Corporate Truth

The Limits to Transparency

Adrian Henriques

• Publisher: Routledge
• Year: 2013
• Print ISBN: 9781844073900
• eBook ISBN: 9781136568756
• Topic: Business
• Subtopic: Ecology
• Index: Business

In the corporate jungle inhabited by Enrons and WorldComs, a lack of transparency is the root of all scandal. Yet delivering transparency seems immensely difficult, with the oftencompeting interests of shareholders, corporate boards, government regulators and other stakeholders to be taken into account.

Drawing on a vast wealth of real-life examples from the commercial world, this lively business book goes in search of the appropriate limits of transparency. From commercial confidentiality and the ethics of marketing to lobbying and corporate corruption, the author addresses the position, significance and limits of transparency in modern corporate life, working through the dilemmas presented by the increasing calls for transparency. From the secrets of the boardroom to the struggles of NGOs, transparency is a persistent challenge. How much is enough? How much do we need? And how do companies actually report on their impacts?

1

Approaching Transparency

Companies and the potential of transparency

Today’s world is characterized by increasing concentrations of power through economic growth and globalization. We have larger and more dominant companies affecting a greater and greater part of our lives, in both the developed and developing worlds. We also have political processes which, while technically democratic, seem at times to operate in dealings with companies well beyond the margins of propriety.

Over 70 years ago, Berle and Means wrote that:

Corporations have ceased to be merely legal devices through which the private business transactions of individuals may be carried on. Though still much used for this purpose, the corporate form has acquired a much larger significance. The corporation has, in fact, become both a method of property tenure and a means of organizing economic life. Grown to tremendous proportions, there may be said to have evolved a ‘corporate system’ – as there once was a feudal system, – which has attracted to itself a combination of attributes and powers, and has attained a degree of prominence entitling it to be dealt with as a major social institution. […] We are examining this institution probably before it has attained its zenith. Spectacular as its rise has been, every indication seems to be that the system will move forward to proportions which stagger imagination today […] they [management] have placed the community in a position to demand that the modern corporation serve not only the owners […] but all society. (Berle and Means, 1933, p1)

Corporations clearly now have a huge impact on our lives – who does not work for one or buy their products or negotiate their way around their lorries in the street or see their factories or offices? Many of us will also ‘own them’ through pension plans. Yet how many of us feel it possible to control them? Or even perhaps, more modestly, that they are under someone’s control? So they appear to suffer from a democratic deficit. Whether their impact is good or bad, we have little control over them. In remedying that deficit, the first need is for knowledge – for companies to be transparent about what they do and what effect they have on us and the world.

In more recent years we have seen corporations challenging our assumptions and values in many ways: from the placement of soft drinks in schools to the implications of cabinet ministers and political parties receiving funds from companies; from corporate scandals involving the collapse of huge multinationals to the European Commission sponsoring the idea of ‘corporate social responsibility’; from the cautious support of some non-governmental organizations (NGOs) for corporate self-regulation to vigorous attacks on it from other NGOs; from the development of courses on corporate responsibility in universities to the enactment of new legislation.

It may not be a surprise that we hear about most of these issues, which affect almost all of us, from newspapers rather than from companies. And some may feel that there is enough information available already. We have the media: we have newspapers; we have the internet; we have television; we have radio. If we have information coming at us from all sides, is there really a need for more transparency?

The problem with the media is twofold: first, the media for the most part are themselves large companies with powerful interests which can preclude an unvarnished access to truth. And second, the media have to sell their information. Routine misery does not usually constitute a story, so the truth has to be ‘sexed up’. If today, as the sayings go, the media are treacherous friends and reporters the whores of truth, how do we move beyond what stands in for truth? What is to be done and what kind of transparency or truth should we legitimately expect from companies themselves?

To move beyond the media story we need to recognise that transparency cannot be purchased wholesale. One thing it requires is painstaking attention to detail. Yet transparency is not just a technical issue of communication, but a moral issue for us all. The fundamental argument of this book is that transparency is required wherever power is exercised. And where power is abused, transparency is doubly necessary. In the world of public life, a misdeed hidden is twice the crime. To wrongly accept money or gifts for yourself or your family may be bad; but to lie about it subsequently will be far worse. Lack of transparency seriously compounds moral failure.

So transparency should be a central element of any real accountability in corporate life. Yet currently both accountability and transparency fall far short of what most of us might like to see. In the last decade, there has been a big rise in the number of corporate reports produced which describe how companies are tackling social and environmental issues. While this counts towards an increase in transparency, the quality of many of these reports is not encouraging. As a result there is a continuing decline in confidence and trust in the corporate sector from an already low level. In any case, transparency alone is not enough. For full accountability, action to improve corporate impacts is also necessary, as well as transparency about them.

