TRANSPARENCY IN CORPORATE GOVERNANCE
WHAT IS TRANSPARENCY?
“Transparency can be defined as a principle that allows those affected by administrative decisions, business transactions or charitable work to know not only the basic facts and figures but also the mechanisms and processes. It is the duty of civil servants, managers and trustees to act visibly, predictably and understandably.”-Transparency international
If something is transparent, it allows light to pass through thereby enabling people to see through it. Using the same concept, an entity is transparent if it enables others to see through it. Transparency works hand in hand with integrity. The more the integrity, the more transparent an entity or person will be. Because of the aforesaid closeness, many people even tend to think transparency is integrity.
IMPORTANCE OF TRANSPARENCY
If a company is transparent enough and reports material facts in real time, stakeholders will have more confidence in the management. Consequently, they will be more willing to invest in the company, thereby reducing the cost of capital. Transparency also helps those in charge to avoid fraud and put measures in place against it. All these factors put together enable the firm’s productive capacity and productivity to improve.
MECHANISMS FOR ENHANCING TRANSPARENCY
From time in memorial, corporate governance chains have undergone various overhauls in order to increase transparency. There is increased regulation on how financial reporting should be done and who should do it. International Accounting Standards (IASs) and other regulations are continually being improved so that what is measured, recognised, disclosed and reported is true and fair. Simultaneously, various trends are occurring in the area of auditing. This is in order for an independent knowledgeable entity to pass an opinion on the truth and fairness of the reports made by the corporations. Apart from these, regulations such as Acts of parliament and codes of best practice are also playing a critical role in enhancing openness. Most of the parliamentary Acts relate to securities exchange, companies in general (Companies’ Acts) and even those that directly target corporate governance such as Sarbanes.
The strife for transparency does not however come without costs. For a small firm, the cost of reporting transactions and the related audit fees can be too much to bear. For this reason, governments around the world exempt certain ‘small’ firms from some of these reporting requirements. However, it is advisable for any entity, no matter what the size to prepare it’s own reports as a management or performance measurement tool.
http://www.transparency.org/news_room/faq/corruption_faq Retrieved 02/03/2011