Transparency and what it really means

Transparency and what it really means
Transparency and what it really means

A corporate governance expert explores what transparency really means for businesses. An organisation that delivers credible and timely information for all its stakeholders is transparent. Such information provides critical insights regarding the performance of a company and therefore it is imperative that companies have a disclosure mechanism in place. Certain kinds of information are required by regulators and other kinds by investors and other stakeholders. In fact, those working in the area of corporate governance, often use the terms transparency and disclosure as if they were synonyms. There is a fine line though. Does submission of reports and filling of forms by businesses imply that they are transparent Regulators may say a resounding 'yes' while experienced investors may not agree instantly. This is because the two groups look at things differently. It may suffice to have materials on financial situation, company performance, ownership, governance for the regulator. On the other hand, shareholders seek timely, accurate and comprehensive information on strategy, growth/expansion and governance plans. Regulators seek disclosures, which are legal obligations that a company needs to furnish, whereas shareholders expect transparency - following ethical practices and demonstrating honesty. In the context of business, transparency means that information, may it be in the form of numbers and charts, is lucid enough for stakeholders to understand. Simply put, disclosure means providing the data while transparency is about making it understandable. There is a clear correlation between the two terms, which is why transparency always leads to good disclosures, but not necessarily vice versa. Disclosure is just one aspect of transparency. For instance, a number of Indian companies do 'over-disclosure', a harmful practice, by producing reams of paper with enormous data which may be difficult to decipher for an ordinary shareholder. It can confuse the public on what exactly is happening in the company. As the eminent American journalist Allan Sloan once said: “Disclosure is when you bury information in widely separated places in a 400-word document filled with small type. Transparency is when you tell people what they need to know in simple terms in readable type on the cover of a document or within the first few pages”. A good, responsible business, should strive for transparency in the first place, following the spirit of law, and not the letter, making disclosures meaningful and informative. Annual reports can serve as a good illustration of a company's transparency. Though the reports are treated as a compliance exercise by some, investors read them diligently and examine both the data and the intent. The way information is presented is sometimes more informative than the data itself. Analysis of recent board evaluation disclosures could illustrate the difference between transparency and disclosure. The law requires companies to disclose the manner of formal annual evaluation of the board, its committees and individual directors along with the performance evaluation criteria for independent directors. Best practice suggests providing additional information on the evaluation outcomes - results of the evaluation process and steps to be taken to improve the identified shortcomings. Though not mandatory, sharing such information with relevant stakeholders demonstrates the company's intent to clearly communicate that the board is conscious about the need for constant improvement. How do Indian corporates approach this According to the latest Board Evaluation report by Institutional Investor Advisory Services (a corporate governance and proxy advisory firm), and National Stock Exchange Ltd, , only 5 per cent of companies included the evaluation outcomes in their annual reports. Results were worse in a similar study if we refer to the Indian Corporate Governance Scorecard report : none of the 30 BSE-listed companies had, in addition to the mandatory disclosures, shared information about the impact assessment with the list of measures for board improvement. The need for improvement is obvious, and there is hope that the latest SEBI Guidance Note on board evaluations will help companies to increase quality of information (action plan is one of the recommended items in the mentioned document). What actions can Indian companies take to boost transparency Firstly, they need to understand how it differs from disclosure, and ensure that transparency is embedded into the company's DNA. Secondly, Annual Reports should not be seen just a company secretary's compliance responsibility. The board of directors should oversee the process, set “a tone at the top” and provide necessary guidance to make annual reports more “human” and comprehensive. It is ideal that communication teams should be involved in refining the messages to stakeholders, making them simple. Increased transparency can reap rich fruits for any institution. Transparent companies enjoy the reputation of being more honest and having good integrity. If a company shares timely, accurate and concise information with stakeholders, they trust and invest more (which reduces the cost of capital). This was amply demonstrated during the 2008 financial crisis: companies that reached out to their stakeholders immediately and openly explained the situation, got more chances to survive. The culture of transparency is also a good preventive measure to avoid fraud and mitigates reputational risk. In some jurisdictions, transparency is also seen as an effective anti-hostile takeover measure. But, most importantly, transparent businesses are simply more sustainable. As Mahatma Gandhi said: “the fact is that the more honest a business, the more successful it is”. Vladislava Ryabota is the Regional Corporate Governance Lead, South Asia, International Finance Corporation (IFC). She joined the Mumbai office of IFC in October 2013 and is the point of contact for investment and advisory services for IFC in South Asia.

No stories found.
India Global Business
www.indiaglobalbusiness.com