The Age of Transparency

by FEI Daily Staff

The Internet, social networking and blogging are making the world a radically more transparent place for businesses.

When the global financial crisis wiped out $30 trillion in financial assets, caused mass unemployment and nearly bankrupted Europe, it reinforced the need for more effective corporate governance, better transparency and greater integrity in corporate management. When WikiLeaks — the so-called “people’s intelligence service” — embarrassed the Pentagon and the U.S. State Department, it became clear that not even the world’s most powerful government could maintain a monopoly on information.

And when a connected generation of freedom-seeking youth topple despots and dictators across North Africa and the Middle East, it’s safe to say that the transparency trend has gone truly global.

Taken together, these events point to one inescapable conclusion: a potent cocktail of technological, demographic and economic forces is making the world a radically more transparent place. In fact, the waves of damaging WikiLeaks revelations are merely a hint of the world to come. Site founder Julian Assange says private sector companies are also on his hit list, starting with the financial services industry. Even if the United States government successfully prosecutes Assange, there are thousands of like-minded wiki revolutionaries who will gladly fill his shoes.

A New Era of Transparency

For companies, this transparency goes far beyond the simple obligation to disclose basic financial information. Thanks to the Internet, people and institutions are gaining unprecedented access to all kinds of information about corporate behavior, operations and performance — from real-time analysis of company financials on StockTwits to third-party monitoring of overseas supply chains.

Armed with new tools to find information about matters that affect their interests, stakeholders now scrutinize companies of interest like never before, informing others and organizing collective responses. Customers can evaluate the worth of products and services at levels not previously possible. Employees can share formerly secret information about corporate strategy, challenges and management.

Global networks of business partners and suppliers share intimate commercial data to help their business ecosystems perform more like a single enterprise. Powerful institutional investors — the ones who own most of the economy — are developing x-ray vision, while increasingly networked investors dig up the “real dirt” on company financials in micro-blogging sites and chat rooms.

Finally, in a world of instant communications, whistleblowers, inquisitive media and Googling, citizens and communities routinely put companies under the microscope.

When organizations are increasingly naked, “fitness” is no longer optional as survival will force them to get buff. With demands for transparency originating from all sides and for all imaginable issues, a new, more systemic and integrated approach to corporate transparency is required. Corporate leaders need to start thinking about transparency as a critical component of competitive strategy and an essential pre-condition for building collaborative relationships with customers, partners, shareholders and the broader public.

Naturally, in the face of relentless scrutiny, it’s tempting to just hunker down. Indeed, many executives assume that ramping up secrecy is the best antidote to their growing sense of impotence in the battle to control information. It is not.

But, leaders should embrace transparency, not fear it. Companies with higher levels of transparency create trust-based relationships that can help manage risk, increase brand value, drive down business costs and unlock new sources of value creation. In the capital markets, trust and confidence in a company’s management builds investor loyalty and reduces its cost of capital.

In the public sphere, trust can help create a social license to operate and lessen regulatory burdens. Trust and transparency in the company and business web can create enterprise-wide alignment on values, enhance collaboration and lower transaction costs in the supply chain.

But transparency can be somewhat of a double-edged sword. It can surface mortal threats for the companies that are caught unprepared. Conversely, openness also creates exciting new opportunities for value creation and high performance, as the numerous examples cited below can attest.

Bottom line, in this age of transparency all organizations need integrity as part of their DNA — not just to secure a healthy business environment, but for their own sustainability and competitive advantage. Society will be increasingly alert to individuals and organizations that cultivate an aura of responsibility, when their business practices don’t measure up in reality.

In everything from motivating employees, negotiating with partners, disclosing financial information or explaining the environmental impacts of a new factory, companies and other organizations must tell the truth, be considerate of the interests of others and be willing to be held accountable for delivering against their commitments.

