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October 08, 2003
Book Review--The Naked Corporation: How the Age of Transparency Will Revolutionize Business
    by William Baue

In making the business case for corporate transparency, a new book cites studies on the competitive performance of socially responsible investment.

The annual report for Progressive Insurance (ticker: PGR) offers a humorous take on corporate transparency. Entitled Bare All, the report features avant-garde photos of an older naked man. These images, which may be less than titillating for most people, symbolize a company willing to expose itself fully to its stakeholders, disclosing all relevant information.

Don Tapscott and David Ticoll, in their new book entitled The Naked Corporation: How the Age of Transparency Will Revolutionize Business, argue that corporate transparency is not optional but rather inevitable. They also counter the conventional wisdom that transparency costs companies, instead contending that transparency enhances shareowner value.

"To coin a phrase, companies should undress for success," Messrs. Tapscott and Ticoll write in the book.

Progressive is the only Fortune 500 company that reports its financial status on a monthly basis, according to the annual report.

"Why give monthly information?" Progressive CEO Glenn Renwick asks. "Because we have it."

"I view it as the owners' information," Mr. Renwick tells Messrs. Tapscott and Ticoll. "When you have information, you should disclose it, good or bad, exactly as it is."

This radical disclosure policy allows Progressive to escape the anxiety that leads many companies to manipulate their quarterly earnings reports to match forecasts and instead focus on long-term performance. Progressive's share price has increased from $10 to $60 over the last decade, Messrs. Tapscott and Ticoll point out, bolstering their business case for the "open enterprise," their term for a fully transparent corporation.

The authors define and describe an open enterprise quite articulately, and they make the business case more through anecdotes about corporate successes resulting from transparent practices (and failures due to opacity) than through hard statistics and studies. Numbers are not altogether absent, though. Prudential (PRU) retained employees better after it "opened the kimono completely" to employees, according Private Client Group Executive Director Michael Rice, than it did before increasing internal transparency.

"Prior to January of 2000 the firm's annual attrition rate was 23 percent," write the authors. "In 2002 it was 11 percent, dropping at a time when the firm cut FA [financial adviser] compensation twice, laid off thousands of people, and reduced costs by $250 million in order to stay alive."

The authors attribute this to transparency, though they do not consider alternative explanations, such as lower inclination to shift jobs during an economic downturn.

Perhaps the most extensive citation of empirical evidence comes in the discussion on socially responsible investing (SRI). In this section, the authors discuss various studies that document how sustainability investments outperform or at least equal non-SRI portfolios. The authors suggest that this positive SRI performance results at least in part from increased transparency, though they are careful to point out that such a correlation is not necessary causal. In fact, they point out that some SRI strategies that are strictly ethical, such as screening companies that provide abortions, may not correlate to sustainability or increased transparency, and hence may not correlate discernibly to financial performance.

Social investors may find one of the most interesting segments of the book to be the concise history of Securities and Exchange Commission (SEC) allowances for omission of shareowner resolutions. Who knew that in 1951, the SEC allowed Greyhound to omit a resolution calling for the company to stop racially segregating its passengers on its buses? Equally interesting is the resolution submitted to Dow (DOW) during the Vietnam War asking the company to stop making napalm. The SEC allowed Dow to omit the resolution from its proxy, but a US Circuit Court of Appeals for the District of Columbia ruled against this corporate attempt to censor shareowners' voice, and the SEC required Dow to include the resolution on its proxy.

Interestingly, Messrs. Tapscott and Ticoll predict the demise of SRI.

"[W]e believe that in the future investors will not speak about socially responsible investment," they write. "Responsible investment and profitable investment will be synonymous."

Similarly, the authors foretell of a time when the term transparency will become moot, because the practice will become so pervasive as to be invisible.


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