We recently posted about the legislative steps needed to open up access to company data and shed light on global money flows, as well as the true ownership of companies. But it’s not all down to governments – companies themselves have a key role to play, starting at board level.
In this blog post, we outline why board members should take heed of how corporate transparency is fast becoming a non-negotiable area of focus for company stakeholders and some initial steps forward-thinking boards can take to promote transparency.
Transparency is fast becoming non-negotiable
Whilst the landscape of business is always evolving, change has been vastly accelerated by Covid and the wide-ranging impacts following Russia’s invasion of Ukraine. Businesses are more globalised than ever, and where historically there was tight integration between a few companies, we now have larger ecosystems of smaller companies working together, all having to navigate the continuing pandemic and an unprecedented geopolitical landscape.
There is also increasing pressure on boards to ‘do the right thing’, with shareholders, consumers, employees and society demanding that companies act responsibly. We have all seen how quickly activism, spread through social media, can impact a company’s brand and profits.
One obvious recognition of this change was the US Business Roundtable overturning their 22 year old definition that a corporation’s principle is to maximise shareholder return.
The definition now states that:
As a result, the old ways of overseeing and governing a company are not as effective as they need to be.
The scope and responsibility of boards have therefore increased exponentially, and world class boards believe in setting a tone from the top. This tone ought to demand transparency and openness in how business is conducted and the relationships through which the business operates.
But far too often, boards fail to promote transparency. They typically do not ask the right questions of management to ensure the company is transparent (both internally and externally) about how it operates, and to ensure the company demands transparency from those it does business with.
As risk traverses company boundaries, it is critical that boards take on responsibility to understand the risk involved in the connections it has with its suppliers and customers, the geopolitical environment they all operate in and the end-to-end environmental and social impact of their business or sector.
Non-financial transparency is soon going to be non-negotiable. Accelerated by the pandemic, transparency on non-financial reporting is being included in new standards and reporting requirements, led by organisations such as the World Economic Forum (see their WEF The Future of the Corporation 2021 report).
Boards shouldn’t consider these requirements to be an additional burden. Corporate transparency not only exposes circumspect or even nefarious practices, but it can help businesses. Modern and progressive boards of leading companies are leveraging new tools and data-driven approaches to scale their governance and oversight efforts. Rather than be left in the dark ages, they are using data to place a spotlight on challenges, often utilising these solutions and their corporate stance as a competitive advantage.
Every board has a golden opportunity to act now to promote corporate transparency – both in terms of how their company operates and what information it has on its customers and suppliers.
Drivers of transparency in a changing world
This is not just about the current crisis.
Corporate transparency is increasingly important to boards for many reasons:
1. Growing demands from customers, investors and shareholders
More people want to buy from, invest in, do business with or work for companies that can demonstrate where their products come from and to ensure that those companies operate in an ethically and sustainable way. If a company cannot show what steps it is taking to ensure that it (and those in its supply chains) do not engage in money laundering, bribery, corruption or negative environmental or social practices, it will soon become obsolete.
2. Third-party and regulatory risks
Boards are responsible for managing the risks facing their company, and it is a significant risk if a company does not know who it is doing business with. Where evidence of money laundering or other integrity risks emerge in their or their third parties’ business activities, companies can suffer regulatory action, fines, loss of business alongside a permanently damaged reputation.
Transparency can also identify resilience challenges where companies are not truly independent. For example: many companies have implemented strategies to diversify their supply chains to increase resilience. Yet when faced with an issue, they realised that the implementation had only the veneer of diversification as a result of companies buying out their smaller competitors – effectively leaving them reliant on the same company they had tried to mitigate their dependency on.
3. Rise of responsible business
It is well documented that companies are recognising the need to demonstrate their environmental, social and governance (ESG) commitments. But there is a much broader move towards responsible business. For a board to show responsible conduct, it needs to do more than introduce ESG or corporate social responsibility (CSR) initiatives but must introduce genuine transparency from top to bottom.
This doesn’t mean that everything about your business needs to be made public – this is about ensuring the key metrics to build that trust are made available and in a way that is demonstrable, of high-quality and can support meaningful engagement.
Non-financial corporate transparency is becoming an increasing requirement for all companies, driven by ever-expanding social pressure, regulation and the role of corporate opacity in managing the outcomes of the current conflict in Ukraine. Soon it will no longer be optional for companies to disclose what they know about their business partners, but transparency will be mandated – whether by regulators or by activist shareholders.
Why not get ahead of the curve?
A roadmap to corporate transparency
Any board member reading this can make a significant difference in how their company approaches corporate transparency.
We have two suggestions to get you started in your next meeting:
1) Put transparency on the agenda
Every board meeting should have transparency as a standing agenda item and set an expectation at every level of the business that transparency is important. This might involve the company’s management updating the board on the steps taken to understand who new business partners are, or the board questioning management on its use of data and the provenance of that data. Taking early steps so that non-financial reporting can be data driven within your organisation will pay dividends as new requirements come into force.
2) Establish precisely who you are in business with
While there would not be time for a board to ask the management what they know about every customer or supplier, they can ask how many of these have been identified at the legal entity level, instead of a vague notion of a ‘business’, like how some legacy vendors offer in their data.
Ultimately you should ask the following question of any board member: are you sure you have the breadth of oversight needed to fulfil your duties, or is it time to turn to transparent data to make sense of a more complex and dynamic business world?
As a Board, you have the chance now to use the impetus from the current global crises to improve corporate transparency, for the benefit of all.