Code of Practice for Transparancy

7/28/2019 Code of Practice for Transparancy

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Topic1CodeofPracticefor

Transparency

Corporate Governance

Trimester 2 2012

2606 words


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Corporate Governance 2 |1 4

Executive summary

The aim of this report is to inform businesses about transparency. Transparency refers to the

disclosure of information from businesses to the public and will allow the company to gain

confidence from its stakeholders and credibility. What is more, corporate transparency is now

regulated by legal entities such as the OECD or the APEC in Australia which make financial

disclosure mandatory. The business can choose to build a corporate strategy and choose to make

some information transparent, other translucent and some opaque to protect the business

interests. Above all, a code of practice to guide employees and managers needs to be set in place.

Managers need to become leaders and establish a positive atmosphere to encourage transparency

and whistleblowing, and take the necessary actions if a dubious behaviour occurs in the

company.


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Table of Contents

Executive summary ......................................................................................................................... 21. Introduction ............................................................................................................................. 42. What is transparency? ............................................................................................................. 5

a. Transparency, a definition ................................................................................................... 5b. How will the business benefit from transparency? .............................................................. 5

Within the corporation ..................................................................................................... 5 As a competitor ................................................................................................................ 5

c. Do we really have a choice anyway? ................................................................................... 5 The legal considerations ................................................................................................... 5 The public pressure .......................................................................................................... 6

3. Can all the information be transparent? .................................................................................. 7a. Transparent and proactive .................................................................................................... 7

Corporate social responsibility ......................................................................................... 7 Financial reports ............................................................................................................... 7

b. Translucent and reactive ...................................................................................................... 7 Supply chain ..................................................................................................................... 7 Detailed financial data ...................................................................................................... 7

c. Opaque and secret ................................................................................................................ 84. Recommendations for developing a code of practice ............................................................. 9

a. Setting up a the right culture ................................................................................................ 9b. Leading by example ............................................................................................................. 9c. Whistleblowing .................................................................................................................... 9d. Become a good barrel and get rid of the bad apples .......................................................... 10e. Choose the right balance of transparency .......................................................................... 10

5. Conclusion ............................................................................................................................ 116. References ............................................................................................................................. 12


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1. IntroductionAfter various corporate governance scandals, investors have lost confidence in businesses. After

the Dot Com bubble burst and many unethical behaviours, various legislations have been put in

place to regulate transparency. One of the key terms all of the media talk about is transparency,

but do we know much about it? If we only read journal articles and newspapers, most of them

explains how all of the businesses need to be fully transparent, but can they be fully transparent

and remain competitive? To answer these questions, it is first needed to understand what

transparency is and what it will bring to the business. Then, we will start to get a critical point of

view and ask if all of the information need to be transparent. The business will need to build a

code of practice and establish a business strategy, for which some recommendations will be

given.

This report has been written following the Stewardship theory, as opposed to the Agency theory,

assuming that the business and the directors are looking for the maximisation of the

shareholders interests (Tricker, 2012). Even though the business interests are kept in focus, it is

assumed that leaders and directors will not be only focusing on their self-interests and will be

willing to work in a positive, transparent and fair corporate environment, and are all ready to

change if necessary.


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2. What is transparency?a.

Transparency, a definitionThe Oxford Dictionary (2012a) defines transparency as a condition of being transparent.

Applying this definition to a corporate context would make a company transparent thanks to its

information sharing (Su et al., 2011). A transparent company would release any information for

its investors, financial and accounting data, commercial actions, partners anything. Corporate

transparency is specifically used for the disclosure of financial and accounting conditions

(Seyoum, 2009), but it has been chosen to focus on transparency as a whole in this report and not

only on corporate transparency as every aspect of transparency should be as important as the

other ones.

b.

How will the business benefit from transparency?

Within the corporationTransparency can be strongly beneficial for the business itself, and is in the self-interest of the

company (Robins, 2010). Indeed, it allows better efficiency and effectiveness (Su et al., 2011)

and above all allows the creation of a system. A system is a group of elements working together

(Oxford Dictionary, 2012b) and all of the elements are correlated. Transparency allows all of the

employees to know a maximum of information and work with them. Thanks to transparency, all

of the employees feel safe to speak up and the business is moving forward. Transparency allows

innovation and success thanks to the empowerment given to employees (Hindus, 2006). All of

the stakeholders are given the maximum of information and productivity and innovation areoptimal which gives a strong competitive advantage to the business.

