The Partial Monty: Nudging Toward More TransparencyPerspective |
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In the quest to escape the current financial meltdown, pundits frequently suggest increased transparency. Transparency usually means that accurate, timely and understandable information is provided to the right people at the right time — no more, no less. With public trust in the financial system greatly diminished, the value of increased transparency is unambiguous. The real question is how to improve transparency to rebuild trust in financial markets.
Raising transparency requirements is expensive. Not only are there infrastructure and process investments required to bolster transparency, but oversight and monitoring consume scarce resources. Moreover, excessive transparency undermines the capacity to innovate — the lifeblood of our market system. The proper balance is elusive.
Getting to the right amount of transparency is all about focus. Information is like incandescent light — diffused, incoherent, and increasingly distorted the farther it gets from its source. This is similar to the growing mountains of information produced within corporations. More information, like light, does not ensure better illumination of distant or hidden objects. Too much information encumbers decision-makers into indecisiveness and possibly erroneous decision-making. Similarly, growing complexities, a byproduct of both growth and innovation, also undermine transparency. Consider the innovation of financial derivatives. Regulators attempted to provide more transparency around these new complex securities by requiring mark-to-market accounting. Unfortunately, with today’s highly illiquid markets, it’s unclear whether this additional information disclosure requirement improved transparency.
To push the light analogy further, researchers learned many years ago that by isolating segments of the light spectrum it was possible to focus light on specific objects, both nearby and far away. The value of focused light (i.e. lasers) became apparent and led to a stream of inventions from TVs to PCs to DVDs. The innovation of lasers drove significant efficiencies in the use of light, enabling focus on specific objects near or far using only the energy needed to light the object in question, not the surrounding objects.
Similarly, we need innovations in how to focus transparency. Perhaps thinking of the risks associated with insufficient transparency will help in identifying where and how to focus transparency. Focused transparency is, for example, critical to keeping the interests of both agents and principals aligned. This in turn is the foundation of effective corporate and regulatory strategy execution. Pursuit of self interest without sufficient transparency will ultimately undermine both market and corporate performance as trust fractures. Both insufficient as well as excessive transparency, therefore, will impose a net burden on both markets and corporations. On the other hand, focused transparency can have a powerful effect of aligning interests within organizations.
Moving to more focused transparency within companies could involve the creation of a new leadership position, a CTO in addition to the chief technology officer: a chief transparency officer. This leader would be responsible for focused transparency within a company — for both activities and performance, ensuring that the right information is in the right place at the right time. This would help restore accountability for those responsible for setting the corporate strategy, as well as those responsible for executing the strategies.
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Richard Woodward
Principal