Corporate Transparency

MGMT-1120 Introduction to Business

CASE STUDY 2

Corporate Transparency: Who Gets to Decide?

You may have heard the Louis D. Brandeis quote, “Sunlight is said to be the best

of disinfectants.” This adage eloquently captures the basic tenet of corporate

transparency: the more open a company is about its operations, the less likely it is

to engage in unfair (or illegal) business practices. In the wake of the global

financial crisis, a number of large businesses moved toward corporate transparency

as a sign of good faith for investors, governments, and customers alike. Still, the

majority of large companies have resisted calls for greater transparency, opting to

protect their private operational information. They may not be able to resist for

much longer, however, as new legislation looks to impose mandatory transparency

on large corporations—whether they like it or not.

In April 2013, the European Union’s European Commission unveiled a new law

requiring every EU company with more than 500 employees to publish an annual

report containing information such as anti-corruption and bribery measures,

business areas of high risk, environmental impact records, boardroom policies, and

other data that had previously been regarded as proprietary information. Affecting

an estimated 18,000 businesses at a cost of roughly $1,600 to $6,300 per company

per year, the measure would compel the EU’s largest corporations to divulge

information that could expose corruption, but also, reveal those companies’ hard-

won trade secrets and competitive advantages.

Few would argue that some degree of corporate transparency is beneficial to the

business environment and society as a whole. However, the line becomes

somewhat less clear when discussing the extent to which businesses should be

forced to divulge their operational information. Even if a business favors

transparency, it may prefer to become more transparent on its own terms, and in its

own time. Should governments be allowed to enforce transparency laws, even if

that means businesses might be giving their keys to success to their competitors?

Or should businesses have the opportunity to protect their private data—even if

that data might be used for illicit purposes?

Proponents of the EU law argue that it signifies a step forward for the

European business community:

• Corporate transparency not only dissuades companies from becoming corrupt—it

also provides them a medium through which they can communicate their positive

business practices and contributions to society. Keeping a channel open only

serves to benefit corporations that do not engage in illicit business practices.

• According to EU Commissioner Michel Barnier, transparency generates greater

profits for the corporations that embrace it: “Companies that already publish

information on their financial and non-financial performances take a longer term

perspective in their decision-making. They have lower financing costs, attract and

retain talented employees, and ultimately are more successful.”

• Jana Mittermaier, director of advocacy group Transparency International, argues

that the new rules would help raise awareness about corruption in the European

Union’s private sector. Consumers and investors deserve to know how businesses

operate—even if those businesses are not willing to divulge that information on

their own. This not only produces a better-educated public, it also protects against

economic crises.

Opponents of the EU law, however, argue that it will do more harm than

good:

• The European businesses sector has flatly rejected transparency; less than 6 percent

of all EU businesses willingly engage in non-financial operational reporting. In

Germany alone, four major federations—the German Federation of Employers'

Associations, the German Federation of Industry, the Association of German

Chambers of Commerce and Industry, and the Federation of German Craft

Trades—have vowed to fight the new legislation.

• Enforced transparency destroys a company’s ability to communicate on its own

terms. Harvard Business Review correspondent Dave Balter suggests, “Just before

tearing open the corporate veil, most companies blush. Then blink. They think:

What if we screw up? What if profits shrink? What if we have layoffs?” A

miscommunicated internal setback can do potential damage to a company, and

thereby to its investors and the economy as a whole.

• Some argue that the new regulation does not go far enough to create a transparent

business environment. According to Jerome Chaplier of the European Coalition for

Corporate Justice, “Companies will only identify and disclose the risks that affect

their economic performance, and won’t take responsibility for the impacts they

have on the people and the planet.” Because it is based on self-reporting, the new

legislation allows companies to manipulate the tone of their reports.

You Decide:

1. Do you think the law requiring Europe’s largest businesses to be more

transparent is a good thing or a bad thing? Defend your position using

pertinent examples from the text. What types of business

communication—if any—should be regulated by the government?

2. Describe a business crisis from recent years during which better

communication would have aided the corporation(s) in question. Could

enforced transparency have prevented the setback—or would it have

made it worse? If you were in control of communication during the

crisis, how would you address your investors?

3. Can you think of any additional reasons a person might support or

oppose a law enforcing corporate transparency in America? Brainstorm

an argument not covered in the text for each side of the debate.

Consider factors that affect your own life, the economic climate, and

business as a whole. Does either of your new arguments change your

opinion on the matter?

Sources: “German Industry Rejects EU Call for Corporate Transparency,” DW

website, http://www.dw.de/german-industry-rejects-eu-call-for-corporate-

transparency/a-16750321; “EU Seeks More Corporate Transparency,” EU

Observer website, http://euobserver.com/economic/119827; “Justice Louis D.

Brandeis,” Brandeis University website,

http://www.brandeis.edu/legacyfund/bio.html; “The Strategic Benefits of

Transparency,” by Dave Balter, Harvard Business Review website,

http://blogs.hbr.org/cs/2007/11/the_strategic_benefits_of_tran.html.