As a competitorBy being transparent, the company will also be more competitive thanks to external investors.

Indeed, releasing information will allow investors to gain confidence in the business, and show

that it is acting fair. The business gains in credibility as investors have sufficient information to

identify risks (Seyoum, 2009) and the level of satisfaction is improved. Transparency also

enhances the relationship with trading partners and suppliers (Su et al., 2011) and creates a

healthy environment of trust. In general terms, disclosure of information will bring better

relationship with all of the stakeholders (Haat et al., 2008). Disclosure shows to stakeholders thatthe company has confidence about its actions, and has nothing to hide. Transparency is a

valuable competitive advantage.

c. Do we really have a choice anyway? The legal considerations

After the scandals in the early 2000s, transparency has become the main focus for many

organisations. The OECD for instance encourages OECD and non-OECD countries to be

transparent (Australian Government, 2004). The APEC has also created standards that members


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need to implement (Australian Government, 2004). Australia being a member of both OECD and

APEC has double pressure to focus on transparency. Also, both of the international organisations

implement sanctions if transparency is not respected (Apec, 2003; OECD, 2001) which do notleave any choice to country members. Receiving a fine by the OECD for instance would become

the focus of the media, and a bad reputation would follow, strongly damaging the business. A lot

of entities are giving advices to business about transparency, but all of the legal restrictions on

the market tend to not leave any choice.

It is also important to mention that all of the countries might have different rules regarding

transparency, and the business will need to consider those discrepancies when expanding

overseas.

The public pressureAs well as the legal restrictions, companies receive another pressure from the media, and the

public (Christensen, 2002). Nike for instance has been in the centre of many scandals, from child

labour to bribery most recently (Stevens, 2012), showing an obvious lack of transparency. After

many scandals, Nikes reputation and image has been damaged. Keeping in mind that the public

are all potential customers, the business should look for their satisfaction. As soon as the public

asks for more transparency, the company should focus on it. In Germany for instance, 15.000

people signed a petition for the Hamburg parliament to introduce a new law regarding

transparency (Humborg, 2012). Even though Chistensen (2002) argues that most of the time,

people are not able to understand all of the data disclosed themselves, the public often shows a

deep interest in receiving more and more information from companies. The capitalist era and theagency theory represent a threat to transparency. Investors, stakeholders and public all need to

feel that businesses are still able to make money and be fair and ethical. The less a business

discloses, the worse its image becomes.


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3. Can all the information be transparent?a.

Transparent and proactive

Corporate social responsibilityAs mentioned before, transparency will increase competitiveness and customers and investors

trust. In order to keep them satisfied, some information need to be released regularly.

Information about ethics and corporate social responsibility should be communicated to the

public as much as possible, aiming to get a better image and reputation. Suppliers will be willing

to collaborate, as well as customers who will feel like they are doing the right thing by buying

the products. A code of ethics should be set in place, and made public. Being a socially

responsible company will increase the market share. The Body Shop for instance focuses most of

its marketing on corporate branding and its social responsibility, and experiences a growingcompetitiveness and customers loyalty (Lin, 2012). Anything related to ethics and corporate

responsibility should be made public instantly.

Financial reportsThe business will also need to release some financial reports regularly. Especially after the

Enron scandal (BBC, 2002), companies are now asked to disclose their financial data. The

financial statements should include the balance sheet, the income statement, the cash flow

statement and an audit report (ASIC, 2011). The data need to be comprehensive and easy to

understand by the public. This report will show to investors the income earned by the company

and how the money has been spent. By providing an audit report, the business gains incredibility. These basic financial data need to be made public regularly to keep investors and

stakeholders informed about the health of the company.

b. Translucent and reactive Supply chain

There is no legal obligation to make the supply chain transparent, except when some items are

subject to safety measures and standards (New, 2010). Some companies are willing to emphasize

on the provenance of their product, often a proof of quality, but there is no legal restriction for

that. However, after some scandals with Apple and Foxconn, its Chinese suppliers regarding

deplorable working conditions (Garside, 2012), revealing aspects of the supply chain might be

good. A reactive position in this field consists in disclosing information when needed, as a

response to a demand from stakeholders.

