The Case for Consumer-Oriented Corporate Governance, Accountability and Disclosure

Abstract

It is legally impossible to offer securities to the public without giving thorough and exhaustive disclosures, allowing potential buyers to compare such securities with competing investment options. But it is legally possible to offer the public any other product under the wide wings of the freedom of commercial speech. Corporations offering merchandise or services to the public, in 2014, enjoy the status of small merchants in the archaic marketplace: they need to provide consumers with information only to the extent where lack thereof would render the agreement involuntary, as required under contract law. Consumers of securities, on the other hand, are labeled "investors," and are considered prominent corporate stakeholders. Offering securities to the public entails an informational regime that includes periodic and immediate uniform disclosures including all material information in plain English, accompanied by standardized financial audit and report.

This paper calls for corporate informational accountability towards consumers, by setting positive disclosure standards on corporations offering products or services to the public. The paper compares product choice to investment allocation, arguing that the choice process, product complexity, and risks are often higher for consumers than for investors. The consumer product market is compared to capital markets, showing that for investors, analysis of information is frequently performed by investment advisors and other intermediaries, whereas consumers typically make their product research and choice unaided. The paper shows that due to the costs of information and the structural characteristic of the consumer products market, intermediaries are unlikely to solve market failure for consumers. Despite the abundance of commercial speech, markets fail to provide consumers with the requisite information for efficient choice, and overwhelm consumers with an overload of information. Securities Exchange Commission v. H. J. Howey Co. and United Housing Foundation Inc. v. Forman create a legal distortion, because it is not the purpose of purchase we need to protect, but rather the unilateral relationship and one-sided control of all relevant information, which equally apply to consumers and investors alike.

Doctrinal foundations are discussed, arguing that consumers should be as well protected as investors in terms of informational rights. Corporate law is established as the doctrinal setting for product disclosures, offering an extension of the scope of current corporate governance and applying stakeholder theory to consumers as corporate members. The suggested corporate law accountability is compared to accountability under contracts law, arguing to the merit of the former. Three essentials for corporate disclosure accountability towards consumers are suggested, including a duty of materiality, accessibility, and succinct disclosures.

Keywords: Consumer, Product information, information overload, corporate governance, stakeholder theory, disclosure