Corporate transparency describes the extent to which a corporation's actions are observable by outsiders. This is a consequence of regulation, local norms, and the set of information, privacy, and business policies concerning corporate decision-making and operations openness to employees, stakeholders, shareholders and the general public. From the perspective of outsiders, transparency can be defined simply as the perceived quality of intentionally shared information from the corporation. [1]
Recent research suggests there are three primary dimensions of corporate transparency: information disclosure, clarity, and accuracy. [1] To increment transparency, corporations infuse greater disclosure, clarity, and accuracy into their communications with stakeholders. For example, governance decisions to voluntarily share information related to the firm's ecological impact with environmental activists indicate disclosure; decisions to actively limit the use of technical terminology, fine print, or complicated mathematical notations in the firm's correspondence with suppliers and customers indicate clarity; and decisions to not bias, embellish, or otherwise distort known facts in the firm's communications with investors indicate accuracy. The strategic management of transparency, therefore, involves intentional modifications in disclosure, clarity, and accuracy to accomplish the firm's objectives. [1]
High levels of corporate transparency can have positive impact on companies. It is known that high levels of corporate transparency improve investment efficiency and resource allocation. Companies with great corporate transparency are expected to enjoy lower cost of external financing resulting in more opportunities for growth. Next, transparency can lead to better reflection of company specifications in the stock prices and greater extent of monitoring by outside investors. [2] Internally, corporate transparency has been shown to increase employee trust in the organization. [3] Among other benefits of corporate transparency are lower transaction costs and greater stock liquidity associated with lower cost of capital which in return correlates with an increase in the firm value. [4] On the other hand, low levels of corporate transparency are linked with moral hazard extracting firm resources for private benefit. This causes principal–agent problem and worsens firm performance. [5]
Standard & Poor's has included a definition of corporate transparency in its Gamma methodology aimed at analysis and assessment of corporate governance. As a part of this work, Standard & Poor's Governance Services publishes a transparency index which calculates the average score for the largest public companies in various countries.
Corporations may be transparent to investors, the public at large, and to customers.
Opening up the customer support channels may mean using a feedback tool which allows users to publicly vote on new developments, having an open internet forum, or actively responding to social media questions. [6]
Standards concerning corporate transparency in European Union are scrutinized under Directive 2014/95/EU, referred to as Non-Financial Reporting Directive (NFRD). Under this legislation companies have to disclose information regarding employed practices related to environmental protection, social responsibility and treatment of employees, respect for human rights, anti-corruption and bribery and diversity on company boards (in terms of age, gender, educational and professional background). By 2018, companies are required to include non-financial statements in their annual reports. It was found that 60% companies disclose their non-financial information in their annual reports in contrast to 40% favoring a separate document in 2019. [7]
Businesses with an obligation to publish such information are large public-interest companies with more than 500 employees, which amounts to approximately 6000 companies across European Union. Companies enjoy great flexibility how to disclose relevant information as they can either use international, European or national guidelines. For instance, they can use the UN Global Compact, the OECD guidelines for multinational enterprises or ISO 26000. [8] Despite enclosed suggestions for guidelines, none is referred to by more than 10% of companies. To better understand the situation, companies are expected to describe their business model in relation to sustainability and strategic risks. This might not be reality as only nearly a half of companies mentioned at least one strategic risk related to sustainability and only 7.2% further described how those risks were being addressed in 2019. The most frequently listed risks where related to climate change (24.9%), environmental challenges (23.9%) and labour issues (23.8%). [7]
As of 20 February 2020, the European Commission launched a public consultation on the review of the NFRD. [8]
In 2008, researchers found that value maximization might not be the ultimate goal of Chinese listed companies as a result of the Chinese government being the major shareholder of state-owned enterprises (SOE). Comparing listed companies in different markets, it seems that those with sound corporate governance practices tend to showcase relatively good performance, which was in contrast to the situation in the Chinese market. It was believed that implementation of new reforms would result in higher corporate transparency of Chinese firms. [9]
In 2002, the China Securities Regulatory Commission (CSRC) issued a code of corporate governance affecting practices and structures employed by Chinese firms. One year later, the CSRC allowed qualified foreign institutional investors (QFII) to enter the Chinese stock market. It was found that QFIIs have greater control over state shareholders in state-owned companies than domestic mutual funds and are more prone to act as unbiased monitoring body. [10]
Institutional ownership has positive effect on both, corporate governance transparency and accounting information transparency. However, there is not sufficient amount of evidence to support the claim that higher levels of corporate transparency lead to higher levels of institutional ownership in China. [11]
