Corporations can no longer remain black boxes


In his famous book The Big Short, Michael Lewis writes that “when, in 1981, [John Gutfreund] turned Salomon Brothers from a private partnership into Wall Street’s first public corporation . . . from that moment, the Wall Street firm became a black box”.

Though Lewis was writing about banking, he was referring to a problem that existed not just at Salomon, or even just within the financial sector, but in nearly all American corporations, even public ones. In all too many areas, with the exception of basic financial information, corporations remain black boxes.

Opacity makes it difficult for regulators, investors, workers and customers to figure out important facts, from the full financial risk positions of big companies (a 2018 IMF paper notes that off balance sheet funding had grown since 2007), to whether they live up to their espoused values, to if they treat individual employees fairly.

As the economist Milton Friedman said back in 1970, the social responsibility of managers is to “make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom”. Fair enough. But what if companies don’t even release enough data to let people know whether they are living up to law or custom?

It’s an issue spotlighted by the new rules on corporate pay transparency which came into effect in New York state last week. The rules, which force companies with four or more employees to include salary ranges when they advertise listings, follow on from similar laws already introduced in California, Colorado and Washington state. Already, they’ve exposed a huge bifurcation between lower level employee pay and those in the upper ranks, while demonstrating how broad (and nebulous) the range of salaries at the top of an organisation can be.

“Employees will have questions about their own pay as a result of seeing pay ranges posted on jobs similar to their own,” says Tauseef Rahman, a partner in the consulting firm Mercer’s career practice.

The issue will be particularly pressing at a time when, according to Mercer, over 80 per cent of employees think it’s important that employers adjust salaries to reflect the current economic environment (in which wage inflation hasn’t remotely kept pace with overall inflation, and even less so with skyrocketing housing inflation) — but only 21 per cent of US employers say they’ve adjusted pay to align with living wages.

Pressure for transparency will rise, even if unemployment does too. Companies will be pushed for more information beyond fixed pay — what about non-cash compensation, stock options and differing benefit regimes? All of these issues are being targeted by a growing number of workers, particularly younger ones, who feel quite rightly that they haven’t got their fair share of the corporate pie (the private sector share is still at near record highs compared with labour). 

But pay transparency is just the tip of a much bigger iceberg of corporate opacity. There is an entire body of law, around things like trade secrets and patents, that is meant to keep information inside companies. Sharing intellectual property around vaccines became a huge, worldwide legal battle during the pandemic, as US and European companies didn’t want to give up their patent secrets, even in the face of a global crisis. They were quietly compelled to do so by governments, in order to speed up vaccine production, even as they fought in public to keep legal protections.

The issue isn’t resolved, nor is it going away. While the US constitution itself allows companies to keep patents, and trade secrets are protected by state laws, there are going to be more and more global health crises that will necessitate such information sharing. Governments will have to find a way to ensure that smaller firms and innovators can protect intellectual property, while making sure that corporate monopolies aren’t locking it up at society’s expense.

What’s true for patents may soon be true for supply chains as well. Companies are often reluctant to reveal what information they have about suppliers for competitive reasons. But as any number of recent supply chain disasters have shown, they often don’t know enough themselves, having outsourced so much production to other companies and countries.

That’s about to change. As climate rules requiring full disclosure of carbon loads in the supply chain eventually take hold, reporting standards will rise. What’s more, in an age of decoupling, in which governments are scrambling to understand whether they can make crucial products at home, companies will be compelled to learn more — and share more — about where risk lies, with both the public and private sector.

Part of what has allowed such opacity in the US is that companies are legally persons, and enjoy all the privacy allowed to individuals. But that’s changing too. In September, the Treasury finalised a rule requiring companies to give much more information about who their owners really are.

It’s about time, say academics like Stanford’s Anat Admati, who researches corporate power and opacity. “A corporate ‘person’ shouldn’t have so much ability to operate in the dark. The forces of ‘free markets’ are undermining trust in democratic institutions to police them.”

Indeed, when even Friedman’s standards aren’t being upheld, things have gone very dark indeed.

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