Corporate transparency describes the extent to which a corporation's actions are observable by outsiders. This is a consequence of regulation, local norms, and the set of information, privacy, and business policies concerning corporate decision-making and operations openness to employees, stakeholders, shareholders and the general public. From the perspective of outsiders, transparency can be defined simply as the perceived quality of intentionally shared information from the corporation. Recent research suggests there are three primary dimensions of corporate transparency: information disclosure, clarity, and accuracy. To increment transparency, corporations infuse greater disclosure, clarity, and accuracy into their communications with stakeholders. For example, governance decisions to voluntarily share information related to the firm's ecological impact with environmental activists indicate disclosure; decisions to actively limit the use of

technical terminology Jargon is the specialized terminology associated with a particular field or area of activity. Jargon is normally employed in a particular communicative context and may not be well understood outside that context. The context is usually a partic ...

fine print Fine print, small print, or mouseprint is less noticeable print smaller than the more obvious larger print it accompanies that advertises or otherwise describes or partially describes a commercial product or service. The larger print that is us ...

, or complicated mathematical notations in the firm's correspondence with suppliers and customers indicate clarity; and decisions to not bias, embellish, or otherwise distort known facts in the firm's communications with investors indicate accuracy. The ''strategic'' management of transparency, therefore, involves intentional modifications in disclosure, clarity, and accuracy to accomplish the firm's objectives. High levels of corporate transparency can have positive impact on companies. It is known that high levels of corporate transparency improve investment efficiency and

resource allocation In economics, resource allocation is the assignment of available resources to various uses. In the context of an entire economy, resources can be allocated by various means, such as markets, or planning. In project management, resource allocati ...

. Companies with great corporate transparency are expected to enjoy lower cost of external financing resulting in more opportunities for growth. Next, transparency can lead to better reflection of company specifications in the stock prices and greater extent of monitoring by outside investors. Internally, corporate transparency has been shown to increase employee trust in the organization. Among other benefits of corporate transparency are lower

transaction costs In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a market. Oliver E. Williamson defines transaction costs as the costs of running an economic system of companies, and unlike pro ...

and greater stock liquidity associated with lower cost of capital which in return correlates with an increase in the firm value. On the other hand, low levels of corporate transparency are linked with

moral hazard In economics, a moral hazard is a situation where an economic actor has an incentive to increase its exposure to risk because it does not bear the full costs of that risk. For example, when a corporation is insured, it may take on higher risk ...

extracting firm resources for private benefit. This causes

principal–agent problem The principal–agent problem refers to the conflict in interests and priorities that arises when one person or entity (the "agent") takes actions on behalf of another person or entity (the " principal"). The problem worsens when there is a gre ...

and worsens firm performance.

Standard & Poor's S&P Global Ratings (previously Standard & Poor's and informally known as S&P) is an American credit rating agency (CRA) and a division of S&P Global that publishes financial research and analysis on stocks, bonds, and commodities. S&P is con ...

has included a definition of corporate transparency in its Gamma methodology aimed at analysis and assessment of

corporate governance Corporate governance is defined, described or delineated in diverse ways, depending on the writer's purpose. Writers focused on a disciplinary interest or context (such as accounting, finance, law, or management) often adopt narrow definitions ...

. As a part of this work, Standard & Poor's Governance Services publishes a transparency index which calculates the average score for the largest public companies in various countries.

Customer support transparency

Corporations may be transparent to investors, the public at large, and to customers. Opening up the customer support channels may mean using a feedback tool which allows users to publicly vote on new developments, having an open

internet forum An Internet forum, or message board, is an online discussion site where people can hold conversations in the form of posted messages. They differ from chat rooms in that messages are often longer than one line of text, and are at least temporar ...

, or actively responding to social media questions.

European Union

Standards concerning corporate transparency in

European Union The European Union (EU) is a supranational political and economic union of member states that are located primarily in Europe. The union has a total area of and an estimated total population of about 447million. The EU has often been des ...

are scrutinized under Directive 2014/95/EU, referred to as Non-Financial Reporting Directive (NFRD). Under this legislation companies have to disclose information regarding employed practices related to environmental protection, social responsibility and treatment of employees, respect for human rights, anti-corruption and bribery and diversity on company boards (in terms of age, gender, educational and professional background). By 2018, companies are required to include non-financial statements in their annual reports. It was found that 60% companies disclose their non-financial information in their annual reports in contrast to 40% favoring a separate document in 2019. The ones with obligation to publish such information are large public-interest companies with more than 500 employees, which amounts to approximately 6000 companies across European Union. Companies enjoy great flexibility how to disclose relevant information as they can either use international, European or national guidelines. For instance, they can use the

UN Global Compact The United Nations Global Compact is a non-binding United Nations pact to encourage businesses and firms worldwide to adopt sustainable and socially responsible policies, and to report on their implementation. The UN Global Compact is a princi ...

