Transparency: Exactly What Do You Mean?

Transparency became a required word in governance somewhere around the turn of the century, and like most required words it lost precision as it gained currency. Boards commit to it. Annual reports claim it. Very few organizations can say what they have actually undertaken to do.

Where the movement came from

The large-scale push toward transparency took hold about two decades before this article was written, and it did not begin in corporate boardrooms. It began in international aid and development. Multilateral institutions extending loans and economic relief to countries across South-East Asia and Latin America wanted assurance that the money was being used and managed as intended. Politically, they wanted to see elections conducted without bribery and patronage, on the reasoning that leadership with genuine popular support is more stable. Financially, they wanted an open accounting of how funds flowed to projects and to citizens, rather than into the personal accounts of the people administering them.

The uncomfortable observation at the time was that while these standards were being pressed on developing economies, business in North America and Europe was itself markedly non-transparent. The corporate collapses of the early 2000s closed that gap the hard way, and the disclosure regimes that followed were, in effect, the developed world applying to itself what it had been recommending to others.

Transparency and accountability are two sides of one coin

The clearest way to see what transparency obliges is to reduce it to a very small business.

Suppose you have put your own savings into an enterprise. You cannot do all the work yourself, so you hire one or two people to help. You are not always present to supervise them or to make decisions, so you give them authority to decide and to commit your money in your absence. In return for that freedom, you expect them to account to you for what was spent and what was decided. If they spent one hundred dollars on an item, you want the receipt, and you want to see the item in use for the purpose you intended. If they found it on sale for eighty, you want the receipt for eighty, the twenty in change, and evidence that what they bought is good enough to do the job.

That is the whole of it. Accountability is the obligation to answer for delegated authority. Transparency is the condition that makes answering possible - the receipt, the item, the visible use. Neither works without the other. An organization that reports extensively but delegates without accountability is producing documents, not transparency. An organization that holds people rigorously to account with no visibility into what they did is running on trust and calling it governance.

Scale that arrangement to a corporation or a government and nothing changes except the number of intermediaries between the person who owns the resource and the person spending it. Every additional layer is another place where the receipt can go missing.

Transparency and competition

Here is where the honest difficulty lies, and where most treatments of the subject go quiet. Transparency requires a balance between openness about process, financial performance and decision-making, and the confidentiality genuinely needed to protect competitive position, intellectual property, invested capital and strategy under development.

People are naturally protective of a new idea or product, and reasonably so: the concern that a competitor will take it, improve it and reach the market first is not paranoia. Whole proprietary systems in the corporate and government worlds have evolved around that defensive default. A perceived scarcity of clients, ideas and resources has made organizations secretive about their financials, their investments, their product development and their innovation systems, and there are therefore real and understandable protectionist reactions to calls for greater openness.

Pretending this tension does not exist is what makes transparency policies unworkable. The productive question is not how open should we be in general, but which specific things must be visible to which specific parties in order for them to hold us to account - and what remains legitimately confidential once that test has been satisfied. A board that has answered that question has a transparency policy. A board that has committed to transparency in principle has an adjective.

Transparency and boards

Boards either represent the owners of an organization or are the legal ownership entity themselves. In a for-profit company the owners may be family members or the representatives of holders of publicly traded shares. In a not-for-profit, the body corporate is owned by its members or by the community. In democratic government, a council or cabinet represents the citizenry as owner. In every case the board must hold both itself and the whole organization transparent and accountable to those owners, and to do that it must in turn require the same discipline of the chief executive, employees, contractors, suppliers and partners.

The instruments through which a board provides transparent accounting to owners and community are unremarkable individually and powerful collectively: official tax filings; regulatory and legislated reporting; annual financial reports and reports on the impact of products, services and programmes; strategic plans; access-to-information and complaint mechanisms; and assessments of the condition of the organization's assets, financial and otherwise.

Executive leadership transparency

For a chief executive and senior team to remain accountable to the board for delegated authority, and to enable the board's own transparency to owners, management must establish a corresponding system of reporting through the organization. In the traditional sense, that system rests on employment contracts and codes of conduct; performance management plans and evaluations; performance indicators and outcome measures; activity and impact tracking; financial controls and signing authorities; and supplier contracting and purchasing systems.

There is a second, less traditional dimension, which matters more where the work depends on knowledge sharing and on people who cannot simply be instructed. There, executives enhance transparency by building a community of shared values, by facilitating dialogue that builds mutual respect and trust across the network, and by ensuring that the exchange between contributors is and is seen to be fair. Knowledge workers withhold what they know from organizations they do not trust, and no reporting system can compel them not to.

Transparency for tomorrow

Expectations keep rising, and the demand for public accountability from senior leaders keeps growing with them. Secrecy and reflexively competitive behaviour will be challenged repeatedly by new collaborations, and the expectation of openness will continue to demand more access to senior leadership and more information from it.

The compensation is real. Transparency creates something closer to a level playing field for investors, customers and employees, and it materially improves knowledge sharing and creativity across a network. It is making life distinctly uncomfortable for a good many leaders. Those who take the principles seriously and build them into how their organization actually runs, rather than into what it says about itself, tend to get that discomfort back with interest - and may even recover some of the trust and respect that the profession of senior leadership has spent.

Readers wanting the contemporary regulatory frame will find it in the disclosure regimes of the US Securities and Exchange Commission and in the G20/OECD Principles of Corporate Governance, whose disclosure and transparency chapter covers much of this ground.

The companion arguments are Issue 17 on stewardship and Issue 16 on rules versus principles. The full library is in the Leadership Acumen archive.