1、 Transparency and Corporate Governance MaterialSource:http:/www.hbs.edu/units/am/pdf/HWTransparencyJan2007.pdf Author: Benjamin Hamelin 1 Abstract An objective of many proposed corporate governance reforms is increased transparency. This goal has been relatively uncontroversial, as most observers be
2、lieve increased transparency to be unambiguously good. We argue that, from a corporate governance perspective, there are likely to be both costs and benefits to increased transparency, leading to an optimum level beyond which increasing transparency lowers profits. This result holds even when there
3、is no direct cost of increasing transparency and no issue of revealing information to regulators or product-market rivals. We show that reforms that seek to increase transparency can reduce firm profits, raise executive compensation, and inefficiently increase the rate of CEO turnover. We further co
4、nsider the possibility that executives will take actions to distort information. We show that executives could have incentives, due to career concerns, to increase transparency and that increases in penalties for distorting information can be profit reducing. 2 Introductions In response to recent co
5、rporate governance scandals, governments have responded by adopted a number of regulatory changes. One component of these changes has been increased disclosure requirements. For example, Sarbanes-Oxley(sox), adopted in response to Enron, WorldCom, and other public governance failures, required detai
6、led reporting of off-balance sheet financing and special purpose entities. Additionally, sox increased the penalties to executives for misreporting. The link between governance and transparency is clear in the publics (and regulators) perceptions； transparency was increased for the purpose of improv
7、ing governance. Yet, most academic discussions about transparency have nothing to do with corporate governance. The most commonly discussed benefit of transparency is that it reduces asymmetric information, and hence lowers the cost of trading the firms securities and the firms cost of capital. To o
8、ffset this benefit, commentators typically focus on the direct costs of disclosure, as well as the competitive costs arising because the disclosure provides potentially useful information to product-market rivals. While both of these factors are undoubtedly important considerations in firms disclosu
9、re decisions, they are not particularly related to corporate governance. In this paper, we provide a framework for understanding the role of transparency in corporate governance. We analyze the effect that disclosure has on the contractual and monitoring relationship between the board and the CEO. W
10、e view the quality of information the firm discloses as a choice variable that affects the contracts the firm and its managers. Through its impact on corporate governance, higher quality disclosure both provides benefits and imposes costs. The benefits reflect the fact that more accurate information
11、 about performance allows boards to make better personnel decisions about their executives. The costs arise because executives have to be compensated for the increased risk to their careers implicit in higher disclosure levels, as well as for the incremental costs they incur trying to distort inform
12、ation in equilibrium. These costs and benefits complement existing explanations for disclosure. Moreover, because they are directly about corporate governance, they are in line with common perceptions of why firms disclose information. We formalize this idea through an extension of Hamelin and Wasat
13、ch (1998) and Hamelins (2005) adaptation of Hailstorms (1999) career-concerns model to consider the question of optimal transparency. Section 2 lays out the basics of this model, in which the company chooses the “quality” of the performance measure that directors use to assess the CEOs ability. In t
14、his model, the optimal quality of information for the firm to reveal can be zero, infinite, or a finite positive value depending on the parameters. When we calibrate the model to reflect actual publicly traded large us corporations, we find that the parameters implied by the calibration lead to a fi
15、nite value for optimal disclosure quality. Thus, our analysis suggests that disclosure requirements going beyond this optimal level are likely to have unintended consequences and to reduce value. We evaluate the implications of penalties and incentives that potentially affect the motives of CEOs to
16、distort the information coming from their firms. Measures that punish exaggerating effort can be effective if they are sufficiently severe to curtail this effort； however, relatively minor penalties can be counterproductive. In addition, incentives for CEOs to improve the accuracy of information can
17、 harm shareholders because such incentives push a CEO to disclose more than the value-maximizing quantity of information. 3 Concealing Information In light of some recent corporate scandals, one concern is not that executives distort information, but rather that they conceal it. In this subsection,
18、we briefly address what our analysis can say with respect to concealing information. One question is whether the other players know if the CEO has concealed information? If so, then presumably they can punish the CEO for non-disclosure Moreover, if it is common knowledge that the CEO knows the value
19、 of signals that he conceals, then an unraveling argument (Grossman, 1981)applies: Whatever the inferred expected value of unrevealed signals is, the CEO will have an incentive to reveal those above that expected value. Hence, the only equilibrium is one in which unrevealed signals are inferred to h
20、ave the lowest possible value and the CEO is correspondingly induced to reveal all signals. We predict therefore that concealment is unlikely to be an issue if the other players know what the set of signals is. Suppose, in contrast, that the other players did not know what the complete set of signal
21、s was(e.g., the set varies over time).If the CEO did not know the realized value when he deciding to reveal or conceal a signal, then he would wish to conceal all signals that he could: more signals means a more precise posterior estimate of his ability, which means greater career risk for him. Our
22、model, thus, predicts that when (i) the CEO has discretion over what signals are revealed and (ii) must commit to reveal or conceal prior to learning the value of the signals, he will choose to commit to conceal all signals over which he has discretion. If, instead, the CEO is not committed to a dis
23、closure decision prior to learning the value of the signals, then he will be tempted to reveal those that are favorable to him. The other players will infer that they are getting a biased sample and, thus, make a downward adjustment. In this sense, the situation is similar to that of “exaggerating e
24、ffort. “The details of the analysis are, to be sure, different and await future analysis, but our general conclusions will generally hold. 4 Discussions and Conclusion Most corporate governance reforms involve increased transparency. Yet, discussions of disclosure generally focus on issues other tha
25、n governance, such as the cost of capital and product-market competition. The logic of how transparency potentially affects governance is absent from the academic literature. We provide such analysis in this paper. We show that the level of transparency can be understood as deriving from the governance relation between the CEO and the board of directors. The directors set the level of transparency (e.g., amount and quality of disclosure) and it is, thus, part of an endogenously chosen governance