Corporate transparency in Taiwan is assessed using Information Disclosure and Transparency Ranking System (IDTRS) launched in 2003 by Securities and Futures Institute. Whole process is on voluntary basis with evaluation executed annually in two-stage process where the ranking committee and companies with possibility of expressing their opinions participate. [12]
Capital markets in Taiwan evolved over the recent decades from ones with insufficient protection of shareholders and stock market instability to markets with plausible transparency practices. [12] Establishing IDTRS has increased the level of corporate transparency and information disclosure by Taiwanese companies. Their motivation is driven by the likelihood of their transparency ranking being made public and possible consequences of such action. Disclosing more information mediates information asymmetry, prevents moral hazard and can lead to higher liquidity and lower cost of capital. Ultimately, IDTRS has been successful in stimulating companies to disclose more information, increasing firm value and improving quality of forecasts of firm's performance in stock market. [13]
The United Kingdom government undertook consultation exercises in 2020 concerning proposed improvements to the quality and value of financial information on the UK companies register, the powers of the registrar and a ban on companies having corporate directors. It then issued a white paper on Corporate Transparency and Register Reform in February 2022, [14] which sought to reflect the government's responses to these consultations. [15]
The Corporate Transparency Act (CTA), part of the National Defense Authorization Act for Fiscal Year 2021, introduced "beneficial ownership information reporting requirements" for companies in the United States. [16] The law requires businesses to disclose their beneficial owners to the U.S. Department of Treasury in an effort to curb illegal economic activities. [17] On December 3, 2024, Amos Mazzant, Federal Judge for the United States District Court for the Eastern District of Texas, enjoined the Government from enforcing the Corporate Transparency Act and its Implementing Regulations, including the beneficial ownership information reporting requirements. [18] The U.S. Court of Appeals for the Fifth Circuit affirmed the nationwide injunction. [19] On December 31, 2024, the U.S. Department of Justice appealed to the U.S. Supreme Court, seeking to stay the injunction. [17] On January 23, 2025, the Supreme Court ruled that the Government can enforce the CTA while the Fifth Circuit Court reviews the law. [20]
Countries with multi-party legislatures are associated with higher levels of corporate transparency. Furthermore, when a country transitions to multi-party legislature, opacity is expected to decrease.
Comparing democracies and authoritarian regimes, we can expect that firms are more transparent in democratic countries. Levels of corporate transparency are decreasing as we go from democracies to countries with semi-competitive authoritarian regimes. Lastly, firms in countries with non-competitive authoritarian regimes display the greatest opacity.
When a regime changes from non-competitive authoritarian one to semi-competitive, corporate transparency tends to improve. However, this trend does not hold if a country transitions from a semi-competitive authoritarian regime to democracy. [21]
The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street crash of 1929. Its primary purpose is to enforce laws against market manipulation.
The Sarbanes–Oxley Act of 2002 is a United States federal law that mandates certain practices in financial record keeping and reporting for corporations. The act, Pub. L. 107–204 (text)(PDF), 116 Stat. 745, enacted July 30, 2002, also known as the "Public Company Accounting Reform and Investor Protection Act" and "Corporate and Auditing Accountability, Responsibility, and Transparency Act" and more commonly called Sarbanes–Oxley, SOX or Sarbox, contains eleven sections that place requirements on all U.S. public company boards of directors and management and public accounting firms. A number of provisions of the Act also apply to privately held companies, such as the willful destruction of evidence to impede a federal investigation.
The Financial Crimes Enforcement Network (FinCEN) is a bureau within the United States Department of the Treasury that collects and analyzes information about financial transactions to combat domestic and international money laundering, terrorist financing, and other financial crimes.
Corporate governance refers to the mechanisms, processes, practices, and relations by which corporations are controlled and operated by their boards of directors, managers, shareholders, and stakeholders.
In economics, a market is transparent if much is known by many about: What products and services or capital assets are available, market depth, what price, and where. Transparency is important since it is one of the theoretical conditions required for a free market to be efficient. Price transparency can, however, lead to higher prices. For example, if it makes sellers reluctant to give steep discounts to certain buyers, or if it facilitates collusion, and price volatility is another concern. A high degree of market transparency can result in disintermediation due to the buyer's increased knowledge of supply pricing.
Banking regulation and supervision refers to a form of financial regulation which subjects banks to certain requirements, restrictions and guidelines, enforced by a financial regulatory authority generally referred to as banking supervisor, with semantic variations across jurisdictions. By and large, banking regulation and supervision aims at ensuring that banks are safe and sound and at fostering market transparency between banks and the individuals and corporations with whom they conduct business.
Sustainability reporting refers to the disclosure, whether voluntary, solicited, or required, of non-financial performance information to outsiders of the organization. Sustainability reporting deals with qualitative and quantitative information concerning environmental, social, economic and governance issues. These are the criteria often gathered under the acronym ESG.
