Corporate Transparency

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What is Corporate Transparency?

Corporate Transparency (CT) is a term that reflects the idea that the more information is disclosed about organizational activities in a more timely fashion to a wider public the better it is. The call for more CT is a typical seasonal event. After the Asian economic crisis of the late 1990s and more recently after the collapse of Enron and WorldCom and the burst of the Internet bubble there was a demand for greater transparency. Experience also suggests that drowning investors in more and more data does not make companies more transparent. In fact, the opposite can often be the case.

Some degree of CT is important since it is one of the theoretical conditions required for a free market to be efficient. Too much transparency however could be an obstacle in the creation of competitive advantage.

Background of Corporate Transparency

Some typical considerations around CT include:

• Extending financial and reporting standards and guidelines.

• Increasing penalties for misleading reporting.

• Prohibiting a firm from providing both auditing and management consulting services to the one client.

• Prohibitions on certain remuneration techniques.

• Disclosing senior executive remuneration and dealings in shares.

• Establishing an independent supervisory board to monitor compliance with ethical rules.

Advantages and Disadvantages of Corporate Transparency

Vaccaro and Echeverri mention 3 effects that increased transparency can have and separate them into one negative aspect and two positive effects:

1. Negative: Disclosure to information might lead to problems and foster criticism, while not having that much influence on customers’ behavior. It might be possible that customers even use the information so as to request modifications on for example current social responsibility programs. Firm-customer collaborative programs can thus become another field for conflicts in which the willingness to cooperate will decrease. This in turn will negatively affect social responsibility program initiatives; in this way corporate transparency is a self-defeating phenomenon.
2. Positive: The disclosure of information can also be seen as minimum requirement, because people simply want and need to know what is done with their money; how it is used. Naturally, if an organization asks increased charges from customers for their corporate/social responsibility programs, the customers themselves will want to know how these increased charges are used in particular programs (such as environmental programs)
3. Positive: Higher transparency raises customers’ understanding of environmental activities and social responsibility programs (and its features). Since understanding of those programs and activities is needed before approval can be given, the disclosure of information is required to stimulate environmental friendly activities as well as social responsibility programs.

Source: Vaccaro, A. and D.P. Echeverri. (2010). “Corporate Transparency and Green Management.” Journal of Business Ethics.

The concept is strongly related to other concepts such as Corporate Accountability, Corporate Governance, Corporate Responsibility, Corporate Sustainability and Intangible Assets.

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