Corporations do have positive and beneficial effects. But they also have negative and detrimental effects. Transparency is required for them all. It is not helpful to attempt to set off one against the other. Consider the building of a beautiful and functional building, with negligible environmental impacts: this is positive. But if the building process led directly to the loss of a life, how can this be taken into account? Does it diminish the positive effects in some way? Should transparency require that all effects are laid out for inspection?

Companies themselves are much more enthusiastic about being transparent about their positive impacts, but rather more reluctant when it comes to the negative ones – particularly when the bad effects are intimately connected with the good ones. As a result, much of this book has to focus on negative impacts and the reasons why it is difficult to be transparent about the negative.

Even if it is accepted that full transparency is central to ethical behaviour, there is still much confusion over how far to go. There is uncertainty about the significance of current reporting practices and doubt about what transparency should actually mean in practical situations. In the end, what is it really possible for companies to say about themselves? Is the demand for full transparency simply unrealistic, or is transparency a necessary part of what companies will have to do?

Perhaps there is too much at stake for companies to be truthful and transparent. For some, the term ‘corporate truth’ will be an oxymoron. Companies are not to be believed as they are immensely powerful. Such sceptics may agree with the approach attributed to Michael Moore that ‘you should just start from the position that anyone important is lying. Force them to tell the truth. Trust, but verify.’

Today, in the face of unjust wars, ethnic cleansing, communities forced off their land and environmental degradation, transparency seems almost too modest a demand. Clearly transparency is not remotely the final remedy for the ills of the world – but it is a first step. Transparency is necessary for those wronged so that they may claim some redress, or at least an acknowledgement of their pain. Without transparency, the task of those wronged becomes far harder. And if it is too hard, such injustices are far more likely to have a violent resolution.

For the powerful, transparency is necessary so that they can release their grip on themselves and allow themselves to change, which is otherwise psychologically hard to do. But transparency is difficult to deliver for governments, companies and other powerful groups, as it seems to require moral perfection in advance. Revealing poor performance feels humiliating. What politician can admit an error without already having solved the problem?

The message of this book is that it does not have to be like this. Transparency does indeed lead to a moral obligation to improve performance. Yet the courage to reveal faults should be received with a period of grace in which they may be addressed.

Transparency for shareholders

It is true that from the shareholder point of view transparency may affect reputation and profits positively or negatively in the short term. In the longer term it is much more likely to put their true prospects on a firmer footing, yet this does not mean that it is possible to develop a general business case for transparency. If it were possible to set out a general business case for transparency (or good social performance in general), someone would have done it by now and companies would just be getting on with delivering it. So the fact that it has not happened is significant and suggests that there is no general business case for transparency.

However, there is no business case for transparency in the same way that there is no business case for proper financial accounting or for honest advertising – or even for mining diamonds. Even to ask the question in this way shows a poor understanding of how business cases work, as I have argued elsewhere (Henriques, 2005b). Business cases are normally constructed at a much more precise and detailed level than this. It is doubtful if there is a ‘business case’ for anything in such general terms, except making money!

There is, of course, a general theoretical argument that greater transparency must lead to more efficient markets. This follows on from basic economic theory that markets perform better when information about products is available and there is also symmetry in the information available to producers and consumers. However, it is not possible to discover from this general theory what the particular costs and benefits of practising transparency for a given company are likely to be. It must also be acknowledged that some instances of transparency will have adverse effects on particular companies. This is consistent with the general argument about economic efficiency, which does not imply the preservation of specific companies but is a claim about the workings of a market as a whole.

There are some business arguments for good social performance in general. Over the past 30 years some 127 studies have been undertaken on the value of social performance to business, involving companies from South Africa to the US. The main finding has been that:

a clear signal emerges from these 127 studies. A simple compilation of the findings suggests there is a positive association, and certainly very little evidence of a negative association, between a company’s social performance and its financial performance. (Margolis and Walsh, 2003)

While it is possible to make some serious methodological criticisms of some of the underlying studies, their consistency is impressive. For a given business, however, they do not guarantee success. After all, quite consistently with all these studies, some businesses will have attempted to be responsible and enjoyed no financial benefit at all. And, of course, transparency is not the same thing as ‘good social performance in general’.

More fundamentally, the argument for transparency is a moral one, not a financial one. The less transparent business as a whole is, the less anyone might want to live in the world which resulted. This book argues that transparency is part of the moral baseline for business conduct, rather than an optional extra to be adopted when it doesn’t adversely affect the bottom line. To ask whether there is a ‘business case for transparency’ suggests that it might be legitimate to place shareholder interests above a moral imperative – which is ethically absurd. After all, if there were a business case for deception and fraud, would that make it a good idea? Down that road Enron lies.

