Lehman Brothers, one of the premier Wall Street investment banks, announced a new round of steep losses in the ongoing credit crisis. Critics were quick to point the finger at one glaring issue: "It's the lack of transparency," said one prominent fund manager. "Most investors don't have any way of knowing what is out there in terms of bad debt." This has been a common refrain over the past months, and by now few question that the credit crisis in the United States was triggered by the appalling lack of transparency about the true state of the balance sheets of major banks and about the actual ingredients of the structured notes and multifarious derivatives that were so promiscuously traded before their collapse late last year.
Lack of transparency has also been cited as a reason for concern about the new breed of sovereign wealth funds in places such as the United Arab Emirates and China. Speaking in Abu Dhabi in early June, United States Secretary of the Treasury Henry Paulson, a supporter of investments by those funds in the United States, nonetheless called on them to embrace more openness in order "to quell calls for restrictions … and help allay concerns about opacity and systemic risks."
Transparency is assumed to be an unequivocally good thing. Questioning the value of it is like an American's criticizing apple pie: it just isn't done. Transparency has come to symbolize good corporate governance—the more the better—and its absence is perceived as a critical failing. There is only one problem with this equation: there's little proof that it's actually true.
The ideal of transparency supposes that more information about the inner workings of a company reduces the likelihood of corporate malfeasance, and increases chances that it will perform well.
The problem with the first assumption is that even if companies disclose everything they are required to and more, they can still deceive and commit fraud. The sheer volume of information that companies provide both in the United States and in other countries is so vast that it takes full-time analysts and regulators to parse it. Even then, there is a tacit understanding that much of what a company reports has to be taken on faith. Only if a company is investigated by a regulator is it truly possible to discover the veracity of the information it provides. In short, a company can be fully transparent and still be fraudulent.
Take the dual cases of Enron and Parmalat, two of the most significant examples of corporate fraud in recent memory. In both cases, the companies disclosed massive amounts of data as required in the United States and Europe, and in both cases, they were able to deceive the public about the true state of their businesses. Transparency was not the problem. Telling the truth was. While there can be a link between honesty and transparency, the latter is no guarantee of the former.
The other assumption is even more tenuous. The notion that with openness comes a greater likelihood of sustainable growth is appealing, certainly. But the world is full of highly competitive, innovative companies that are anything but transparent. China Mobile is the largest and arguably most successful wireless service provider on the planet, with 400 million customers and growing. Yet while a portion of it is publicly traded, much of the company is embedded in the complex state-business web that dominates the Chinese economy. Its stock, despite a recent downturn, has been on a tear, generating returns in excess of 300 percent in the past two years alone. It also delivers reliable coverage and ever-expanding options to its customers. Hardly a paragon of transparency, it has nonetheless been a stellar performer.
Many East Asian and Indian conglomerates are dominated by the state and/or family, and are notoriously resistant to sharing information. They have also been crucial to the success of their economies in recent years. The fact is that sometimes, less transparency leads to greater efficiency, much as the undemocratic China has been able to grow more quickly and raise more people out of poverty more rapidly than a democratic—though not more transparent—India.
The China Mobile example highlights a final uncomfortable fact: transparency has become a code word to use against non-Western companies. The veiled assumption is that Americans and Europeans have it, and non-westerners don't. Along with human rights and democracy, transparency has become another watchword that demonstrates the supposed moral superiority of the West over the rest. And like those other litmus tests, the rest invariably fall short. Enron and Parmalat are only two of hundreds of examples where the motes in one's own eye are just as pronounced.
Today lack of transparency is being used as a cudgel against sovereign wealth funds and foreign companies whose inner workings are indeed opaque. The concerns may be legitimate, but it is hard not to wonder how much of that discomfort is a product of a lack of transparency and how much is about the shifting power balance in global finance.