Transparency and corporate governance

Abstract

We are suspicious of what goes on behind closed doors. This is especially true when the doors are to the boardroom and the offices of senior management of the corporations in which we invest. And, in light of scandals such as Enron and Worldcom, we would appear to have good reason to be suspicious. But even before those events, economists and other commentators on corporate governance have long expressed concern and, consequently, called for greater transparency. It is, in fact, difficult at times to imagine reasons why we would not wish for the corporations in which we invest to be maximally transparent. As I will argue in this chapter, however, that view can be short-sighted: some opaqueness could ultimately be to investors’ advantage. Moreover, even if we believe that transparency is generally to be promoted, that does not necessarily justify legally mandating greater transparency, as for instance was a goal of the United States Sarbanes-Oxley legislation and similar legislation in Japan and other nations.