EU Transparency Directive

Transparency is currently one of the hottest topics among policymakers on both sides of the Atlantic. What can be done to give investors more information about companies, transactions, markets and risks? Can greater levels of corporate disclosure enhance regulatory and public oversight of corporate activities? This week, John Browne, the former CEO of BP, used a rare public intervention to crank up the heat further by calling for greater transparency in the oil sector.

According to the conventional wisdom, transparency is an essential facet in promoting financial stability, market predictability and corporate responsibility. From this it is often taken that public policy should require ever-greater levels of openness from business. While this may seem axiomatic, the logic is dangerously flawed. A good case study comes in the form of proposed changes to the EU’s Accounting and Transparency Directives—elements of which are the subject of European Parliament hearings this week.

At the heart of the proposed Directives are new provisions which would require European companies to disclose how much they pay governments in individual oil, gas, mining and logging projects. Advocates of the proposals—led by the “Publish What You Pay” coalition of NGOs—argue that shining a light on these transactions is an important step towards tackling the “resource curse” which has blighted many developing economies.

There is certainly some merit to this argument: the disclosure of payments to governments should (theoretically) be a powerful driver of good governance in resource rich nations. For this very reason, many leading extractive firms already provide a public reconciliation of payments made to host governments under the highly-credible Extractive Industries Transparency Initiative.

Mandatory legislation could well work to enhance this process; but to do so any new rules must be carefully calibrated. EU policymakers—and indeed commentators such as Lord Browne—risk advocating an approach which could be both counterproductive and commercially damaging. What follows are three fundamental principles to guide legislators on the right path to transparency.

First, transparency is not an end in itself. From a development perspective, the underlying challenge is to ensure that civil society can utilise information disclosed in a meaningful way. Whilst it can be relatively easy to put masses of data in the public domain, it is far harder to build informed debate around particular disclosures.  This may go some way to explaining why there is little clear evidence linking enhanced transparency to development outcomes—even in sectors (such as the extractive industries) where there is a history of good corporate disclosure. This is a fundamental issue that requires careful empirical study, rather than a flurry of knee-jerk legislative action.

The second golden rule follows logically: specifically, that the quality and relevance of disclosures is more important than the quantity and granularity. Investors and other stakeholders need accessible, understandable and comparable information about how companies run their operations. Many corporate reports are already too large, too lengthy—and unfortunately sometimes irrelevant. Anyone who has worked in politics knows that the way to stifle debate is to bombard opponents with data: a corporate report lasting 500 pages is often an entirely inadvertent way of obfuscating rather than informing.

The proposed EU rules for natural resource companies risk falling into this trap by contemplating highly granular disclosures on a “project-by-project” basis. Companies and regulators have struggled for over a year to alight on a definition of “project” that could be meaningfully applied across extractive sectors and different investment regimes. The European Commission’s decision to propose a less-than-uniform definition—based on the lowest level of management reporting—could give rise to inconsistent disclosures. This would likely prejudice rather than enhance transparency in the targeted sectors.

Less granular disclosures—such as reporting on a country-level basis—are often opposed on the basis that they do not provide “total transparency”. But the utility of targeted reporting along these lines would be far higher than a confusing mass of incoherent data.

Finally, further thought needs to be given to the boundaries of corporate transparency. Whilst management gurus may fantasise about “crystalline corporations”, full disclosure would breach well-established rights such as privacy, security and commercial confidentiality. The latter issue requires careful thought in particular.

In the extractive sector, there is a risk that overly stringent disclosure rules might affect the competitive position of European firms vis-à-vis their Chinese or South American competitors. The issue here is not—as some commentators have sought to imply—whether companies retain the latitude to bribe foreign officials; but rather whether the types of disclosures envisaged by the draft legislation might provide competitors with valuable data that could be used to gain a commercial advantage in future tenders.

This risk is often hastily dismissed by campaign groups, but the dangers are real. Last year, the cost of industrial espionage to UK businesses stood at over £7bn. Would it not be folly for EU legislation to mandate disclosures of similar commercial value to international competitors?

It may be too late for an entire rethink of the EU’s proposed disclosure rules for the extractive sector. But it is vital that amendments to the draft legislation are adopted on the basis of these three basic principles. Misconceptions about the transparency agenda have survived recently because policymakers and commentators have been too distracted to challenge them. One hopes: no longer.