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 market participants can base decisions of value on the same data. Companies also have a strong motivation to provide disclosure because transparency is rewarded by the stock's performance.
Clarity: My Favorite Term
Because investor decisions are based on financial reports, the 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 operates with transparency concerning its financial reports while the other company runs multiple businesses with complex financial reports. Investors are more likely to invest in the first company because they can 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 information stating where a company invests, 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 be aware of the underlying investments that compose their portfolios. For example, owning a single stock means investing in one company while owning a mutual fund means investing in multiple companies. Transparency shows investors how much risk they will be exposed to with a security helping them to make more educated investment decisions.
Investors should regularly monitor how their securities are performing. The history of an investors' returns and market fluctuations may indicate possible fund performance in the future. Investors may also compare their returns with the performance of related securities, benchmarks and other asset classes and make investment choices that better meet their goals. Investing limitations, liquidity restrictions and fee structure should also be considered because they 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 notes 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 notes 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.