Why the World Needs More Corporate Transparency
There are powerful social, environmental and economic implications associated with transparency. Corporations are not the only ones that should be concerned about transparency; governments, employees, consumers and the whole of civil society all have a stake. Transparency is about open access to an organization’s activities and this has implications for everything from climate change to the bottom line.
Starbuck's CEO Howard Schultz effectively communicated the importance of transparency when he said:
"I think the currency of leadership is transparency. You've got to be truthful. I don't think you should be vulnerable every day, but there are moments where you've got to share your soul and conscience with people and show them who you are, and not be afraid of it."
Transparency is a trend that has been gaining momentum in recent years and in 2016 it has emerged as a critical success factor. Corporate disclosure is a key component of sustainability and a salient element in B Corporations. Transparency is imperative that is now being integrated into university curriculums.
As explained by Dr. Chet Chaffee, the Director of Sustainability at FirstCarbon Solutions:
"Many leading global companies today are embracing sustainability practices as they understand that this method is not simply a reporting exercise; they realize that full and transparent disclosure to all stakeholders is crucial for success."
As reviewed in an Economist article, factors contributing to the rise of transparency include greater demands for corporate accountability from governments, investigative journalism, and NGO activism from organizations like Transparency International (TI) and Global Witness.
We have come a long way in the past two decades. Ben Elers of TI described the journey as follows: “Twenty years ago our work seemed an impossible dream. Now it’s coming true.”
“Corporate initiatives around supply chain transparency have become just as essential as a brand’s logo, mission statement and value proposition,”
Sustainability, including transparency, has been shown to be profitable. Investors, employees and other businesses are attracted to firms that engage in disclosure reporting and this contributes to the health and financial well-being of an organization. Corporations are becoming more transparent because they want to keep up with the progressive efforts of their competition and position themselves to prosper going forward. As quoted in the Economist article, George Serafeim of Harvard Business School said, "there is evidence that it boosts the share price by signaling that management is tackling hidden risks."
Transparency may be among the best tools we have to advance climate action. Making climate efforts public enhances a corporation's self-awareness and invites public scrutiny. This can contribute to corporate mitigation and adaptation efforts. These efforts are aided by reporting initiatives like CDP’s Climate Performance Leadership Index (CPLI).
Transparency can also advance sustainable development. This is the view of many organizations including the International Institute for Environment and Development (IIED).
“G8 leaders need to see transparency not as an end-goal, but as the means to an end. Transparency needs to increase accountability in natural resource management. It needs to empower local people affected by resource extraction projects,” said the IIED’s Dr Emma Wilson. “People affected by resource extraction projects or land investments need to be able to access the information that the various transparency initiatives gather.”
One of the factors driving sustainability and corporate disclosure is consumer awareness. Businesses are also coming to the realization that transparency is an essential part of forging enduring ties with consumers. Consumers are well informed and they are demanding ever more information. More knowledge translates into more responsible buying behaviors. Consumers armed with accurate information have the power to change the world through their patronage, or lack thereof. Consumers are also exerting pressure on companies directly and they also influence stockholders to table resolutions.
Tax evasion and corruption
Transparency combats the kind of secrecy that facilitates tax evasion. The tangled web of corporate subsidiaries makes it difficult to identify tax havens. By aggregating their accounts, corporations commonly obscure their tax avoidance. Country by country reporting would expose this kind of shell game that is sadly altogether common. Transparency is also bulwark against excess and greed. The gaze of watchful eyes illuminates the shadows in which corruption and corporate malfeasance can grow.
Nowhere is corruption more rampant than in the extractive industries. However, even here we are seeing signs of change. More than 50 countries and 90 companies have already signed on to the Extractive Industries Transparency Initiative's (EITI) reporting guidelines. One of the companies that have backed the EITI initiative is Norway’s Statoil. Hege Marie Norheim, head of Statoil sustainability efforts, argues that disclosure is “better for the company’s long-term stability”.
Getting on-board affords a host of benefits while failing to engage entertains a range of risks. Being opaque makes an organization vulnerable to both reputational and financial risks. Leaks of information are one of the risks associated with opacity. In the digital age, containing these leaks is an impossible challenge. Leaks are part of a trend that is growing alongside disclosure. As reported in the Economist article, employees now, "see it as their civic duty to leak information if their employer is shady and secretive."
Governments are not only a crucial part of the push for transparency they are also a pivotal source of resistance. As explained by George Cazenove of Tullow Oil, “it’s more often the governments than the companies that want the terms kept quiet.” For corporate disclosure to truly come into its own, governments must also be transparent. This needs to be a global effort. In the absence of a truly global initiative, such reporting could offer unfair short term advantages to companies that do not disclose.
Conceptually, the governments of wealthy nations are onboard, as revealed by the G20's support of central registers. Countries like Britain and Denmark have made it known that their registers will be publicly accessible. While we are seeing movement from governments, there is much work that remains to be done.
Avoiding data fatigue
Data can enable companies, investors and the public to make better decisions. However, too much data can be just as problematic as too little. Corporate disclosures need to focus on relevant clusters of data so that less than honorable activities are discernable and not buried under a mountain of information.
There are also justified concerns that demanding too much data from companies can put unnecessary demands on corporations that do not ultimately contribute to the public good. As explained by the Global Reporting Initiative's (GRI) Michael Meehan, large companies have “data fatigue”. Reporting every single data point can be counterproductive to global transparency initiatives.
While open access to raw data is useful, pertinent constellations of data and a review of relevant interrelationships between these clusters of data are needed. This is the type of work we are seeing from organizations like OpenCorporates. They have done a good job of data-scraping to cut through massive amounts of information to collate important data.
On its own, transparency is not a panacea, but if widely implemented, it could significantly contribute to our collective social, environmental and economic betterment. Consider what detailed disclosure could have achieved had they been implemented decades ago.
Transparency could have prevented the kind of tax dodging revealed in the Panama papers. Even more importantly, corporate disclosure could have revealed the relationship between fossil fuels and climate change. Our world would be radically better today if Exxon's insights into the relationship between climate change and fossil fuels had been made public forty years ago. On its own, it may have been enough to attenuate the climate crisis. At the very least, we may have engaged in climate action much sooner.
As explained in the Economist article:
"The world is still full of murky shell companies. But the direction of travel is clear. In tax and contract transparency, there is general acceptance that change is coming, like it or not."
Today's savvy consumers and a growing number of corporations want transparency and tomorrow’s consumers will expect it. The future is calling corporations to weave transparency into their DNA.
Richard Matthews is a consultant, eco-entrepreneur, green investor and author of numerous articles on sustainable positioning, eco-economics and enviro-politics. He is the owner of The Green Market Oracle, a leading sustainable business site and one of the Web’s most comprehensive resources on the business of the environment. Find The Green Market on Facebook and follow The Green Market’s twitter feed.
Image credit: FUMIGRAPHIK-Photography, courtesy flickr