Detailed financial dataA financial report needs to be made public on a regular basis, but when needed, detailed financial

data can be disclosed. If the media starts to point unethical use of fund for instance, full financial

data will need to be provided. Disclosing all of the data in a proactive basis would be too costly

for the company, and most of the time, all of the stakeholders will not be able to understand


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them. Nevertheless, the business needs to be able to present any financial data at any time to

prove its fair use of funds.

c. Opaque and secretSome businesses are able to stay competitive thanks to a secret. Coca Cola is able to face its

competitors thanks to its secret recipe (Watson, 2011), a French restaurant, lEntrecte has been

experiencing a huge success thanks to a special sauce and its secret recipe (Ribaut, 2007). The

example of those two businesses shows that some information needs to stay opaque to survive,

and unveiling them would make the business vulnerable to competitors (Christensen, 2002). For

this reason, when the Indian government forced Coca Cola to give its secret recipe to the Indian

competitor, Coca Cola chose to leave the market (Mahadkar, 2012). The success of some

businesses is due to the mystery around the brand, and being fully transparent about it would

bring competitors, and fake copies, and a drop in the market share. Any information whichwould endanger the business should remain opaque.


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d. Become a good barrel and get rid of the bad applesAlthough it is extremely important to encourage a good behaviour, it is also important to ban any

unethical action. By creating a positive environment, the company will be considered a goodbarrel, but bad apples will remain. It is important to start hiring people conforming to the new

code of practice and be careful about existing employees in the business. Grill for instance, an

Australian engineering company did not hesitate to make redundant one of the senior executive

for lack of disclosure (Ferguson, 2012). Taking such actions will show to the public that the

company is committed in fighting unethical behaviours, and will also result in good publicity.

Some company will tend to believe that it is better to keep such actions private, but the will

mostly gain in credibility. Furthermore, bad publicity and financial fines will be much worse.

e. Choose the right balance of transparencyAs mentioned above, some information legally need to be transparent. However, some need toremain opaque. According to the business strategy, it is needed to find the right balance between

what will be transparent and what will not. Indeed, too much transparency can damage

confidentiality, which can damage the business interests. Another question then arises, is it

possible to be transparent and innovate? If a business makes public any information, then the

competitors will grab the opportunity to copy. If a business is working on a new innovative

product they need to keep it secret until it is made public. The business can also choose not to

give any explanation about the construction of the product and choose to make it a secret. On the

contrary, some businesses will choose to make everything public and become fully transparent

for all of its stakeholders, including competitors. All of the businesses need to establish a clear

corporate strategy about what will be transparent, translucent or opaque, apart from the legal

restrictions.


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5. ConclusionFirst, the cohabitation of transparency and competitiveness seems to be impossible if the

business wants to protect its interests. However, transparency is necessary for a company but itcan be difficult to find the right balance. A strategy needs to be put in place to understand what

should be transparent, translucent and opaque. A code of practice then needs to be created,

following this corporate strategy, for all of the employees and managers to follow. Yes

transparency is important, and yes it should stay on focus, but it does not mean that the business

should forget its own interests. The aim of a business is to survive and stay competitive, and for

this, the public and customers need to be satisfied which is why transparency is necessary, but

the company also needs to be able to face its competitors by not unveiling all of the data when

necessary.

If you played poker, would you win if all of the participants knew your cards?


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6. ReferencesAPEC, 2003, Leaders statement to implement APEC transparency standards,Leaders

Declarations, Asia-Pacific Economic Cooperation, 21st October, accessed 15th July 2012,

http://www.apec.org/Meeting-Papers/Leaders-

Declarations/2003/2003_aelm/leadersstmtimplapectranspstd.aspx

ASIC, 2011, Financial reports,Australian Securities & Investments Commission, accessed 16th

July 2012, http://www.asic.gov.au/asic/asic.nsf/byheadline/Financial+reports?openDocument

Australian Government, 2004, Transparency obligations in international investment

agreements,Economic Roundup Winter 2004, The Treasury, accessed 10th

July 2012,

http://archive.treasury.gov.au/documents/876/HTML/docshell.asp?URL=International_investment_agreements.htm

BBC, 2002, Enron scandal at-a-glance, BBC News, 22nd

August, accessed 14th

July 2012,

http://news.bbc.co.uk/2/hi/business/1780075.stm

Christensen, L. T., 2002, Corporate communication: the challenge of transparency, Corporate

Communication: an International Journal, vol 7, iss 3, accessed 3rd July 2012.