Transparency Strategy Needed The new era of transparency can be confusing, even frightening. That’s understandable. It’s sometimes harder to operate under the glare of constant scrutiny. Thus, some organizations will choose to fight transparency and resist the changes in the way the world operates around them. But the successful companies will choose the transparent alternative and seek opportunities to profit from a more open and networked business world. In fact, smart businesses already recognize that proactive transparency increases corporate success and will be an increasingly important source of differentiation in the future.

That said, there are many tough questions when it comes time to setting the appropriate strategy and managing its implementation: Which corporate functions need to be involved in managing transparency to ensure success and what are the unique leadership responsibilities of chief financial officers? What are the key classes of information and what should be open or closed? Which stakeholders should get access to information and how often?

To ensure success, organizations need something new — a transparency strategy — to rethink what information should be made available to all of their key constituents. The natural candidate person to lead a company in developing its transparency strategy is the CFO who has fulfilled the requirements of corporate disclosure since the U.S. Securities and Exchange Commission started requiring filing of annual financial reports in the 1930s. But today, there are multiple layers of transparency CFOs must heed if they want to build and maintain shareholder value. These multiple layers include customers, employees, business partners, shareholders and the public; and each of these five groups has different needs.

Customers In the past, customers were isolated. A few joined quaint consumer groups, others talked to neighbors about products they might buy, or read Consumer Reports, the main source of objective advice. Now, they self-organize, they get other readers’ book reviews on Amazon.com from their home, workplace or coffee shop — even on their smartphones. To learn what others think about a wide range of products and services, they can consult numerous sites such as Epinions.com.

Consumer electronics retailer Best Buy Co. Inc. is one of a handful of leading organizations that understands how transparency with customers engenders success. Through its Chief Executive Brian Dunn, the company has adopted the principle that “our customers should know everything that we know.” This “everything” includes data about the defect levels in the products it sells, and Best Buy has reaped benefits in increas­ed customer loyalty.

Progressive Insurance Co. also embraces customer candor. Years ago Progressive started publishing online its own prices along with its competitors’ prices, and it didn’t always win the comparison. But customers love this Internet-enabled honesty. It builds trusting relationships. And if the comparison shows Progressive not to be competitive, it’s so public that Progressive and its employees are highly motivated to improve the situation.

Employees Thanks to email, instant messaging, Facebook and Twitter, employees are better informed. Every worker has an electronic printing press at his or her fingertips. All actions by company leaders are scrutinized, analyzed and judged, and employees use the Internet and other communications tools to reach shared conclusions that directly affect morale and productivity.

No company can afford to ignore this force. It’s uncanny how fast news and rumors spread across organizations as the process amplifies an atmosphere of growing mistrust and cynicism.

Fortune wrote that Vault.com is “the best place on the Web to prepare for a job search.” Job seekers — from students to experienced professionals — have discovered that Vault is a comprehensive resource for career management and job search information, including juicy insider intelligence on salaries, hiring practices and company cultures. The site combines the inside perspective of anonymous employee reviews with expert context from Vault’s editors.

Accenture plc Chairman Bill Green has surprising candor with employees about everything from the company’s financial performance to his personal struggle recently regarding the tough decision to terminate the company’s contract with Tiger Woods. “Transparency with employees builds trust; it speeds up the metabolism of collaboration and increases loyalty,” he says. The authors’ research shows that transparency with employees improves and increases loyalty and trust and reduces collaboration costs, office politics and game playing. In short, companies that open up and share pertinent information with all employees can expect better results.

Business Partners Companies face similar scrutiny from business partners. In the networked global economy, companies increasingly function in networks or business webs. Rather than attempt to do everything from design to component manufacturing, assembly, marketing, distribution and customer service, companies are focusing on what they do best and relying on partners for the rest.

