The dark side of transparency

That corporate transparency is a good thing is one of the givens of our age. On the principle that sunshine is the best disinfectant, companies have been required to prise open their books and make public a great deal of information that would once have been considered private.

Nor is this a static situation. In Europe, the thinking seems to be that if transparency is good, more transparency is even better. Disclosure obligations multiply and the day of the see-through corporation comes closer.

So enveloping is the pro-transparency consensus that it is a brave or perhaps foolish person who suggests there may be costs as well as benefits to prescriptive disclosure regimes. Yet my research shows this is indeed the case, that transparency can set up new incentives for firm behaviour and that the UK, once outside the European Union, may well wish to look at new approaches to corporate disclosure, especially in relation to small business.

But first, the case in favour of transparency. It often improves capital-market efficiency, giving investors a clear line of sight and allowing them to make better decisions. Indeed, it almost certainly increases the funds available for investment, given people and institutions are far more likely to put their money in businesses whose affairs are open than in opaque companies whose inner financial workings are a secret closely guarded by a cabal of directors.

In addition, transparency allows regulators and the media to identify corporate misbehaviours, such as tax avoidance, mis-selling, over-reliance on low-quality earnings, among others. Even when no wrongdoing is involved, mandatory disclosures can alert the outside world when a company is losing its way.