Case Study: 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’ hardwon 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.
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–corporatetransparency/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.