in the transparency networked economyesterkaufman.com.ar/wp-content/uploads/2010/02/williams.pdf ·...

Transparency in the

Networked Economy

Rise of the

Transparency

Network

TRANSPARENCY IN THE NETWORKED ECONOMYRise of the Transparency Network

Anthony Williams

~ Acknowledgements ~

Transparency in the Networked Economy: Rise of the Transparency Network was produced for the Digital4Sight's Leadership in the Networked Economy (LNE) research program. The research was generouslyfunded by members of the LNE program including our executive sponsor Hewlett-Packard, in addition toAOL Time Warner, Bell Canada Enterprises, British Telecom, Canadian International Development Agency,Cisco Systems, General Motors, Hill & Knowlton, KPMG, McGraw-Hill, and Motorola. My colleagues PhilDwyer and Alan Majer made enormous intellectual and personal contributions to see this project through tocompletion. None of this would have been possible without our shared commitment to research and inquiry.I also wish to thank many past LNE collaborators, including David Agnew, Amanda Clutton, LaurenHarvey, Phil Hood, Priscilla Li, Elaine Shin, Maria Sirivar, Don Tapscott, David Ticoll, Tim Warner, andAndrea Wood, all of whom provided invaluable input and support at various stages of the project. My thanksas well to several members of LNE's research board whose work has been tremendously influential inguiding and inspiring the development of the ideas presented in this paper, including Ann Florini, VirginiaHaufler, Lawrence Lessig, Roger Martin, Charles Sabel, Saskia Sassen, and David Wheeler. Thank you all.

© 2003. Digital 4Sight Inc.

TABLE OF CONTENTS

1. Introduction...................................................................................................................................................1Trust and the Brave New World of Transparency ..................................................................................................................1Key Research Questions .........................................................................................................................................................3Structure of the Report............................................................................................................................................................3Executive Summary of Our Findings .....................................................................................................................................3Key Takeaways .......................................................................................................................................................................4

2. Transparency in a Networked World ...........................................................................................................7The Meaning of Transparency................................................................................................................................................7Globalization and Interdependence ........................................................................................................................................8Transparency and the Interdependent Corporation.................................................................................................................9Thinking Like a Network .....................................................................................................................................................10

3. The Evolution of Transparency .................................................................................................................12Social Drivers: An Emerging Global Civil Society..............................................................................................................12

Changing social expectations................................................................................................................................................................12Transnational civil society.....................................................................................................................................................................13

Political Drivers: A Rising Global Civil Foundation ...........................................................................................................15Democratization.....................................................................................................................................................................................15New rules for information disclosure ....................................................................................................................................................16An evolution in global governance........................................................................................................................................................17

Economic Drivers: An Evolving Capitalist Economy..........................................................................................................19Globalization and liberalization............................................................................................................................................................20Intangibles and the knowledge economy...............................................................................................................................................21Sustainable economics...........................................................................................................................................................................22

Technological Drivers: The Emerging Hypernet..................................................................................................................23Accessibility ...........................................................................................................................................................................................23Granularity ............................................................................................................................................................................................24Immediacy..............................................................................................................................................................................................25Collaboration and self-organization .....................................................................................................................................................25

It's a Transparent World—Get Used To It ............................................................................................................................26Transparency drivers: timescales and intensity ....................................................................................................................................27

4. The Value of Transparency: Trust and Transaction Costs ......................................................................28Transparency and Trust.........................................................................................................................................................28Transparency and Transaction Costs ....................................................................................................................................30Transparency, Trust and Lower Transaction Costs: Fueling a Virtuous Cycle ....................................................................31

5. Five Dimensions of Transparency.............................................................................................................33Firm Transparency ................................................................................................................................................................33Business Web Transparency .................................................................................................................................................35Customer Transparency ........................................................................................................................................................39Market Transparency ............................................................................................................................................................42Public Transparency..............................................................................................................................................................43Information Demands and Transparency Value Drivers ......................................................................................................45Transparency Networks Traverse the Layers .......................................................................................................................46

© 2003 Digital 4Sight Inc. All rights reserved

Leadership in the Networked Economy

Digital 4Sight IncorporatedLeadership in the Networked Economy

Principal author:Anthony Williams

i

6. The Rise of Transparency Networks .........................................................................................................47Defining Characteristics of a Transparency Network ..........................................................................................................47

1. Transparency networks are not traditional organizations ................................................................................................................472. Transparency networks draw participants from all sectors of society .............................................................................................483. Transparency networks generate fluid and reciprocal flows of information ....................................................................................484. Transparency networks are in a constant state of flux......................................................................................................................495. Transparency networks cause shifts in values and behavior ............................................................................................................50

Transparency Networks: Willing or Unwilling ....................................................................................................................50

7. Caught in the Web: Transparency Network Case Studies.......................................................................52Case Study Methodology......................................................................................................................................................52De Beers................................................................................................................................................................................52Home Depot ..........................................................................................................................................................................54Monsanto...............................................................................................................................................................................55Unilever.................................................................................................................................................................................57Wal-Mart ...............................................................................................................................................................................59Dimensions of Variability in Transparency Networks..........................................................................................................60

Network leadership and participants ....................................................................................................................................................61The institutionalization of transparency networks ................................................................................................................................61Integration and congruence of goal and values....................................................................................................................................61Compliance and accountability mechanisms ........................................................................................................................................62The scale and reach of transparency networks .....................................................................................................................................62Scope and boundaries of transparency issues.......................................................................................................................................63

Key Lessons..........................................................................................................................................................................64

8. Transparency Strategy: The Art of Interactive Communications............................................................66Eight Observations on the Nature of "Managing" Transparency Networks ........................................................................67