Ferguson, A, 2012, Building on a culture of credibility, The Sydney Morning Herald, 7th July,

accessed 16th

July 2012, http://www.smh.com.au/business/building-on-a-culture-of-credibility-

20120706-21mga.html

Garside, J, 2012, Apples efforts fail to end gruelling conditions at Foxconn factories, The

Guardian, 30th

May, accessed 16th

July 2012,

http://www.guardian.co.uk/technology/2012/may/30/foxconn-abuses-despite-apple-reforms

Haat, M. H. C., Rahman, R. A., Mahenthiran, S, 2008, Corporate governance, transparency and

performance of Malaysian companies,Managerial Auditing Journal, vol 23 iss 8, accessed 3rd

July 2012.

Hindus, S, 2006, Transparency and there again: lessons learned at Digital, Journal ofManagement Development, vol 25 iss 10, accessed 7

thJuly 2012.

Humborg, C, 2012, Hamburgs transparency law to open government more than ever,

Transparency International, 25th June, accessed 15th July 2012,

http://blog.transparency.org/2012/06/25/hamburgs-transparency-law-to-open-government-more-

than-ever/

Lin, J. Y., 2012, Corporate social responsibility, The Sydney Globalist, accessed 16th

July 2012,

http://thesydneyglobalist.org/archives/2044


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Mahadkar, V. M., 2012, The tiger loses its stripes?, Fordham Corporate Law, 15th

April,

accessed 16th

July 2012, http://fordhamcorporatecenter.org/2012/04/15/the-tiger-loses-its-stripes-

indias-proposed-retroactive-tax-on-foreign-takeovers-may-diminish-its-aura-as-an-attractive-destination-for-foreign-investors-4/

New, S, 2010, The transparent supply chain,Harvard Business Review, October, accessed 16th

July 2012, http://hbr.org/2010/10/the-transparent-supply-chain/

OECD, 2001, Transparency and disclosure, 2nd

Meeting of the Eurasian Corporate Governance

Roundtable, Organisation for Economic Co-Operation and Development, 7th-8th June, accessed

15th

July 2012, http://www.oecd.org/dataoecd/59/59/2354040.pdf

Oxford Dictionary, 2012a, Transparency, accessed 13th

July 2012,

http://oxforddictionaries.com/definition/english/transparency?q=transparency

Oxford Dictionary, 2012b, System, accessed 13th July 2012,

http://oxforddictionaries.com/definition/english/system?q=system .

Ribaut, J. C., 2007, Le secret de lEntrecte enfin dvoil ?(The secret of the Entrecte finally

unveiled? own translation),Le Monde, 20th

June, accessed 15th

July 2012,

http://www.lemonde.fr/vous/article/2007/06/20/le-secret-de-l-entrecote-enfin-

devoile_925998_3238.html

Robins, F, 2010, Learning from corporate mistakes, Corporate Communications: An

International Journal, vol 15 iss 2, accessed 3rd July 2012.

Seyoum, B, 2009, An empirical analysis of the impact of corporate transparency on foreign

direct investment,Multinational Business Review, vol 17 iss 3, accessed 3rd

July 2012.

Stevens, S, 2012, Nike executive accused in Chinese bribery scandal, Portland Business

Journal, 25th

April, accessed 14th

July 2012,

http://www.bizjournals.com/portland/morning_call/2012/04/nike-executive-accused-in-

chinese.html

Su, H. Y., Fang, S. C., Young, C. S., 2011, Relationship transparency for partnership

enhancement: an intellectual capital perspective,Journal of Business and Industrial Marketing,

vol 26 iss 6, accessed 3rd July 2012.

Transparency International, 2012, Transparency Ireland urges employees to protect whistle-

blowers, 20th

January, accessed 17th

July 2012,

http://www.transparency.org/news/pressrelease/20120120_whistleblowers

Tricker, B, 2012, Corporate governance: principles, policies and practices, 2nd edition, Oxford

University Press


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Watson, B, 2011, Has Coca Colas top secret recipe been leaked? Not really,Daily Finance,

15th

February, accessed 15th

July 2012, http://www.dailyfinance.com/2011/02/15/has-coca-colas-

top-secret-recipe-been-leaked-not-really/

Code of Practice for Transparancy

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