Companies can no longer remain black boxes

In his famous book The great short filmwrites Michael Lewis: “As 1981 [John Gutfreund] transformed Salomon Brothers from a private partnership into Wall Street’s first public company. . . From that moment on, the Wall Street firm became a black box.”

Although Lewis wrote about banking, he was referring to a problem that existed not only at Salomon, or even just in the financial sector, but in almost all American corporations, even public ones. With the exception of basic financial information, companies remain black boxes in far too many areas.

The opacity makes it difficult for regulators, investors, workers and customers to find out key facts, from the full financial exposures of large companies (a 2018 paper from the IMF notes that off-balance sheet financing has increased since 2007) to how they meet their requirements lived values, to the fair treatment of individual employees.

As the economist Milton Friedman said as early as 1970, the social responsibility of managers is “to make as much money as possible while complying with the fundamental rules of society, both legal and ethical mores”. Fair enough. But what if companies don’t even release enough data to let people know if they’re complying with laws or customs?

It’s an issue highlighted by the new corporate pay transparency rules that went into effect in New York State last week. The rules, which force companies with four or more employees to include salary ranges when advertising jobs, follow similar laws already in place in California, Colorado and Washington states. They’ve already uncovered a huge gap between salaries at the bottom and those at the top, while showing just how wide (and nebulous) the salary range at the top of a company can be.

“Employees will have questions about their own pay when they see salary ranges posted on jobs that are similar to their own,” says Tauseef Rahman, partner in careers practice at consulting firm Mercer.

The issue will be particularly acute at a time when, according to Mercer, over 80 percent of workers find it important that employers adjust wages to the current economic environment (in which wage inflation has not remotely kept pace with headline inflation, and even less in the face of skyrocketing housing inflation) – but only 21 percent of US employers say they have adjusted their wages to living wages.

The pressure for transparency will increase even as unemployment rises. Companies are being pushed for more information beyond base salary – what about benefits in kind, stock options and different benefit schemes? All of these issues are being targeted by a growing number of workers, particularly younger ones, who rightly feel they are not getting their fair share of the company’s pie (the share of the private sector relative to the labor market is still at record highs ). .

But pay transparency is just the tip of a much larger iceberg of corporate opacity. There are a number of laws, such as trade secrets and patents, designed to keep information within companies. The swapping of intellectual property around vaccines became a huge global legal battle during the pandemic, as US and European companies refused to reveal their patent secrets even in the face of a global crisis. They have been quietly coerced by governments to speed up vaccine production despite publicly fighting to maintain legal protections.

The problem is not solved and does not go away. While the US Constitution itself allows companies to retain patents and trade secrets are protected by state laws, there will be more and more global health crises that will require such information sharing. Governments must find a way to ensure that smaller companies and innovators can protect intellectual property, while ensuring that corporate monopolies do not lock it up at the expense of society.

What applies to patents could soon also apply to supply chains. For competitive reasons, companies are often reluctant to disclose their information about suppliers. But as numerous 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 going to change. As climate regulations that require full disclosure of carbon footprints in the supply chain eventually come into effect, reporting standards will rise. Additionally, in the age of decoupling, with governments struggling to understand whether they can make essential products at home, companies will be forced to learn more – and learn more about where risks lie, both with the public and with the private sector.

Part of what has enabled such opacity in the US is that corporations are legal entities and enjoy all the privacy due to individuals. But that too is changing. In September, the Treasury Department passed a rule requiring companies to disclose much more information about who their owners really are.

It’s about time, say academics like Stanford University’s Anat Admati, who are exploring the power and opacity of corporations. “A ‘person’ in a company shouldn’t be so able to operate in the dark. ‘Free market’ forces are undermining trust in the democratic institutions that oversee them.”

In fact, if not even Friedman’s standards are upheld, things have gotten very dark indeed.

rana.farhoohar@ft.com

https://www.ft.com/content/3ab3ec60-dcba-4fd7-846f-0acbe36ffa65 Companies can no longer remain black boxes

Adam Bradshaw

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