SEC mandates CD&As written in plain English
Writing this column is a bit like being caught in a time warp in an episode of Star Trek. You’ll be reading it in August, even though I wrote it in late June. You’ll be reading this in my future, but, when you read it in the future, you’ll be reading my past. Get it?
I mention this because I was lucky enough to attend the Society of Corporate Secretaries’ annual spring meeting with the SEC staff in Washington, DC. While the conversations were very intelligent and focused, there was also a sense that people were letting their hair down. Everyone from both the Society and the SEC were entirely polite, but at the same time, they were completely frank. The meeting bore a lot of good stuff.
The subject of plain English came up in the context of the new compensation-disclosure rules. As companies filed their disclosures this spring, SEC chairman Christopher Cox had some comments on the lack of plain English that was contained in them. People at the meeting seemed a little perplexed – wasn’t the issue of plain English settled many years ago? Aren’t the government and its agencies using it every day? Don’t most of the folks who have to file with those agencies also use it every day? Hadn’t this been settled in the past, and why was it still a problem in our present? Seemed like one of those Star Trek time warps to me.
As was widely reported in a variety of different news outlets at the commencement of April, Cox gave speeches at the University of Southern California and Georgetown University, saying, ‘Based on the early returns, the average compensation disclosure and analysis section isn’t anywhere close to plain English.’ Cox also told the audience: ‘In fact, according to objective third-party testing, most of it’s as tough to read as a PhD dissertation.’
Who was the third party, you might wonder? It turns out that the chairman was referring to a March 2007 study of
40 companies’ CD&A by Clarity! Communications, a Toronto-based consulting firm. The study used three popular academic readability tests; the Gunning-Fog Index, the Flesch Reading Ease Test and the Flesch-Kincaid Test to see if firms’ disclosures are understandable by the average American investor. (Dr Rudolf Flesch was ‘Da Man’ in the plain English arena.)
Critics respond that the tests rely on inflexible standards such as the average number of syllables per word and average number of words in a sentence. CD&A reports tend to exceed recommended readability levels as a four-syllable word like ‘compensation’ automatically ‘dings’ the plain-English meter, where a word like ‘pay’ would not. Therefore, writing the phrase ‘chief executive officer’ will hurt when compared to using the more pungent term ‘boss.’
To get a little more rigorous in our linguistic benchmarking, here are the readability guidelines under the Flesch Reading Ease Test and the Flesch-Kincaid Test: Scores of 90-100 are considered easily understandable by an average 5th grader. Scores of 60-70 work for 8th and 9th grade students, and passages within the 0-30 range are best left to college graduates. (If you want more information on this, Google ‘Flesch’ and you’ll get tons of info, of varying degrees of reliability, along with some lovely tidbits about PGA pro Steve Flesch, who has absolutely nothing to do with this plain English mess.) Several of the websites that discuss the Flesch Tests recommend 60-70 as a good level of readability.
Now that you have a solid idea of how the scoring works, let’s play the readability game. A statement such as, ‘Compensation for senior executives included an annual base salary as well as restricted stock options’ doesn’t seem like a big deal, does it? And it’s probably too simple to be of use in disclosing what’s going on in most companies, right? Well, it only scored a 16.7 for Reading Ease, and was considered suitable for 12th grade readers. That’s not exactly what the Plain English Police (PEP) had in mind.
(In case you’re wondering, this column, up to this point, scores a 50.4 and a 10.5 grade level. Oops, looks like I missed the readability standard. I apologize if you are having a hard time following my prose. And I apologize that I don’t have the time to rewrite it in words of one syllable, but I have to escape – here come the PEP.)
Let’s try again, try to get something a little more readable according to the good Dr Flesch: ‘The boss is paid with cash and more than cash.’ How does that do in the readability game? It scores 100, and the grade level is 0.1, meaning a starting reader in the early months of 1st grade could handle it.
Does anyone think this kind of first grade-primer writing really helps investors? As they say in the Bronx: Puh-leeeeease.
How can things like bonuses, deferred pay, vesting schedules, stock options, pay-for-performance benchmarks and everyone’s favorite: perquisites, be discussed so that the average 8th grader is able to understand it? (Given the confusion these topics generate in the conversations of a bunch of lawyers, is that even a faint possibility?)
A quick look at some of the SEC releases shows that the commission doesn’t always do well by the standards its chairman is touting. The June 13 press release entitled ‘SEC votes on regulation SHO amendments and proposals; also votes to eliminate Tick test’ struck me as pretty clear. It deals with some complicated issues, but I think I understood it, and I didn’t even have to break a sweat. However, it did flunk the Flesch Reading Ease Test with a score of 18.7 and a 12th grade level. It communicated the message in the plainest English it could, but according to those third-party tests, it wasn’t plain enough.
While writing this column I quickly ran a few SEC releases and speeches (which, of course, are written to be spoken but also to be read after the speech) and found nothing that scored higher than mid-30s, far short of the 60-70 range. Don’t get me wrong, I happen to think most of the SEC writing is fine. Maybe I’m delusional, but I’m pretty sure that I understand what the folks over there are talking about, and I do it without the benefit of a law school education or consulting a dictionary. (To be completely honest, my lips sometimes get tired from reading out loud. ...) But the good Dr Flesch would flunk them for their failure to provide written discourse in plain English. If you’re not communicating with the 8th graders of the world, you’re not communicating.
That last sentence clocked in at 41.5, almost 20 points below the target range, and it’s almost at an 11th grade level, if you can believe that. Let me try that again:
Talk well to the 8th graders of the world, or do not talk at all. Much better. Score: 100, Grade Level: 2.8, or just short of 3rd grade. Now that’s communicating. Sorry, ‘communicating’ has four syllables. Try again: Now that’s talking.
