Overcoming opacity: the importance of corporate transparency

March 2015  |  FEATURE  |  CORPORATE GOVERNANCE

Financier Worldwide Magazine

Where should corporate transparency begin and where should it end? What information should be disclosed and what should be withheld? Boiled down, what determines the limits of transparency?

Since the 2007-2008 global financial crisis massively shook up the economic status quo, leaving many companies battered and beaten, such questions have become de rigueur; today, corporate transparency is now considered a key watchword throughout the industry, with the result that corporates are now subjected to much greater scrutiny – be it executive compensation, tax obligations, planning strategies, financial statements, facilitation payments, overseas business operations, or controlling interests – by potential stakeholders before transactions are rubber-stamped.

The financial crisis also led to an increased focus on corporate reporting by criminal investigative agencies and regulatory bodies (including the Financial Conduct Authority in the UK and numerous bodies such as the SEC and FINRA in the US) that are supported by legislation such as the US Foreign Corrupt Practices Act (FCPA), the UK Bribery Act, and others. Sanctions including hefty fines, debarment or imprisonment await companies and employees found to have transgressed.

“The fallout from the financial crisis highlighted that trust in certain companies was misplaced,” says Adrian Jenkins, director of brand advisory firm Financial Progression. “Since then, businesses have been asking themselves, are our suppliers really all that they purport to be? Are they actually doing what we have agreed? Are we happy to be associated with them? Are they authentic? Boards are now far more likely to want independent, expert verification to determine whether their trust is well placed.”

With global companies and their subsidiaries now under escalating legal and ethical pressure to conduct their business honestly, and the growing visibility of regulatory authorities suggesting a clear link between a lack of transparency and the potential for corruption, what should companies be doing to get their house in order and improve levels of transparency?

KPMG’s Jose Luis Blasco Vazquez, a partner in the firm’s Spanish branch, discussed the importance of transparency in corporate reporting within the pages of KPMG’s 2013 ‘Survey of Corporate Responsibility Reporting’. He said: “Transparency is a well-recognised principle for effective reporting, and to achieve this, companies must provide stakeholders with a balanced account of progress. However, achieving balanced disclosure can be challenging for companies who may be uncomfortable with admitting mistakes or fear it may expose them to criticism or even legal risk.”

In the 2014 report, ‘Transparency & Trust: Enhancing the Transparency of UK Company Ownership’, Vince Cable, UK Secretary of State for Business, Innovation and Skills, opined: “Transparency and accountability are both essential for trust. We need business, investors and society to have the confidence that comes from accessing the information they need to make the best choices and complete transactions. We also know a lack of transparency, with respect to those who really own and control companies, can allow tax evasion, money laundering and terrorist financing to flourish.

“Business, investors and society must trust a system which holds accountable the minority who transgress, protecting the interests and reputation of the majority who do not. A lack of accountability – even a perception of a lack of accountability – can undermine faith in the legal framework which should protect the innocent majority when things go wrong.”

Stirring the collective conscience

Also driving the greater corporate transparency agenda is the proliferation of non-governmental organisations (NGOs) dedicated to the exposure of corporate malfeasance. Although NGOs can be somewhat difficult to define, in this context, their objective is to clarify obfuscation, uncover the facts and instigate change – overall, a noble orientation.

One such organisation, dedicated to achieving its vision of a world in which “government, business, civil society and the daily lives of people are free of corruption” is Transparency International, a body that strives to “stir the world’s collective conscience and bring about change”.

“We believe that companies have a responsibility to report publicly in a number of areas to demonstrate their commitment to doing business honestly,” says Peter van Veen, director of the Business Integrity Programme at Transparency International UK. “Public reporting allows for increased monitoring by civil society and the public at large, making companies more accountable and putting pressure on the laggards to raise their game. Reporting on anti-corruption programs is key in publicly outlining the company’s commitment to preventing corruption in their operations.”

With a global reach exceeding 100 countries, the work undertaken by Transparency International is bearing fruit, but the ways and means for affecting change can be slow and ponderous, as might be expected. Despite this, the organisation has achieved much during its relatively short existence. It has created international anti-corruption conventions such as the International Aid Transparency Initiative (IATI). It has driven the prosecution of corrupt leaders and the seizure of their illicitly gained riches. It has seen national elections won and lost on the issue of tackling corruption. And it has held companies accountable for their behaviour both at home and abroad.

