USA 10-K: Why America Needs an Annual Report

On the eve of America’s Independence Day on July 4, the nation seems deeply divided. Trust is low; temperatures are high. Still, the U.S. has witnessed difficult times in the past and bounced back. In this opinion piece, Jay Clayton, David N. Lawrence, Stephen Labaton, Matthew Lawrence, Carl Schramm and their co-authors propose that the U.S. should adopt a simple solution that was successfully used to restore trust in public companies and markets after the Great Depression: an annual report that spells out the most significant issues the country faces. Quoting Abraham Lincoln, who said, “Let the people know the facts and the country will be safe,” the authors offer a sample annual report — on which all Knowledge@Wharton readers are invited to comment. The nation’s shareholders, the authors say, deserve nothing less.    

As we celebrate the 236th birthday of our great nation, it would be easy to conclude that the American dream is under pressure and that we are a nation deeply divided. Trust is low. Temperatures are high. Conflict is amplified by an insatiable 24-7 news cycle and easy-access by all to the megaphone of digital technologies. Consensus feels beyond reach. Fortunately, we have the context of “being here before.” Since 1776, we have united to confront wars, economic crises, the struggle for civil rights and threats of terrorism. When challenged as a country, our citizens rise, rebound and become stronger. In the words of former President Clinton: “People have been betting against America for 200 years, and they all wound up losing money.”

We have defied the world’s odds-makers in the past not through luck or complacency, but by drawing upon our greatest leaders to find clarity of thought, honesty in approach and simplicity in communication. Transparency has always been the basis for our national trust. When our elected leaders provide the American people with a candid and comprehensive assessment of the issues of the day, the American people, in turn, provide the support, consensus and shared sacrifice necessary for bold action.

The issues of today largely center on our deteriorating financial condition, the growing gulf between our most and least fortunate, and the prospects for our children’s future. Make no mistake: These are combined matters of economic, national and global security. The American people are waiting for our leaders to provide a candid and complete assessment of where we stand, how we got here and, most importantly, where we must go.

As The Wall Street Journal columnist Peggy Noonan, a former presidential speech-writer, recently noted: “[A]pplause line speeches are not right for a time of crisis, because they do not allow for the development of a thought, a point of view, an insight. Sometimes they take paragraphs, sometimes pages. They take time. But people like to listen if you’re saying something interesting.” In recognizing the need for leadership to inspire people to meet the challenges of our day, Thomas L. Friedman of The New York Times recently cited Dov Seidman, author of the book, How: “[N]othing inspires people more than telling the truth…. The most important part of telling the truth is that it actually binds you to people because when you trust people with the truth they trust you back…. Trusting people is like giving them a solid floor. It compels action. When you are anchored in shared truth, you start to solve problems together. It’s the beginning of coming up with a better path.”

Honest Conversation

Fortunately, America invented the model for this honest conversation. During the Great Depression, when confidence in our businesses and markets was all but lost, a collection of brilliant minds re-wrote the rules of our public markets. The public market rules are clear. Companies may raise money from investors so long as they issue reports that accurately and comprehensively discuss their business, performance and objectives, including the risks they face.

The reports, including the Annual Report or “10-K,” must be concise, in plain language and embody personal accountability. The consequences of faulty disclosure include significant fines and, in the case of intentionally false statements, banishment from public companies and prison sentences. The benefits go beyond the distribution of information. The preparation of the reports forces discipline upon senior executives to focus on priorities and risks as they articulate the state of their businesses. The conclusions build the consensus for corporate action and investor participation. Although the system is not without fault, the result has been a legacy of investment, innovation and job creation that has nurtured our nation and changed the world — a virtuous cycle of possibility and progress.

These rules, which show genius in their simplicity, are rooted in our traditions of transparency and participation. For more than 200 years, we have embraced the power of sunlight in a democracy. An informed citizenry has always been the basis for achieving the consensus that leads to collaborative action and our sustained progress. James Madison famously observed that “a popular government without popular information or the means of acquiring it is but a prologue to a farce or a tragedy, or perhaps both. Knowledge will forever govern ignorance; and a people who mean to be their own governors must arm themselves with the power knowledge gives.” During the most tumultuous period in this nation’s history, Abraham Lincoln remarked, “Let the people know the facts and the country will be safe.”

These groups and individuals have stepped into the information breach to educate the public and invite ideas to form the basis for consensus. To date, our leaders have not reached any agreement about endorsing these efforts. These are reports about, not from, our leadership. In short, while we have ample information and brilliant analysis, we still lack the type of collective buy-in to the reality of our condition that prompts action.

We offer a simple first step that builds on the broad body of research and the undeniable truth that clear, complete and concise communication regarding the most significant issues facing a country is a foundation of good governance. The annual reporting requirements imposed upon our public companies to protect and inform their shareholders should be extended to our government. Our citizens — the shareholders in our great democracy –deserve a candid and accessible assessment of where we stand that comes directly from our leaders.

America’s 10-K should borrow liberally from the template of reports issued by public companies large and small. It should include a letter to voters followed by the information that is essential to the country’s stakeholders — such as relevant history, recent performance and prospects, a summary of financial condition, management discussion and analysis, future objectives, anticipated risks, related party-transactions, internal controls (including weaknesses and deficiencies), pension and off-balance sheet liabilities, litigation exposures, and the compensation, benefits and insider purchases and sales of senior officials. It should describe the ability to make accurate forecasts and projections, contain an auditor’s report and all necessary qualifications, and conclude with certifications as to accuracy by the top officials. A summary of such a report might look like this.

The relevance of an American annual report now is clear. The historian Jon Meacham recently succinctly described the true source of our nation’s strength. “[N]o single politician can restore the faith of our fathers and mothers. That’s up to all of us. We are stronger the wider we open our arms. Our dreams are more powerful when they are shared by others in our time. And we are the only ones who can create a climate for the American Dream to survive another generation, then another and another.”

The link between truth, trust and progress — and the optimism expressed by our founders — is even more compelling within a digital age of “smart” devices and viral social connectivity, where information can now be widely and cost-effectively delivered, and citizenry comments received.

Nothing less is owed to our nation’s shareholders.

Note on the Authors:

Jay Clayton is a partner at Sullivan and Cromwell and an adjunct professor at the University of Pennsylvania Law School; David N. Lawrence is associate general counsel and managing director at Goldman Sachs, and a former deputy chief of the Criminal Division, United States Attorney’s Office, Southern District of New York; Stephen Labaton is the founder of Georgetown Policy Advisers and a former senior writer for The New York Times; Matthew H. Lawrence is a graduate of Brown University (B.A. History, 2012); Carl J. Schramm is a professor at Syracuse University and the former CEO of the Kauffman Foundation.

The authors also acknowledge the assistance of John Squires, a partner at Perkins Coie; Arthur Grubert, formerly acting special agent-in-charge, F.B.I.; Bill Freeland, an analyst with Goldman Sachs and Benjamin Black (J.D., MBA candidate, Harvard University). The views expressed by the authors are entirely their own and in no way reflect the opinions of their respective present or former organizations.

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