The Unintended Consequences of Corporate Transparency

[Editor's Note: This the final post in a three-part series about how corporate transparency can reshape business. Part one details the value of transparency as an investment, and part two explores why your CSR report isn't enough.]

The last two articles have covered the importance of transparency, and how it involves developing knowledge, honing communication, and identifying why you are opening up, for whom, about what, and through which mediums.

All of that is well and good and necessary in the fishbowl that is the modern marketplace. These actions should help companies improve or protect their brand reputation and build equity with customers, particularly in the event of a mishap. At the same time, there are unintended consequences of transparency that companies should recognize.

First of all, with information comes expectations, and you can not reverse transparency any more than you can reverse a child riding a bike for the first time -- it is a skill that needs to be cultivated and nurtured, not put back in the garage.

Secondly, your external requests for transparency are perfectly inelastic. Once you share one ingredient or aspect of your business, there will always be customers who want you to share even more.

Thirdly, transparency about your actions is a de facto acknowledgment of accountability for your actions. But this does not equal accountability to all of your stakeholders. These concepts of accountability are very different, and can lead to dramatically different results for your company. This article focuses on the hazards of misinterpreting the skill of transparency with the notion that you need to be accountable to everyone.

In the United States and much of the world, "accountability to shareholders" has been both an internal rallying cry and an excuse, akin to "my brother made me do it," that has allowed companies to justify almost anything they want within legal reason, including least-cost but potentially disreputable suppliers, and delaying the abolition of certain substances of concern because the capital required would simply be "too costly."

Moreover, this accountability was narrowed even further in the 1990's, when employee stock options came into favor. Over 20 percent of U.S. corporate employees (non-governmental) are now shareholders of the companies they work for (National Center for Employee Ownership, 2009), compared to about 13 percent in the U.K.

This helps to explain the American obsession with quarterly analyst calls, and the inability to look beyond the next three months, which appears more prevalent in the U.S. than across the pond. In my last seven years of consulting, I have seen at least two U.S. companies install a live electronic feed of their share price onto a flat-screen in their entrance lobbies, and I have seen a CEO get up and leave a long-term strategy meeting, without a hint of irony, to check the movement of the company's share price over the preceding 15 minutes.These examples represent one end of the spectrum, where there is an excessive focus on short-term financial returns and an absence of internalizing externalities or taking the long view. Such behavior breeds the neglecting of long-term societal impacts.

The other end of the spectrum can also be dangerous, however. Confusing transparency to the public with accountability to everyone can be debilitating to company performance.

We can learn from the World Bank in this regard. During the 1980s, the World Bank, as the result of U.S. environmental pressure groups and the influence of now Speaker of the House, Nancy Pelosi (at the time Congresswoman from California and member of the House Appropriations Committee), began to incorporate social and environmental assessments into World Bank projects. U.S. taxpayers are major funders of the World Bank, and they have the right, for example, to make sure they are not funding highly destructive dams or pipelines in emerging economies.

In 1989, Congress passed a provision known as the "Pelosi Amendment" (officially the International Development and Finance Act), that requires U.S. executive directors of multi-lateral development banks (e.g.; the World Bank) to not vote, or vote no, on projects that are likely to have significant environmental impacts that were either not assessed, or the assessments had not been made public for 120 days. This was essentially legislating both transparency and being responsible for one's actions. (It's interesting to consider where we would be today if we required the same scrutiny of our own banks.)

It was a great move -- it helped to shift the bank's focus from churning out loans to measuring the economic, social, and environmental impacts and benefits of their projects. It greatly increased transparency and sustainability. And it suddenly gave a voice to thousands of indigenous peoples who otherwise had no voice.

But in the process the World Bank also became accountable to many, many stakeholders who were not their paying, core customers -- the emerging economy governments who wanted large infrastructure projects built quickly. Project development slowed and host countries saw environmental assessments as burdensome.

As a result, those countries are now turning to other sources of funding. Arab and Chinese money is now flowing into Africa, for example, at figures that dwarf World Bank lending. And Chinese and Arab funding comes with little or no environmental considerations or expectations.

The business model of the World Bank has come into question, and environmental and social project standards are slipping backwards in some countries, a lose-lose situation. (More information can be found in this paper I wrote for the University of London: "Catching the Boomerang: EIA, The World Bank, and Excess Accountability." [PDF])

This series ends with a cautionary tale of transparency -- it should mean accountability for your actions, not accountability to everyone. We need to end our myopic obsession with quarterly returns and bring in the true cost of business. But being a sustainable business requires being a business too.

Leaving floor mats, Super Bowls, Donald Rumsfeld, and Apolo Ohno aside, focusing on listening to your customers and being responsible for your actions is a good way to start the journey. And maybe, in the name of transparency, take down the flat screen of your stock price in your foyer (which is a reflection of how the market perceives you, available anywhere) and maybe put up a few metrics about who you are and who you want to be, about your declining Green House Gas emissions, for example, or increasing revenues, reduced waste, or reduced turnover. That is transparency, and it will help you become a better company.

Stephen Linaweaver is an associate principal at GreenOrder, an LRN company. GreenOrder is a strategy and management consulting firm that helps companies achieve competitive advantage through environmental innovation.

_{Photo CC-licensed by Flickr user M0rt3s.}