As such, global networks of business partners and suppliers share intimate commercial data to help them perform more like a single enterprise. The Procter & Gamble Co. receives specific, real-time performance results from every Wal-Mart store so that it can replenish shelves as needed. Wal-Mart Stores Inc. lets P&G in on its store-by-store sales because it is confident that P&G won’t give the information to, say, Target Corp. In the electronics industry, competitors Celestica Inc. and Solectron Corp. give capacity forecasts and production costs to competitors Dell Inc. and IBM Corp., which in turn share market demand signals with Celestica and Solectron. Celestica builds products to IBM’s forecasts because it trusts that IBM will not game the system and stick it with the bill if demand fails to materialize.

Nike Inc., another transparency leader, recently launched the GreenXchange where it swaps green tech innovations with other like-minded companies. Some find this openness unorthodox, but CEO Mark Parker insists that extraordinary acts of sharing are critical to addressing the extraordinary challenges facing his industry.

Shareholders: The Owners Scrutiny from shareholders continues to build. Consider in the 1970s a relatively small number of individuals still owned almost 80 percent of U.S. equities. Today, institutions are the primary owners of corporations. Pension funds, mutual funds, insurance companies, other institutional investors and a broad range of individuals own or manage most public equity. And after the recent economic meltdown, institutions are striving to scrutinize their investments even more closely.

Achieving shareholder trust reveals who owns the organization. Progressive CEO Glenn Renwick believes that his company’s monthly report of operating costs — versus the traditional quarterly report issued by other companies — is better because it is the owner’s information. Good or bad, he believes they have the right to know.

A now-famous Progressive annual report — which pictured a naked man throughout, illustrating Progressive’s drive to be a fully transparent company — reads: “Our desire for transparency demonstrates our belief that good decisions flow from clear information.” With more than $96 billion in net assets, the Ontario Teachers’ Pension Plan uses its own staff of 200 to research companies and make most investment decisions. Former Executive Vice President of Investments Bob Bertram says that much more information is publicly available than ever before. To him, incremental knowledge comes from dedicat­ed people talking to management and boards of companies.

The pension plan’s analysts have a deep understanding of a company’s products, business strategy, human resources, marketing plans, financial assets and competitors.

But there is more to know. “Sure we know lots of factual information,” says Bertram. “By spending time with management we know about their thinking processes, we have intimate knowledge about the people making decisions and we understand a lot about their culture and what makes them tick.”

The Public Years ago, in trying to make a business case for good corporate behavior, corporate social responsibility advocates coined the optimistic adage “You do well by doing good.” Few were persuaded. The main reason for the lack of success in winning support for corporate responsibility was that the “doing well by doing good” adage was not true.

Many companies did well by being bad. Creative accounting, unfair labor practices, corporate secrecy, monopolistic behaviors, externalizing costs to society and shady environmental behaviors could help beef up the bottom line.

Since 2001, market research and public opinion polling firm GlobeScan has been asking consumers across 25 countries to rate the extent to which large companies should be held responsible for a variety of different actions, such as CSR initiatives, and has found that more than eight out of 10 people think corporations should take on greater responsibility for solving social and environmental issues.

When companies are not responsive to these demands, corporate critics use the Internet to pepper management with detailed inquiries, monitor private-sector behavior around the world and swap insight and intelligence with one another. Many companies are uncomfortable with such scrutiny, which only intensifies as social media continues to accelerate the speed at which critical messages can “go viral.”

Indeed, as technology advances, so to do the capabilities of citizen journalists and civil society groups. CorpWatch.org, a San Francisco-based nonprofit, boasts a sophisticated array of research tools that empower amateur corporate investigators to operate out of the comfort of their living rooms. Crocodyl.org — a corporate malfeasance wiki — covers 15 issues and 35 industries and maintains detailed profiles on hundreds of companies that are kept up-to-date by volunteers around the world.

And with a recent extension called CrocTail, users can peruse the site’s world map to pinpoint subsidiary locations or browse SEC filings from several hundred thousand U.S. publicly traded corporations and their many foreign and domestic subsidiaries.