“Transparency on how a business uses its funds allows for a better understanding of what is driving public decision making, and prevents corruption in public action,” believes Laura Frigenti, vice president of the global development practice at InterAction, the largest alliance of US-based NGOs. “Also, raising fiscal revenues and local financing of development is a critical part of the global development agenda; transparent reporting of revenues and expenditures from the private sector will help bring illegal flows and tax evasion, for example, under control.”

Evaluating the transparency of corporate reporting

Transparency International’s 2014 report ‘Transparency in Corporate Reporting: Assessing the World’s Largest Companies’ (TRAC) sets out its stall early: to evaluate the transparency of corporate reporting by the world’s 124 largest publicly listed companies. Its findings – based on the clarity of the companies’ anti-corruption programs, corporate holdings and financial reporting – reveal that on a scale of 1 to 10, four-fifths of the 124 scored less than 5.

Vigilance of the type exemplified by Transparency International has of course achieved significant results. High-profile cases such as the uncovering of financial skulduggery by Enron and Tyco, as well the more recent revelation – via a leak of 28,000 documents – that more than 300 multinationals secured secret deals from Luxembourg which allowed them to slash their global tax bills whilst doing negligible business in the country, demonstrates that no company is considered too big to be beyond the scope of ‘fair play’ in business.

Those bent on chicanery in business are more than capable of circumventing established rules or finding loopholes. “Companies that conduct business corruptly often use opaque company structures and off-shore jurisdictions that allow business to be conducted with secrecy. Therefore, a lack of transparency makes it easier to conduct business corruptly.”

Transparency: too much of a good thing?

However satisfying it may be to bring law-breaking corporates to book, the question should be asked: where should the limits of disclosure be set so that transparency demands do not morph into agendas that are way too radical, or devolve into a corporate witch-hunt?

“Transparency International does not believe a company can be too transparent in relation to its anti-corruption program, how it organises its business and their holdings, and in its country-by-country financial data,” confirms Mr van Veen. “Our recent TRAC study clearly demonstrated that many of the world’s top companies have a long way to go before they run the risk of ‘over-reporting’.”

Mr Jenkins believes that certain parameters can suggest whether the line on transparency has been crossed. “In commerce, transparency should be encouraged up to the point that it starts to impinge on competitive advantage or the very essence of a brand or product. We’ll know things have gone too far on the day that Coca-Cola reveals its secret recipe in the name of transparency,” he says.

Conclusion: sustaining ethical behaviour and transparency

In the aftermath of the global financial crisis, with companies now duty-bound to continue the process of rebuilding trust in their activities through the avenue of increased corporate transparency, it is essential for corporates to understand the corrosive effects of remaining opaque. “We, along with other NGOs, will keep reminding companies of their obligations to report publicly and we will list the laggards in publications such as the TRAC study,” pledges Mr van Veen. “The law is also catching up with anti-bribery laws, encouraging companies to report what they do in relation to their anti-bribery efforts, upcoming beneficial ownership legislation requiring the ultimate owner of corporate assets to be listed and a number of laws and an EU Directive forcing many companies to report their results on a country by country basis. Standards will continue to increase as a result of this and we will keep pushing for other jurisdictions besides those in the US and EU to adopt similar legislation to ensure a higher, but level playing field for all.”

NGOs will continue to push the agenda for enhanced corporate transparency, according to Ms Frigenti. “NGOs have been strong advocates for this agenda, for making sure that the flow of funds are reported openly, that international standards on accounting and audit are upheld globally, pushing for additional global transparency standards – such as in the extractive industry – and for having mechanisms that guarantee citizens’ oversight. Governments all over the world have adopted more transparent standards because of pressure from public opinion.

“While a lot still needs to be done in the coming years, it’s clear that NGOs have played a critical role in increasing the visibility of this agenda and the public awareness around it. International NGOs have also strengthened the capacity of local NGOs on these topics – making them more effective transparency watchdogs,” she adds.

Whilst the G20 nations are keen to throw their considerable weight behind the idea of central registers – such as the UK’s PSC Register – to enhance global transparency standards and prevent the misuse of legal entities, it remains to be seen whether current levels of corporate transparency will continue to climb in the years to come. Mr Jenkins, for one, is convinced that this will be the case: “Levels of transparency are likely to increase further as both corporations and consumers demand it. The accessibility of information afforded by the internet and the ability to express opinions to a large and varied audience via social media are driving a fundamental change in society.”

What is certain is that integrity is integral to future efforts in this area. Only if corporates implement and sustain ethical behaviour and transparency across the full spectrum of their operations will we continue to see opacity decline and transparency prevail.

© Financier Worldwide

BY

Fraser Tennant