, often because the agency is understaffed and under-resourced. With the growing interest in companies’ environmental, social, and governance performance (ESG), or corporate social responsibility, the SEC’s website and database of periodic filings for all public companies selling securities in the US crucial. The site is the first place the public can go to vet a potential investment while learning about the company’s operations. Indeed, investment advisors are required to submit filings to the SEC. But fraud detection is time-consuming and tedious, which is one reason why Madoff was able to carry on for years without getting caught.
What if the entire investment community, or even the general public, had access to all of their colleagues’ performance claims and reviewing tips?
Crowdsourcing is behind Wikipedia’s success—try posting bogus or boastful claims about your favorite company or celebrity and watch them get flagged almost as quickly as you type them. Such a process could work in fraud detection, too. One example is when one of the leading British dailies, the Guardian, released almost 460,000 pages of documents detailing the expense reports of British members of parliament. Over 27,000 people reviewed almost half of the documents, which revealed all kinds of juicy tidbits, from a £225 pen to a giraffe print, with plenty of bad mathematics to boot.
Marcia Kramer Mayer and Paul J. Hinton of NERA Economic Consulting suggest that the SEC require investment advisors to report quarterly their assets under management, using an account code. Custodian banks in turn would report the quarter-end numbers of their advisors; clients, meanwhile, would have the option to enter their collective asset value of their investments. Meyer and Hinton believe that even if only a few individual clients entered their numbers, advisors who inflate their numbers would be quickly exposed. For even greater transparency, trading data from the Depository Trust Company would become part of this system as well.
In the long run, this streaming of tips from financial professionals and the general public could include nuggets of information on brokers, public companies, and municipal bond issuers. Some objections naturally would arise. Confidentially and cost are at the forefront, but designing a good infrastructure and a requirement that advisors contribute to the system could address these issues. Naturally a flood of bogus and vindictive tips could stream into such a space, but outrageous claims would also be exposed to the public’s scrutiny.
I have focused on governance and transparency, but such a model could work for the evaluation of a firm’s environmental social performance as well. Timberland is an early pioneer in this regard, as its “Voices of Challenge” site actively seeks shareholder engagement.
Some dismiss new and social media as borderline anarchy, dismissing crowdsourcing and wikis as allowing everyone to be an expert or critic. That’s a fair reaction, but these tools also allow for greater participation with our society’s institutions: as long as the Internet stays free and neutral, tools like this may help keep government, businesses, and yes, non-profits more accountable.