Recently, Dover Corporation, a US public company, made some disturbing revelations in its publicly available annual report that it filed with the Securities and Exchange Commission (SEC). During 2012, a German affiliate of Dover exported certain engineering products to two Iranian companies. As it turns out, these two companies are on a special Iran-watch list, one of which is characterized by the British government as an "entity of potential concern for WMD-related procurement."
Dover is one of a number of US public companies that has been making Iran-related disclosures in its SEC filings since February 2013, the date on which Section 219 of the recently enacted Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRA) came into effect.
ITRA was signed into law with the principal aim of strengthening the existing sanctions regime maintained by the US against Iran. One lesser known feature of this new law is Section 219 which requires a US public company to disclose in its annual or quarterly reports that it files with the SEC certain activities that the company or its affiliates knowingly engaged in relating to Iran including with the Government of Iran. A company that makes Iran-related disclosure is required to file with the SEC an appropriately titled form known as the "IRANNOTICE" and to provide in its annual or quarterly reports information relating to its Iran-related activities including the profits that it derived from this.
So far over 160 IRANNOTICE filings have been made and judging by the frequency of reports being filed many more are expected.
Required Iran-related disclosure raises important questions concerning the use of the SEC public filing system to advance US attempts to prevent Iran's race towards the bomb. Historically, public filing with the SEC was designed to provide investors with information about a company's business so that investors can make informed investment decisions. Viewed from this perspective one may legitimately ask what Iran-related disclosure has to do with an investor's understanding of a company's business especially if only a small portion of that business is derived from Iran-related activities.
At one level, doing business in Iran carries with it the risk that costly regulatory action may be initiated by the US government against a company if it is suspected of engaging in prohibited activities. Under Section 219 of ITRA, the SEC is required to pass on to both the President and two Congressional committees the Iran-related disclosure made with the SEC. Additionally, under certain circumstances, the President is required to commence an investigation with a view to sanctioning the company if it is found to have engaged in prohibited activities. If a company faces such a risk, surely this is information that an investor should be made aware of in the company's periodic filings with the SEC so that an investor can make an informed decision about the company.
There is however a more controversial justification for the Iran-related disclosure. Of late, there has been a trend towards requiring public companies to make disclosures that are intended to advance social/political goals.
For example, last year, the SEC adopted new rules requiring public companies to make disclosures about their use of so-called 'conflict minerals'. Conflict minerals are minerals that originate from the Democratic Republic of Congo (DRC) and surrounding areas, a region that has been plagued by armed conflict which in part is funded by the lucrative minerals trade. From a purely financial perspective, its difficult to see how disclosure of whether a company's use of conflict minerals is relevant to the making of an investment decision. In fact, the real goal of conflict mineral disclosure is to "name and shame" companies that procure conflict minerals in order to discourage future procurement and eliminate their indirect contribution to the humanitarian crisis in the DRC region.
Like the conflict minerals rule, the Iran-related disclosure has a "name and shame" component to it. The filing of a prominently titled IRANNOTICE draws attention to the fact that Iran-related disclosure is contained in a company's periodic reports. And as can be seen from the IRANNOTICE filings made to date, many companies are going to great lengths to emphasize that they do not intend to continue Iran-related business activities irrespective of their legality.
That doing business with Iran may be perceived negatively in the marketplace is indicative though of something else. No longer is financial performance the only metric by which a company is to be measured. Relevant in the mix of information when making an investment decision is the extent to which a company exhibits social responsibility.
Put another way, would you be willing to invest in a company that contributes to Iran's quest for a nuclear bomb?