essareye


To disclose or not to disclose
February 13, 2011, 4:38 am
Filed under: Brain dump | Tags: , ,

Much early (and current) analysis of corporate social and environmental performance centers on disclosure — not what a company is doing necessarily, but on its level of transparency. The benefit of this approach is that (a) it gets around the problem of comparability of data on actual performance, and (b) it promotes transparency, which could reduce the problem of comparability in the future (as well as promoting better internal management systems necessary for the reporting). The problem is that a more transparent company is not per se a more responsible company.

But let’s consider also some reasons a company might not disclose:
1. Voluntary disclosure creates a legal liability
2. Reported indicators, per for example the GRI, could be misleading out of context

On the first point, if a company proactively volunteers information, it can be held accountable for the accuracy of that information. There are multiple methods of estimating greenhouse gas emissions, for instance. The company’s competitors may also find the disclosed information useful, without the burden of having to provide comparable transparency. And activists may target a company for unflattering information, even if a fuller look at the industry could show that the company in question actually performs better than most of its peers.

Transparency can also have downsides, as we discovered following greater disclose of executive compensation — compensation actually increased, as companies did not want to be seen as paying “below average” salaries.

On the second point, there are a multitude of stakeholders using information in corporate disclosures. These include activists pursuing direct action, providers of information to consumers (e.g. Good Guide), and socially responsible investment research companies (e.g. MSCI, Bloomberg, Thomson Reuters, EIRIS, SAM, et al.). Not unlike consumers losing control over their credit reports (in terms of how the score is generated and how it is used), companies lose control of their information once it’s made public. Does the existence of a “climate change policy” (whatever that is) mean the company is better than a company that doesn’t? Do operations in emerging markets signify a positive (e.g. job creation or providing services to underserved communities) or a negative (e.g. supporting a corrupt government)? Does a large product recall indicate a company that is less “responsible” or one who willingly took a financial hit to forestall negative consequences that may or may not have materialized? How does one compare a European company’s benefits (where pensions and health are largely provided by the state) to a US company’s benefits (where questions of defined benefit vs defined contribution retirement schemes are meaningful)?

These are not insignificant reasons to hold back in terms of corporate disclosure.

There are of course other reasons that a company might not disclose environmental and social indicators:
3.Management is not aware of the company’s impacts on its various stakeholders
4.Management is aware of its impacts but prefers not to be held accountable for poor performance

The challenge for those who would like to see more corporate disclosure is to address the concerns raised above, by supporting legal protections related to voluntary disclosure and by promoting transparency in the generation of corporate responsibility rankings, so increasingly the only excuses for not disclosing would be points 3 and 4.

Of course, greater transparency in evaluation opens up the possibility of companies “gaming the system” by managing to the letter of the scoring models rather than the spirit behind them, so these scoring systems will have to be flexible enough to develop with the market. As these evaluations represent opinions, they are not constrained as legislators and regulators are; it is much easier for an SRI research firm to hold companies to standards in their international supply chains, than for regulators to set official policy through (or around) the WTO, for instance.

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[…] as CEOs were better able to compare their packages against their peers. And, as discussed in another post, the meaning of disclosed numbers can have multiple causes — just as an NGO that has lower […]

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