SOCIAL TOPICS (Archive): General

Transparent, Not Invisible

Published, Summer 2004

When I was in grade school we read The Hobbit, the prelude novel to the now much-hyped Lord of the Rings trilogy. The teacher asked us the following question: If we had a ring that made us invisible, and we knew we would not be caught, would we steal from stores? The question made a strong impression on me. I liked to think I was honest folk, but passing the candy section in our local Woolworth’s, I had to admit, if I had that ring, I would be severely tempted.

After Enron/WorldCom/etc., U.S. investors of every ilk joined together and called loudly for greater transparency in the reporting of financial information, and helped to spawn an unprecedented push for corporate disclosure and accountability on a range of issues. The logic behind this push reflects a pessimistic assumption about human behavior: There are certain decisions people will make only when they are "invisible," when they are confident that they will not be held accountable for, nor have to take ownership of, their actions.

Given the role multinational companies play in the global economy, the importance of reporting in building trust, helping understand the broader impacts of business decisions, and developing knowledge about complex issues cannot be overstated. Transparency, and a clear line of responsibility at a company, is a precondition for improving the social behavior of companies.

Fortunately, social issues are increasingly being addressed in company reporting, not only in response to activist pressure, but as leaders associate the long-term success of their companies with a more holistic approach to financial, social, and environmental challenges. For instance, this year, both Novartis and PepsiCo included social reporting in their annual reports. In explaining this choice Steve Reinemund, chairman and chief executive officer, wrote in PepsiCo’s 2003 Annual Report, entitled Growth and Trust, "We’re focused squarely on a commitment to deliver sustained growth through empowered people, acting with responsibility and building trust. Put simply, this commitment represents our priorities in the pursuit of creating value."

The Gap’s recent report on vendor relationships perhaps best exemplifies the changing trend toward transparency. When released, the report made international headlines because it did more than admit to vendor compliance flaws in its sourcing system. It reported on its difficulties and demonstrated that it is responding with thoughtful, determined actions. The 40-page report covers a range of topics from country-by-country monitoring data about factory conditions, the complex challenges facing the company, the building of stakeholder relationships, and the work still needing to be done. Most importantly, The Gap took responsibility for recognizing and responding to labor abuses in supplier facilities.

The strongest reports, like The Gap’s, detail the thought processes that support company decision making, acknowledge accomplishments and challenges, set goals and incorporate stakeholder feedback. This style of reporting truly enables a company to "tell its story," and demonstrate that it is working to understand the complexities involved in responding to social and environmental concerns.

Another sign that companies are embracing more open reporting is the increasing use of the Global Reporting Initiative (GRI). Formulated in part to respond to "survey fatigue," the GRI seeks to create an international standardized format with which companies can address a range of economic, social, and environmental issues. By harmonizing reporting structures, the expectation is that readers will be more easily able to assess a company’s social performance against its industry peers.

Still, only some companies have voluntarily given up their invisibility rings. Many remain as they have always been¾ superficial in their reporting of social and environmental issues. Much work is being done to remedy that, with activists fighting to ensure the accuracy of the information within the reports, and investors fighting for greater disclosure.

In the United States there is a campaign underway to encourage the Securities and Exchange Commission (SEC) to both enforce its existing disclosure laws and to develop new mandates regarding social and environmental reporting. In doing so, the SEC would keep pace with existing regulations in countries such as South Africa, France, and the UK. In South Africa, companies listing on the Johannesburg Stock Exchange must report following the GRI Guidelines; in France, regulations passed in 2001 require social reporting on human resources, community and labor standards; and in the UK, a consultative draft of potential reporting regulations was released in May 2004. The draft regulations call for mandatory reporting of the company’s impact on the environment, employees, supplier relationships, and the community. Beginning in 2005, these regulations would require directors to explain their reasoning when inaction is chosen on social and environmental issues.

Without mandated disclosure in the United States, however, companies with something to hide have the legal flexibility to mask their flaws, and this puts the environment, employees, shareholders, and other stakeholders at risk. Companies that are openly and actively addressing social and environmental issues through reporting are seizing opportunities and building relationships that we, and they, believe will support them in the long term. These companies, regardless of their challenges, deserve commendation for their willingness to reveal.

—Meredith Benton