Transparency: It’s good for business

Transparency isn’t exactly a natural instinct for companies in the throes of fierce competition.

Share this article!

The fear is that anything anyone else knows about a company — from its profit margin to the salary of its CEO — can and will be used against it. And corporate espionage is a real thing.

Still, more and more companies are opening up, in Oregon and across the country. Weekly, Facebook founder and CEO Mark Zuckerberg shares tantalizing details Unmasked 02 Transpabout unreleased products and the company’s strategy to his nearly 16,000 employees. And CEOs across America are becoming increasingly open, even about things they have every instinct to hide.

Why? To some degree, companies today don’t have a choice. The call-out culture rampant on social media means your every mistake, if discovered, could be retweeted a thousand times. But overall, transparency is simply better for business.

Also, times have changed. Millennials value openness and loathe secrecy in ways no other generation has. That means young consumers avoid buying things from clandestine companies, and young job seekers avoid going to work at businesses that don’t keep the outside world in the loop.

“Information is like oil,” says Jonas Kron, the Portland-based director of shareholder advocacy for Trillium Asset Management, a socially responsible investment firm. “It’s worthless until it’s refined. The question is who gets to do the refining. My inclination is that as public equity investors, the market and investing community and the public should be the ones doing the refining.”

New federal regulations also force companies to be transparent about operations. A Department of Labor ruling put in place last year requires financial advisers and brokers handling retirement accounts to reveal potential conflicts of interests and act in the best interest of their clients. An SEC ruling to be implemented next year mandates public companies disclose the ratio between CEO and worker pay.

To be sure, these and many other corporate disclosure rules may get a stay under the Trump Administration, an avowed critic of regulations on business.

But the momentum may be hard to curtail. That’s because what once made a company valuable has changed dramatically. In the 1970s, about 80% of a company’s value was tangible, a measure of cash in the bank, physical assets in the company’s possession, says Quinn Underriner, an analyst with the Sustainability and Accounting Standards Board in San Francisco.

But in the past 40 years, there’s been a major shift away from such hard measures. Now a company’s value is more about the quality of its employees, the equity of its brand and the value of its patent libraries.

“The kind of transparency that’s increasingly important relates to what are the materials of a product, where they were made, where a company has been spending its money in the community,” says Stephen Babson, managing director of Portland-based private equity firm Endeavour Capital. [But] all those things can be disclosed because they’re looking backward. I don’t think companies’ [actions] are ever going to be disclosed at the moment they do them.”

That change puts increasing pressure on companies to be transparent about these intangibles. Underriner estimates that only about 20% of the S&P 500’s value can be seen on a balance sheet.

“How do you value the intelligence of an engineering team?” he asks.

There are obvious elements of a business its executives will always want to keep under lock and key, says David Chen, founder of Equilibrium Capital Group, a sustainability-focused investment firm with offices in Portland, San Francisco and London. Chief among those elements: trade secrets.

“I don’t want to tell competitors about the latest shoelace I’ve come up with,” he says.

But transparency can take many forms, and it’s usually woven into a much broader umbrella of corporate responsibility. Being ethical and sustainable isn’t really possible without openness.

“No one has a transparency strategy,” Chen says. “They have a responsibility strategy. Transparency is a part of being an ethical, responsible business.”

Does transparency pay? There are several ways to parse that question. Secrecy certainly seems to hurt the bottom line: New account openings have dropped by as much as 40% since Wells Fargo admitted to using unethical sales tactics last year. And after an E. coli outbreak at Chipotle, the fast-food chain that prized itself on quality ingredients, the company’s sales and stock price plummeted and have not since recovered.

Some companies respond to scandal more proactively. After years of criticism about its overseas sweatshops, Nike became the first in the industry to disclose the location of its factories.

“That disclosure was and still is leading in the industry,” says Emily Lethenstrom, an environmental, social and governance analyst at Trillium. “Nike’s competitors don’t want to share that information, but from Nike’s perspective, because of the controversy they were involved in, it was a benefit to them to disclose that.”

That benefit paid off. Lethenstrom’s firm reinvested in Nike in 2007, “in part based on the company’s efforts to clean up the supply chain and increase transparency.”

Charitable donations and community-service efforts are obvious parts of a business to be transparent about, says Cliff Johnson, the co-founder of Portland-based vacation rental site Vacasa, one of a new breed of tech-driven sharing- economy businesses, staffed mostly by millennials. But transparency should be about much more than touting your do-gooding.

“If we have nothing to hide, we have nothing to lose,” he says. “Let’s make it public.”

That attitude has paid off for Vacasa, Johnson says. The founders decided to make the site’s calendar “100% transparent,” he says, allowing visitors to see the rate per night of each property including how that amount breaks down into taxes and cleaning fees. Competitors tend not to disclose the same fee breakdown, lumping all the costs together.

“We were basically just laying out our business model,” Johnson says.

Especially among millennials and especially in Oregon, customers place a high level of importance on whether the companies with which they do business are responsible and honest, says Babson.

“They want to know where [a product] was made, who made it and what the working conditions were in the place it was made,” Babson says.

Companies that answer those questions often see increased profits. But transparency goes beyond the supply chain to include other kinds of disclosures, business watchdogs say.

“Companies increasingly recognize that disclosure and board oversight of their political spending is in their best interest,” says Bruce Freed, director of the Center for Political Accountability in Washington D.C. “It provides them with protection. They know what they’re spending; these decisions are no longer hidden within the company, so they can weigh the pluses and minuses. It also protects them from the threat of extortion and shakedown.”

Organizations that raise money secretly, like 501(c)(4)s, may promise anonymity but can’t actually guarantee it, which means clandestine political spending often comes back to bite a company if a politician or group decides they aren’t getting paid enough. Target Corp.’s support of an antigay candidate for Minnesota governor in 2010 led to a boycott and problems in San Francisco building a store.

None of the analysts or executives Oregon Business interviewed for this series advanced an argument for secrecy (though several corporate representatives ignored our requests for interviews). While privately held companies tend to be more secretive by design, they would arguably enjoy better relationships with customers and the public by being more open. And even publicly traded companies endeavor to hide things — especially their mistakes. Chen chalks that up to arrogance.

“There’s a tendency with great power to think you won’t get caught,” he says. “Sometimes that attitude runs very deep in a company.”