What is 'Transparency'
Transparency is the extent to which investors have ready access to required financial information about a company, such as price levels, market depth and audited financial reports. Transparency helps reduce price volatility, because all the market participants can base decisions of value on the same data. Companies also have a strong motivation to provide disclosure, as transparency is generally rewarded through the stock's performance.
BREAKING DOWN 'Transparency'
Because investors decide which companies to invest in based on financial reports, those reports should be as transparent as possible. For example, assume two companies have similar leverage, market capitalization, market risk exposure, earnings and return on capital. One company runs one business with clear transparency in its financial reports, while the other company runs multiple businesses with complex financial reports. More investors put their money in the first company because they easily understand the company's fundamentals and the risks involved.
Importance of Transparency
A strong indicator of future growth is how a business invests its money. When an investor cannot find concrete information stating where a company's money is invested, the investor is less likely to invest in the business. Opaque financial statements may hide a company's debt level, and the business could be facing insolvency.
Investors should also know what underlying investments comprise their securities. For example, owning a single stock means investing in one company, yet owning a mutual fund means investing in multiple companies. Transparency shows investors how much risk they are exposed to with a security, helping investors make more educated decisions on where to put their money.
Investors should regularly monitor how their securities are performing. This may be done by studying the history of the investors' returns and market fluctuations to determine possible fund performance in the future. Investors may also compare their returns with the performance of related securities, benchmarks and other asset classes to make proper investing choices that better meet their goals. Investing limitations, liquidity restrictions and fee structure should be considered as well, since they all affect how much an investor pays for a security.
Example of Transparency
In February 2016, six groups at a Tyson shareholder meeting spoke with chairman of the board John Tyson about the lack of transparency the company provided on its financial reports. The International Brotherhood of Teamsters pointed out that contributions to the American Beef Federation, the National Chicken Council and other trade groups, as well as state and local lobbying efforts, were not readily available. Multiple shareholders pointed out Tyson's leak in Monett, Missouri, which killed over 100,000 fish in the city's waterways.
Shareholders wanted more information on the company's planned improvement of water quality in plant areas. Additionally, shareholders asked for an annual report showing plant safety records to ensure the records improve over time. Because Tyson family members control the company's voting rights and did not approve of what was being asked of them, all six proposals were voted down.