Let’s be clear: The need for greater corporate transparency

Linnea Texin argues that companies can only regain stakeholders’ trust by becoming transparent throughout their organizations.

Transparency is the next frontier of corporate responsibility.  Across industries, companies can no longer expect stakeholders to trust corporate assurances regarding responsible business.  Rather, there is growing pressure for companies to share the information necessary to allow stakeholders to decide on their own. As more and more investors ask for it, consumers expect it, and activists demand it, a commitment to genuine transparency becomes increasingly integral to businesses’ long-term viability.

To be considered truly transparent, companies need to make information easily available and present it in a way that people can understand.  Relevant information that is buried in a brochure or written in complex, technical language will no longer satisfy requests for greater disclosure.

Specifically, stakeholders want businesses to answer two questions:

• Practice: How do you operate?
• Strategy: How do you make decisions?

Practice

Many companies have a black box around their operations.  As such, stakeholders cannot understand the wider impacts of the products and services that the business offers.  Without the full picture, stakeholders are left to make assumptions about whether companies are operating in a truly responsible way.  This opaqueness can lead to larger questions about the company’s long-term viability.  Stakeholders want a firm commitment that products are manufactured and delivered ethically, not only because it is “the right thing to do,” but because it signals that the company is forward-looking and has robust risk mitigation processes in place.

For example, there is growing pressure for supply chain traceability, whereby stakeholders can gain better visibility into the journey of products through the value chain and the corresponding environmental and social impact.  This interest in transparency goes beyond the niche target demographic for free-trade coffee and organic products and extends to the broader public.

After the recent Bangladeshi factory collapses, the media did not focus on the list of building owners’ names, but instead emphasized which retailers sourced from these factories.   The press was responding to the public’s desire for transparency regarding the origins of the products they buy and services they use.  In response to this news, associated companies (e.g. Walmart, Gap) experienced global protests demanding that they sign a major agreement to improve Bangladeshi factory conditions.  This agreement serves to not only protect workers’ rights but also provide stakeholders with greater confidence in retailers’ supply chain responsibility.

Strategy

The pursuit of greater transparency does not mean that companies must share every aspect of their business and sacrifice their competitive advantage.  At the heart of transparency is the desire to better understand how companies approach their business.  How is corporate responsibility embedded across their company?  In other words, do employees use corporate responsibility as a filter through which they make business decisions?

For example, corporate compensation has become a hot-button issue in the wake of the global recession.  Some stakeholders find it difficult to understand how companies can award large bonuses amidst high unemployment rates and also worry that it discourages focus on long-term success.  While companies may not want to release salary information for competitive reasons, they should consider offering more visibility into how they set salary bands.  A rationale that explains how businesses consider a variety of elements, such as employee workload, individual contributions to profit margin, work/life balance, and corporate strategy, may help raise the level of conversation and facilitate a mutually beneficial solution.

Overall, stakeholders want confidence that businesses make strategic decisions based on a broad perspective and long-term view that incorporates corporate responsibility, stakeholder expectations, and business objectives.

The future is transparent

Corporate transparency can help provide stakeholders with this confidence.  In truth, greater openness about practice and decision-making strategy are strongly connected.  As stakeholders gain more visibility into business operations, they will have more questions about how decisions are made.  H&M takes this interconnectivity into account in its recent decision to publish its supplier factory list.  The Swedish retailer not only publicly reports factory and supplier information, but also shares the rationale for excluding certain factories from the list.

Senior business leaders should adapt to rising demands for transparency in the same way that they would address the potential for new regulations: try to get ahead of the curve.  Currently there is a dearth of companies that practice true transparency throughout their organization.  There is ripe opportunity for companies to step forward and define transparency for their industry.  Leaders in transparency will differentiate their business and build trust as stakeholders’ expectations continue to shift from asking for transparency to demanding it.

Linnea Texin is a Consultant for Corporate Citizenship in New York.