A New Corporate Reporting Paradigm Rising transparency raises still another issue. In a world where real-time information is increasingly abundant on the Web, the clunky and outmoded mechanics of corporate reporting are looking dangerously anachronistic. Boards of directors face heightened expectations in corporate reporting, but many directors feel they lack effective tools to deliver. Directors are spending more time and are asking more questions. Senior managers are trying to provide relevant information in a form directors and others can digest. Everyone is working harder, but it’s not clear that they’re any wiser. There must be a better way.

Perhaps there is. Consider the annual report. Traditionally the annual report was a bland and limited way of communicating with shareholders and other stakeholders. And it was historical, focusing on the past. Because the report was printed paper, it was an island — not linked to other pertinent data and information that might help a stakeholder understand the company better or an executive manage more effectively. While essential, financial data alone did not convey a comprehensive picture of corporate health. It was opaque — often the more detailed data, the more difficult it was to understand.

There was little nonfinancial information necessary to provide a clear view on current performance and enable more accurate predictions regarding future prospects. It was separate from the company’s Corporate Social Responsibility or Sustainability report, relegating these documents to minor status and preventing the integration of information about critical topics such as risk. This clearly isn’t good enough. One innovation that has promise is the One Report, proposed by Bob Eccles and Mike Kruz in their book of the same name. Eccles and Kruz argue for a comprehensive, networked, real-time, living-and-breathing system that through integrated reporting provides a single version of the truth to all concerned parties, inside and out. When viewed in this context, comprehensive reporting is at the very heart of the success and even survival of companies.

One Report recognizes that because of the huge changes occurring in the global economy and every industry and the challenges of rebuilding society for the 21st century, nonfinancial aspects of performance have implications beyond boards, auditors, audit committees and investors.

It acknowledges that organizations do have stakeholders, who have a legitimate, important and overall healthy interest in the breadth, veracity and integrity of corporate performance and behavior. Thus, directors and managers find themselves in a vastly more complex environment, increasingly accountable to and influenced by multiple stakeholders and pressured from all sides for better reporting on corporate health and behavior.

To be sure, this new environment is full of danger and financial executives are right to be concerned. Not everything should be open. Trade secrets and personal data, for example, are properly kept confidential. But more often, opacity is used only to mask deeper problems. Armies of corporate lawyers fight openness as part of a good day’s work. Old cultures — the insular model of yesterday’s firm — die hard.

Nevertheless, the technological, economic and sociopolitical drivers of an open business world will prevail. Smart executives see transparency as an opportunity. They believe they will do better for shareholders when they openly align their business with the interests of stakeholders. Increasingly, they are becoming open enterprises with explicit and sophisticated transparency strategies. Responsible and sustainable business practices strengthen relationships with customers, employees, business partners and shareholders. Trust, based on open, honest, reliable, transparent and considerate behavior, increases. That, in turn, strengthens relationships and improves value for all. Corporations will always face trade-offs and will never satisfy everyone. But if they operate with transparency and integrity in the interest of trust, their odds of success improve.

Keeping up with society’s evolving expectations can be tough, but integrity shouldn’t be a millstone. Among other things, firms need clear corporate values and a commitment to integrity that runs through every vein and capillary of the organization.

Executives will need to show leadership on openness. Managers will need to pioneer new approaches to customer and stakeholder engagement. A culture of continuous innovation will ensure that companies can be responsive to evolving stakeholder expectations. And an interactive reporting system that collects external knowledge and insight can help cycle good values and behaviors throughout the enterprise.

Business leaders with a combination of vision, energy and communication skills can drive lasting change by helping convince their peers to share the risk and responsibility in meeting the challenges of the 21st century.

Don Tapscott is a widely-recognized authority on innovation, media and the economic and social impact of technology. He has authored 14 books and chairs the think-tank Moxie Insight. Anthony D. Williams is an author, speaker and consultant, who is currently a visiting fellow with the Munk School of Global Affairs at the University of Toronto and a senior fellow for Innovation with the Lisbon Council in Brussels. Tapscott and Williams coauthored Macrowikinomics: Rebooting Business and the World.
This article first appeared in Financial Executive magazine.