Transparency in Corporate Governance

Transparency in Corporate Governance

Corporate governance is one particular area that has seen evolution over the past century. A common factor throughout the world that determines the success of a corporate governance structure is the extent to which it is transparent to market forces (Millar, Eldomiaty, Choi, & Hilton, 2005). Events of the past, such as the Worldcom and Enron accounting scandals, have led to much concern and stricter oversight, especially when it comes to financial reporting. Such corporate scandals also illustrate the importance of effective corporate governance systems and the linkage to business ethics throughout the world (Millar, Eldomiaty, Choi, & Hilton, 2005).

Transparency, in its simplest state, is an organization's full disclosure of all private information relevant to a stakeholder making a decision or judgment regarding the corporation. Financial transparency, as defined by John Morrissey, Deputy Chief Accountant of the Securities Exchange Commission (SEC), "A primary goal of the federal securities laws is to promote honest and efficient markets and informed investment decision through full and fail disclosure. Transparency in financial reporting, that is, the extent to which financial information about a company is available and understandable to investors and other market participants, plays a fundamental role in making our markets the most efficient, liquid, and resilient in the world" (McCarthy, Flynn, & Brownstein, 2004, p. 129). Virtually all organizations of any size have external stakeholders who are not active participants in their management, but who have a legitimate interest (i.e., a stake) in the activities of the organization (Gaa, 2010). Transparency is not important for its own sake; its value is its role in increasing economic efficiency, that is, the efficiency of the economy in producing goods and services (Gaa, 2010). When it comes to public companies, the SEC is primarily concerned that companies tell investors what

they do, by requiring full, fair and accurate disclosure of material information about their businesses, financial condition and operating results. With certain limited exceptions, the SEC's rules do not impose substantive corporate governance requirements on issuers, but rather require only disclosure (Gaa, 2010). Additionally, the corporate governance framework should ensure

that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company (Gaa, 2010).

The significance of financial disclosure relies heavily on the assumption that organizations are disclosing private information that is valuable to stakeholders in evaluting the company's state of affairs, and