, the OECD guidelines for multinational enterprises or ISO 26000. Despite enclosed suggestions for guidelines, none is referred to by more than 10% of companies. To better understand the situation, companies are expected to describe their business model in relation to sustainability and strategic risks. This might not be reality as only nearly a half of companies mentioned at least one strategic risk related to sustainability and only 7.2% further described how those risks were being addressed in 2019. The most frequently listed risks where related to climate change (24.9%), environmental challenges (23.9%) and labour issues (23.8%). As of 20 February 2020, the

European Commission The European Commission (EC) is the executive of the European Union (EU). It operates as a cabinet government, with 27 members of the Commission (informally known as "Commissioners") headed by a President. It includes an administrative body o ...

launched a public consultation on the review of the NFRD.

China

In 2008, researchers found that value maximization might not be the ultimate goal of Chinese listed companies as a result of the Chinese government being the major shareholder of state-owned enterprises (SOE). Comparing listed companies in different markets, it seems that those with sound corporate governance practices tend to showcase relatively good performance, which was in contrast to the situation in the Chinese market. It was believed that implementation of new reforms would result in higher corporate transparency of Chinese firms. In 2002, the China Securities Regulatory Commission (CSRC) issued a code of corporate governance affecting practices and structures employed by Chinese firms. One year later, the CSRC allowed qualified foreign

institutional investors An institutional investor is an entity which pools money to purchase securities, real property, and other investment assets or originate loans. Institutional investors include commercial banks, central banks, credit unions, government-linke ...

(QFII) to enter the Chinese stock market. It was found that QFIIs have greater control over state shareholders in state-owned companies than domestic mutual funds and are more prone to act as unbiased monitoring body. Institutional ownership has positive effect on both, corporate governance transparency and accounting information transparency. However, there is not sufficient amount of evidence to support the claim that higher levels of corporate transparency lead to higher levels of institutional ownership in China.

Taiwan

Corporate transparency in Taiwan is assessed using Information Disclosure and Transparency Ranking System (IDTRS) launched in 2003 by Securities and Futures Institute. Whole process is on voluntary basis with evaluation executed annually in two-stage process where the ranking committee and companies with possibility of expressing their opinions participate.

Capital markets A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers ...

in Taiwan evolved over the recent decades from ones with insufficient protection of shareholders and stock market instability to markets with plausible transparency practices. Establishing IDTRS has increased the level of corporate transparency and information disclosure by Taiwanese companies. Their motivation is driven by the likelihood of their transparency ranking being made public and possible consequences of such action. Disclosing more information mediates

information asymmetry In contract theory and economics, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. Information asymmetry creates an imbalance of power in transactions, which ca ...

, prevents

and can lead to higher

liquidity Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity, the ease with which an asset can be sold * Accounting liquidity, the ability to meet cash obligations when due * Liq ...

and lower

cost of capital In economics and accounting, the cost of capital is the cost of a company's funds (both debt and equity), or from an investor's point of view is "the required rate of return on a portfolio company's existing securities". It is used to evaluate new ...

. Ultimately, IDTRS has been successful in stimulating companies to disclose more information, increasing firm value and improving quality of forecasts of firm's performance in stock market.

Emerging countries

Countries with multi-party legislatures are associated with higher levels of corporate transparency. Furthermore, when a country transitions to multi-party legislature, opacity is expected to decrease. Comparing democracies and authoritarian regimes, we can expect that firms are more transparent in democratic countries. Levels of corporate transparency are decreasing as we go from democracies to countries with semi-competitive authoritarian regimes. Lastly, firms in countries with non-competitive authoritarian regimes display the greatest opacity. When a regime changes from non-competitive authoritarian one to semi-competitive, corporate transparency tends to improve. However, this trend does not hold if a country transitions from a semi-competitive authoritarian regime to democracy.

References

External links

Transparency International report on corporate transparency

GAMMA: An Introduction to Corporate Governance Scoring

Journal of accounting research

Corporate transparency

CTI Index

CTIScorecard2006

{{DEFAULTSORT:Corporate Transparency Corporate governance