In domestic and international commercial law, a beneficial owner is a natural person or persons who ultimately owns or controls an interest in a legal entity or arrangement, such as a company, a trust, or a foundation. Legal owners, commonly described as the "registered owners", may hold those interests as beneficial owners or for the benefit of someone else, in which case they may be described as a "nominee".
The Global Reporting Initiative is an international independent standards organization that helps businesses, governments, and other organizations understand and communicate their impacts on issues such as climate change, human rights, and corruption.
Carbon accounting is a framework of methods to measure and track how much greenhouse gas (GHG) an organization emits. It can also be used to track projects or actions to reduce emissions in sectors such as forestry or renewable energy. Corporations, cities and other groups use these techniques to help limit climate change. Organizations will often set an emissions baseline, create targets for reducing emissions, and track progress towards them. The accounting methods enable them to do this in a more consistent and transparent manner.
The CDP is an international non-profit organisation based in the United Kingdom, Japan, India, China, Germany, Brazil and the United States that helps companies, cities, states, regions and public authorities disclose their environmental impact. It aims to make environmental reporting and risk management a business norm, driving disclosure, insight, and action towards a sustainable economy. In 2022, nearly 18,700 organizations disclosed their environmental information through CDP.
Corporate sustainability is an approach aiming to create long-term stakeholder value through the implementation of a business strategy that focuses on the ethical, social, environmental, cultural, and economic dimensions of doing business. The strategies created are intended to foster longevity, transparency, and proper employee development within business organizations. Firms will often express their commitment to corporate sustainability through a statement of Corporate Sustainability Standards (CSS), which are usually policies and measures that aim to meet, or exceed, minimum regulatory requirements.
Network governance is "interfirm coordination that is characterized by organic or informal social system, in contrast to bureaucratic structures within firms and formal relationships between them. The concepts of privatization, public private partnership, and contracting are defined in this context." Network governance constitutes a "distinct form of coordinating economic activity" which contrasts and competes with markets and hierarchies.
Environmental, social, and governance (ESG) is shorthand for an investing principle that prioritizes environmental issues, social issues, and corporate governance. Investing with ESG considerations is sometimes referred to as responsible investing or, in more proactive cases, impact investing.
Voluntary disclosure is the provision of information by a company's management beyond requirements such as generally accepted accounting principles and Securities and Exchange Commission rules, where the information is believed to be relevant to the decision-making of users of the company's annual reports.
India's National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business (NVGs) were released by the Ministry of Corporate Affairs (MCA) in July 2011 by Mr. Murli Deora, the former Honourable Minister for Corporate Affairs. The national framework on Business Responsibility is essentially a set of nine principles that offer businesses an Indian understanding and approach to inculcating responsible business conduct.
European company law is the part of European Union law which concerns the formation, operation and insolvency of companies in the European Union. The EU creates minimum standards for companies throughout the EU, and has its own corporate forms. All member states continue to operate separate companies acts, which are amended from time to time to comply with EU Directives and Regulations. There is, however, also the option of businesses to incorporate as a Societas Europaea (SE), which allows a company to operate across all member states.
Economic transparency refers to banks and other financial institutions that have made data available about their financial position and condition. However, the definition depends on the perspective of different research areas through which it is examined, mainly monetary economics, international finance, corporate finance, and others. The WTO defines economic transparency as a “degree to which trade policies and practices, and the process by which they are established, are open and predictable.”. United Nations Conference on Trade and Development relates to transparency as to “a state of affairs in which the participants in the investment process are able to obtain sufficient information from each other in order to make informed decisions and meet obligations and commitments”. According to the National Bureau of Economic Research (NBER) there are three main branches: transparency in economic policy, in the institutional structures surrounding the markets, and in the corporate sector.
Sustainable finance is the set of practices, standards, norms, regulations and products that pursue financial returns alongside environmental and/or social objectives. It is sometimes used interchangeably with Environmental, Social & Governance (ESG) investing. However, many distinguish between ESG integration for better risk-adjusted returns and a broader field of sustainable finance that also includes impact investing, social finance and ethical investing.
The Task Force on Climate Related Financial Disclosures (TCFD) provides information to investors about what companies are doing to mitigate the risks of climate change, as well as be transparent about the way in which they are governed. It was established in December 2015 by the Group of 20 (G20) and the Financial Stability Board (FSB), and is chaired by Michael Bloomberg. It consists of governance, strategy, risk management, and metrics and targets. It will become mandatory for companies to report on these disclosures by 2025 in the UK, although some companies will have to report earlier.