Transparency and the corporation

Malaysian Business,  May 16, 2008  by Millicent Danker

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THE TREND TOWARDS GOOD governance following the Cadbury Report of 1992 was accelerated after the Barings, Enron and other international accounting scandals.

In East Asia, impetus came from the regional financial crisis of 1997/98, which was largely perceived as a crisis of confidence in corporate governance attributed to shortfalls in financial reporting.

Governments have since recognised that to rebuild their capital markets and regain the confidence of investors, they have to play by the rules of international best practices. Corporate governance regimes have since been strengthened and more than 60 corporate governance codes are believed in existence worldwide.

Malaysia was one of the first East Asian countries to respond with its own Code of Corporate Governance, issued in March 2000 and revised in 2007. Bursa Malaysia, as a key regulator, has noted that the challenge for corporate Malaysia is `to build on the existing sound foundations of corporate governance and continue to inculcate a spirit of transparency and a culture of accountability', and that, `in the business community, the best practices of corporate governance is a must to facilitate a safe and regulated environment within the scope of transparency, accountability and integrity.'

Indeed, the global literature has shown corporate transparency to be closely associated with corporate governance and is believed to be its twin.

This begs the question of what is the real meaning of transparency within the theoretical framework of corporate governance and how it can be further demystified in the context of day-to-day governance of companies.

Is it simply a case of ethical financial reporting and therefore a mere accounting matter or does it come under the ambit of good communication practice? In the case of Enron and Worldcom, financial reporting appears to have been deliberately distorted with the objective of misleading investors and the public about the underlying economic performance of the enterprise.

Was this the result of the absence of communication ethics on the part of the firms or the lack of proper accounting procedures? Several high- profile corporate collapses have arisen despite the fact that the annual report and accounts seemed fine at the time.

In moving for transparency, Bursa Malaysia suggests that listed companies need to strive for effective communication not only through annual reports but also through other channels such as investors' briefings and forums and establishing an investor relations desk.

This call appears to recognise that annual reports alone do not do justice to the information needs of investors, suggesting also that transparency is about more channels of open two-way communications. Indeed, various codes of corporate governance (the UK Combined Code, Malaysia and Singapore) recommend increased communication between the company and its shareholders.

But questions need first to be asked. To whom must companies be transparent with, and how? Who decides and who regulates? What is corporate transparency and does it mean the same thing as reporting, compliance and disclosure obligations? Does it call for greater communicativeness with not just shareholders, but also other stakeholders?

If corporate governance codes recommend greater communication, what is the nature of corporate communication policies and do such policies facilitate corporate transparency? If good governance suggests greater corporate transparency, do boards of listed companies govern corporate transparency? What is the role of Malaysian boards in ensuring corporate transparency?

Today, experts see corporate governance as a web of relationships, not only between a company and its owners (shareholders) but also between a company and a broad range of other stakeholders: employees, customers, suppliers, bondholders, to name a few.

This is fundamental to the understanding of stakeholder management as a function of corporate transparency as there are implications on the reporting, communication and relational responsibilities of companies.

Where companies accept accountability for only shareholders and owners, their communication responsibilities would be materially different than if they were expected to serve the interests of all stakeholders.

Channels and tools of communication would be broader and more stakeholder-specific. Corporate transparency would carry greater expectations beyond fulfilling the needs of shareholders and investors for performance-related information.

This author suggests that stakeholders have legitimate relational, dialogic, communication & information needs which must be met by companies and the governance of these relationships is vital to ensure the delivery of corporate transparency (see chart).

What then is corporate transparency?

Definitions go back to the 19th century, but in recent times, the notion of `bringing to light' as a function of transparency has been advanced by several experts including Richard Oliver, who defines the term as `allowing others to see the truth, without trying to hide or shade the meaning, or altering the facts to put things in a better light'.