Having said that, there are different ways of being transparent, some more expensive than others. And there may also be specific business advantages for being transparent, say, about the impact a company’s new construction site may have on the local community, so that there is less opposition, or even support, for the project over its lifetime. It is clearly a good idea to make the best of transparency.

One area in which there actually is a business case for transparency is where ‘transparency’ means the absence of corruption, which is discussed in Chapter 12. Since corruption is an economic phenomenon – clearly with attendant social and environmental consequences – it is not surprising that it has fairly direct adverse economic consequences. Some of these are spelt out in Chapter 12.

It is also possible to suggest that there are, in general, business advantages for transparency over secrecy and deception. These would include greater trust, greater stakeholder understanding and lower transaction costs such as legal fees. What is not possible is to quantify such advantages for the general case – or to take proper account of the attendant costs. Yet often the greatest obstacle to transparency is not really financial, but a matter of personal pride and embarrassment. While this can be made to appear like a matter of corporate reputation, it is more usually a matter of the personal survival of a number of individuals.

About this book

Transparency is ‘a good thing’ – that is the basic premise of this book. But how far can you or should you go in being transparent? And in particular, what transparency should we expect of companies? What transparency do we actually get from companies? And what are the limits of transparency?

The aim of this book is therefore to describe the nature and limits of corporate transparency, how far it is possible for companies to tell the truth, how far they should be required to tell the truth and when they might have a right to keep information secret. Its purpose is not to pass some kind of overall moral judgement on companies in relation to their stakeholders, which would be futile. There are three main themes:

1	A description and assessment of the current transparency practices of companies. This includes their reporting, both financial and non-financial, and the numerous other ways in which companies reveal themselves. It also describes the practical challenges and issues which drive companies to behave as they do.
2	An exploration of the nature of transparency itself and particularly its moral character. The basic claim is that wherever power is exercised, there should be transparency.
3	An unravelling of the complex nature of companies and their relationships to their stakeholders. Companies can be seen both as actors in their own right and also as mechanisms for reconciling the often conflicting demands of stakeholders. This reconciliation reflects the balance of power between stakeholders and so is important to an understanding both of the moral nature of transparency and also of some of the mechanisms which companies use to avoid transparency.

The first part of this book assesses the current practice of transparency by companies, particularly in the West. Chapter 2 presents two case studies of the practical difficulties facing companies trying to be transparent. The issues raised include the personal investment of company staff in addressing corporate transparency. These include dealing with personal shame, corporate pride and the desire to be perfect in the face of relentless commercial pressures, all of which compromise the ability to be transparent. They also make clear that simply saying the word ‘transparency’ is not enough.

Chapter 3 attempts to clarify the multitude of concepts and buzzwords, such as corporate social responsibility (CSR) and ethics, which sometimes confuse this whole field. It argues that the impacts of power relationships provide the foundation for the moral case for transparency. The chapter also sets out some practical ways to assess the truth of companies and their behaviour.

In an attempt to reveal ‘the truth’ of companies, Chapter 4 examines what companies really are and how they are structured. The chapter discusses the idea of companies as a legal fiction and the analogy of companies as ‘persons’, showing how that peculiar analogy informs their functioning in many different ways. It argues that we may even have to accord companies some degree of ‘personality’ if we are to expect them to behave ethically.

Chapter 5 examines the field of human rights and the competing rights brought into play to demand, and to refuse, transparency. The language of human rights provides an authoritative framework to set out the moral basis of transparency in some detail. The chapter explores the relationship between formal human rights and the shifting legal basis for transparency. It also reveals the surprising extent to which companies themselves claim ‘human’ rights to justify their activities.

Chapter 6 turns to the role of...

Table of contents

• Front Cover
• Title Page
• Copyright
• Contents
• Boxes, figures and tables
• Acknowledgements
• Acronyms and abbreviations
• Dedication
• 1 Approaching Transparency
• 2 Case Studies
• 3 Coming to Terms with Transparency
• 4 What is a Company, Exactly?
• 5 The Right Perspective
• 6 The Ethics of Personal Transparency
• 7 Reporting: Talking Your Walk
• 8 Reporting Challenges
• 9 The Story of the Media and the Honest Truth
• 10 The Certainty of Tax
• 11 The Crisis in Confidence
• 12 Corruption
• 13 Lobbying and Complicity
• 14 A Future for Integrity
• Bibliography
• Index