By Doug Pinkham
President, Public Affairs Council

It seems that everyone - from the institutional investor to the anti-globalization protestor - is demanding more corporate transparency.

In the financial world, transparency deals with disclosure of governance practices and the timely release of information about a company's performance. The SEC's approval of Regulation Fair Disclosure in 2000 was designed to ensure that financial analysts and large investors would no longer receive privileged access to key information. Following the Enron, Tyco, Global Crossing and WorldCom scandals, Congress reacted aggressively by passing the Sarbanes-Oxley Act of 2002. This legislation made major changes in the rules for corporate governance, financial disclosure, auditor independence and corporate criminal liability.

One of the key premises of both laws is that transparency serves as a deterrent to illegal or unethical behavior. The more information a company is required to disclose, lawmakers reason, the more likely it is that investors will make sound decisions. As transnational corporations have expanded rapidly across the globe, the demand for another type of transparency has also risen dramatically. Stories of human rights abuses in third-world factories and environmental degradation in rain forests have created a clamor for companies to engage in proactive social reporting.

Activists don't just want to know what a company produces; they want to know how it is produced. Are child laborers used? Are worker conditions safe? Are toxic emissions being released into the air? What is a company doing to reclaim the land it has mined for minerals? Just as Enron spurred the outcry for more financial disclosure, scandals (and alleged scandals) dealing with companies ranging from Nike to Royal Dutch Shell have created a host of initiatives to require detailed reporting of company operations around the world.

In this environment, corporate CEOs and their communications and public affairs counselors must ask themselves a series of tough questions:

• Can we comply with the laws and keep up with the public's expectations?

• Where is this push toward greater transparency going?

• Will greater transparency build trust in our company or will it merely open the door to further harsh scrutiny?

The first order of business, of course, is to find ways to comply with new laws on accountability and transparency. The National Investor Relations Institute (NIRI) has published an analysis of Regulation Fair Disclosure, Regulation G and other SEC directives. It has also produced useful guidelines for earnings releases (see http://www.niri.org/).

'Compliance is not enough'

While NIRI's advice can help companies abide by various regulations, compliance is not enough. Corporate management needs to take on the responsibility for creating an open environment. "Some companies will lean forward into disclosure and make that information transparent to their investors," said NIRI President and CEO Lou Thompson in a recent speech. "Some companies will be leaders. Others will reluctantly comply with these new rules as their lawyers counsel that being too progressive involves too much risk."

Openness must be modeled first within corporate boards. Thompson suggested that board members receive all of the relevant analysts' reports, regardless of whether they are good or bad; and they should hear about the most frequently asked questions from analysts or institutional investors. "This could provide some of the best early warning information of a problem or potential problem that board members may have to deal with," Thompson explained. "It can also provide evidence that the 'Street' understands the company's strategy or is rejecting the board-approved strategic plan." In addition, NIRI recommends that the board know the company's shareholder mix (and whether any effort is underway to change it) and how the company is ranked by the various corporate governance-rating services.

While it's still too early to know how well these rating services will serve as predictors of good or bad behavior, the fact is that many institutional investors are already using them. Plus, they may identify vulnerabilities in governance policies or practices.

The challenge of meeting or exceeding public expectations for operational transparency is a more amorphous undertaking. Making the matter even more complicated are the many proposals put forth to standardize corporate accountability. These include the Global Reporting Initiative, which was established in 1997 to disseminate sustainability reporting guidelines that cover the economic, environmental and social dimensions of a company's business practices. The Global Sullivan Principles, established in 1999, are a code of conduct designed to support economic, social and political justice by companies where they do business. Add to these the myriad of other accountability codes proposed by non-governmental organizations and you can see why many companies struggle with the whole concept.

Once upon a time, these types of issues were addressed on a case-by-case basis, depending on the laws of the host country and the willingness and ability of a corporation to release operational data. But now both the expectations for greater transparency and the capability to be transparent have increased.

The Internet as activist enabler

The power of the Internet has enabled activist groups to show video of human rights abuses and create databases that help citizens figure out which companies are polluting the air in their neighborhood. The more the public exercises its right to know, the more it seems to want to know. The likely outcome will be a permanent tension between activists' demands for more transparency and the business community's desire for a modicum of opacity. The big question is whether it is worth trying to keep up with public expectations on transparency. The answer is a qualified "yes." But not for the reasons you might expect.

