Why Transparency Matters for Emerging Market Companies

10.23.2013
Markets thrive on transparency. (Photo: Wikimedia Commons)
Markets thrive on transparency. (Photo: Wikimedia Commons)

Many of the world’s largest and fastest-growing companies now come from emerging markets. But according to a recent report, these companies lag behind their more established peers in transparency — a handicap that could prevent them from becoming true global leaders in their fields.

Looking at 100 large multinational companies from 16 emerging market countries, Transparency International found an average transparency score of just 3.6 out of 10. A 2012 report on the world’s largest companies using the same methodology found an average score of 4.7. And while only one in five of the emerging-market multinationals had a transparency score above 5.0, just under half of the largest companies did.

These results should be deeply concerning for the executives of these companies, their investors, and the governments and citizens of countries where they operate.

Modern capital markets operate on information. The larger a corporation is, the more investors it has and the more widely dispersed those investors are, the greater the disconnect in incentives between the owners of the company (its shareholders) and the managers in charge of day-to-day operations.

Transparency and openness is the only way to bridge this gap and bring those incentives into line, which is why publicly traded companies in most developed countries are required to open their books several times a year as part of a standardized disclosure process. It’s also important to know just who owns a company and what that company owns: what Transparency International calls “organizational transparency.” The emerging market firms scored an average of 54 percent on this metric, compared to 72 percent among the world’s largest companies.

Of the worst performers, almost all were incorporated in China. Interestingly, although state-owned companies ranked worse on this metric than listed companies (24 percent versus 67 percent), the worst-performing category was privately held companies at just 15 percent. CIPE has long argued that both state-owned enterprises and family-owned firms need to adopt the same corporate governance models used in publicly-traded firms if they wish to survive and prosper, including greater transparency.

Transparency has other important benefits: one of the areas focused on in the report, for example, was anti-corruption policies:

Companies that publish their anti-corruption policies and disclose the key measures they have in place to fight corruption send a strong signal to stakeholders that the company is committed to fighting corruption.

The average score on this metric for the emerging-market companies was just 46 percent, compared to 68 percent among the world’s largest firms.

These policies are especially important in countries where corruption runs rampant: the private sector is the biggest victim of corruption, and can also be one of the most powerful tools for stamping it out. There is a strong business case for anti-corruption policies, especially as more global firms worry about corruption risk and the danger of falling afoul of strict anti-corruption laws in the U.S. and European Union.

Any emerging-market company that wishes to do business with a major American or European firm needs to be able to assure their partner that they won’t be exposed to expensive litigation or forced into unexpected expenses to “expedite” their project. One thing this report makes clear is that these firms need to start seeing transparency as an asset, not a liability.

Jon Custer is Social Media and Communications Coordinator at CIPE.