Transparency is Central to Financial Reforms in the US

The last several weeks have seen important movements in US requirements for corporate transparency. The US Congress – despite its many disagreements – passed a financial reform bill that explicitly advances transparency as critical to reforming financial systems and corporate practices.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, which passed Congress this week, represents arguably the most significant change to financial regulation since the 1930s. And while the bill is primarily focused on the regulation of complex financial institutions, there are some interesting transparency requirements that will affect almost all companies in the US.

First the bad news on transparency. The Dodd-Frank bill does not address the central question of disclosure of financial institution investments – that is, exactly what these institutions are investing in (and indebted to) in their increasingly complex financial products. As even Forbes magazine decried: the bill created “a “policy of ‘systematic non-disclosure’ – the absence of complete transparency about what financial firms really owe and are owed.”

But there was also some positive news on transparency. The bill requires energy and mining companies to disclose how much they pay foreign countries and the U.S. government for oil, gas, and mineral rights. This requirement was motivated by the long-standing, international Publish What You Pay campaign, which seeks greater transparency from oil and mining companies – particularly when they operate in developing countries.

The campaign lauded the Congressional action, saying the bill “will give citizens of resource-rich countries essential information to hold their governments to account and ensure that natural resources generate benefits for everyone, rather than a select few.”

Also buried within the Dodd-Frank bill is a requirement that all publicly-traded companies disclose not only their CEO’s salary, but how that amount compares to an average worker in the company. Companies in the US already have to disclose the compensation of their five highest paid employees. But now they will also be required to disclose the median compensation of all employees apart from the CEO, and then to calculate and publish the ratio of the median worker to the CEO’s pay.

As Phil Mattera argues:

For the first time, we will be able to make direct comparisons of the broad compensation practices of different companies within given industries or across sectors….Having clear, company-specific data could help stimulate a much-needed movement to address the problem of wage stagnation in the United States. The reality of that stagnation is quite evident from overall labor market data collected by the U.S. Bureau of Labor Statistics, but it would be much more effective to point the finger at individual companies with low medians and seek to shame them for failing to provide adequate compensation to their workers.

Finally, in a non-regulatory action, the US government announced this week that they will ask suppliers (the companies that sell to the government) to disclose their greenhouse gas emissions. The General Services Administration buys over 12 million products and services per year from over 600,000 suppliers. So this voluntary disclosure request could have far-reaching impacts.

All of these initiatives make clear that even slow-moving regulators will continue to push transparency in the marketplace.

About Dara O'Rourke

Associate Professor at UC Berkeley and Co-Founder of GoodGuide.
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