A company that positions itself as "open" is trying to convey the message that it welcomes the public's scrutiny. Unlike Tyco, which used to conduct many of its annual meetings in Bermuda with few Board members in attendance, many corporations are now scrambling to prove that they have nothing to hide. This strategy, if successful, certainly can improve a company's public image. If the approach can be sustained, it can help to rebuild trust.

But here's where many companies fall short. They think that by appearing to be transparent - or at least more transparent than their competitors - they will be left alone. Instead, every time they report in more detail about their activities, the expectation "bar" gets raised a little more. Make no mistake about it. The price of gaining credibility through openness is often a higher level of scrutiny.

But the greatest benefits of corporate transparency lie elsewhere. They include improved relationships with stakeholders, awareness of emerging problems and greater efficiency. That's because openness creates opportunities for dialog with customers, shareholders, employees, local communities and government officials. If you make the effort to engage your critics - and those who may become your critics - you can correct problems before they get out of hand. Listening is the first step toward rebuilding trust. You also will have developed a long-term "feedback loop" (in the words of author and futurist Virginia Postrel) to gather business intelligence that will help you respond more quickly to changes in the marketplace.

"Social and environmental auditing and reporting give companies the opportunity to assemble and assess more comprehensive information on operations and impacts," says Business for Social Responsibility (BSR), a California-based business group. "This information can help coordinate and maximize efficiencies and collaborations across departments, facilities and business units."

If transparency becomes part of your corporate vision - and not just a tactic to fend off your opponents - the long-term benefits will become apparent. For example, honest relationships with reporters may not always result in glowing news coverage, but they will result in your company being given the benefit of the doubt when it faces a crisis. Similarly, a positive image that comes from a sustained philanthropic or volunteerism program will come in handy when you are trying to obtain rights-of-way to construct new facilities.

How to create an open company

How do you get started? In addition to the recommendations from NIRI, here is a list of 10 steps a corporation can take to become more transparent:

1. Set your own social and environmental performance targets. Define what transparency means to you and build a case for your approach.

2. Proactively engage your stakeholders in dialogue.

3. Monitor your external environment so that you can understand expectations and prioritize your responses.

4. Publish your corporate governance policies on your Web site. (Very few companies do this.)

5. Form an internal committee to ensure that your board is getting a complete picture of your company's performance. The SEC and NIRI recommend that companies establish a Disclosure Committee to evaluate internal controls, review disclosure policies and practices, determine the materiality of information that might need to be disclosed, and review public communications and SEC filings.

6. Require employees to take ethics training and sign letters upholding your business principles. This rule will not only encourage ethical behavior, it will show your willingness to invest company funds to maintain integrity.

7. When addressing issues of public concern, localize the message by utilizing company employees in affected communities and enlisting the help of third-parties (e.g., community organizations and local government officials).

8. Be willing to disclose all of your business, social and political activities (as long as doing so does not raise legal issues or jeopardize your competitive position in the marketplace).

9. Address the tough questions (e.g., CEO compensation) directly and talk candidly with employees about why you do business the way you do.

10. Conduct a "culture audit" to ensure that employees believe they are being rewarded for positive behavior. At Enron, every employee signed a code of ethics, but the unwritten code was that managers should push the limits of the law to accomplish corporate goals.

An important role for everyone

In the process of building your company's capacity for openness, your senior public relations, investor relations and public affairs executives can play important roles. They can be the ones who integrate all of your external engagement strategies, from media relations to government affairs to financial reporting. They can also be the ones who champion the concept of openness throughout the corporation to make sure skeptical employees understand the upside potential of this strategy.

Rebuilding trust is a long-term undertaking that cannot be accomplished simply by telling the world what great corporate citizens you are. You need to inject a philosophy of social responsibility and ethical behavior into your company's culture, and be willing to open yourself up to scrutiny. Deciding how transparent you should be - or can afford to be - is no easy task, but the process of doing so will help you see yourself as others see you.