1. The dispersion of power and authority .............................................................................................................................................672. Traditional mechanisms of management and control are eroding....................................................................................................683. A new paradigm in corporate communications ................................................................................................................................694. Boundaries and blind spots ...............................................................................................................................................................715. The edge of the network ....................................................................................................................................................................736. Fluidity and negotiation of corporate values....................................................................................................................................757. Competing for ideas and attention ....................................................................................................................................................768. Multiple roles, multiple identities......................................................................................................................................................78

Limits of Transparency .........................................................................................................................................................80Building a Transparency Strategy.........................................................................................................................................82Facing a Transparent Future .................................................................................................................................................85

9. Transforming Corporate Governance: Conclusions and Key Lessons .................................................87A New System of Multi-Stakeholder Governance Emerges ................................................................................................87

Creating a culture of learning and engagement....................................................................................................................................88Building a networked organizational structure.....................................................................................................................................88Enabling a process of continuous policy innovation.............................................................................................................................89

Implications for Leaders .......................................................................................................................................................90

ii © 2003 Digital 4Sight Inc. All rights reserved

Transparency in the Networked Economy

1. INTRODUCTION

Trust and the Brave New World of Transparency

When we launched the Leadership in the NetworkedEconomy (LNE) research program in February 2002 wehypothesized that transparency would be a transformationalforce in the global economy. Events over the course of thispast year have only confirmed and strengthened thisconviction. The wave of scandals that rocked UScorporations and reinforced the need for more effectivecorporate governance, better transparency and greaterintegrity in corporate management; the increasing attentionto corporate governance and corporate social responsibility(CSR) issues by non-government organizations (NGOs),governments, academics, the media, and firms in a broadrange of sectors; the Johannesburg Summit, which putissues of transparency and accountability front and center;and the growth of corporate “triple bottom line” reporting,including first-time reports from major companies likeMcDonald's and Hewlett-Packard.

But such events are merely accents on a much deeper andintense set of forces that are making the world a moretransparent place. To name only a few of these transparencydrivers, consider:

• The speed, flexibility and reach of humancommunications driven by the accelerating power andpervasiveness of information and communicationtechnologies;

• The growing power of employees, customers and civilsociety to find out information about company behavior,inform others, and organize;

• The insatiable public appetite for information andspectacle that provides the media with incentive to putcompanies under the spotlight;

• The creation of new regulatory regimes for transparencyand a shift to global structures of governance thatenhance accountability in the global economy;

• The discovery and adoption of new economic measuresfor social and natural capital that will transform the waywe account for growth and value creation in theeconomy and capital markets;

• And, the central role of knowledge, trust and corporatereputation in driving business success in the networkedeconomy

Together, these forces lay the groundwork for a brave newworld of transparency. With greater transparency will comea rebalancing of the relationship between the economy andsociety, and between corporations and their stakeholders.While not irreversible, the trend is powerful and unlikely tobe quelled—even if terrorist attacks, economic downturnsand reactionary forces occasionally result in minor setbacks.To be certain, transparency is already well on its way toestablishing itself as a powerful norm in global politics anda transformative force within the firm and its stakeholderrelationships.

Given the nature of contemporary global issues, it's notsurprising that corporations find themselves at the epicenterof the transparency phenomenon. Capitalism's most visiblesymbols and institutions have come under an unprecedentedlevel of scrutiny as citizens and civil society groups aroundthe world mobilize behind public expectations for a morejust and sustainable economy. For companies that havecome under the spotlight, simply meeting the legalrequirements to regularly report financial (and sometimesenvironmental) information to shareholders and regulatorsis no longer enough. Today, transparency issues affect everyrelationship firms depend on for success.

• Employees are demanding greater openness andaccountability from their employers, while digitalnetworks enable employees to access and sharecompany information with each other and the outsideworld.

© 2003 Digital 4Sight Inc. All rights reserved 1

Rise of the Transparency Network

“In the struggle to balance the needs of many, theanswer is not more information but a different formof engagement.”

—Mark LeonardForeign Policy Centre

UK

“NGOs are a bunch of people whose currency ofpower is information and the ability to makearguments and persuade people to change how thingsare done, and in order to have that kind of power youhave to have access to information.”

—Ann FloriniBrookings Institution

• Global networks of business partners and suppliers sharecommercial data to help them perform more like asingle enterprise. Firms also disclose detailed volumesof environmental and social performance data, and oftenas a condition of entry into global supply chains.

• Consumers and NGOs use the Internet to peppercorporations with detailed inquiries, monitor privatesector behavior, and swap insight and intelligence withone another.

• Investors buy and sell stock on the basis of thecredibility of the information they receive throughcorporate financial reports and financial analysts, butalso in chat rooms and bulletin boards where networkedinvestors share the “real dirt.”

With demands for transparency originating from all sidesand for all imaginable issues, it's clear that a new, moresystemic and integrated approach to corporate transparencyis required. Corporate leaders need to start thinking abouttransparency as an essential component of competitivestrategy and relationship-building. Most companiesinstinctively think of transparency strategy as riskmanagement (e.g., the information we need to put out thereto satisfy the various interest groups influencing the publicagenda). At one level, this is reasonably pragmaticinterpretation of the business case for transparency. But itlargely misses the point, and more critically, the potentialvalue of transparency. The strategic reason to providegreater transparency to stakeholders concerns anincreasingly scarce, but critical resource: trust.

Trust is the essential glue that binds together complexnetworks of participants involved in the creation ofeconomic value (i.e., customers, business partners and otherstakeholders). In fact, the importance of trust is increasingas today's networked organizations become increasinglydefined by a large, interwoven set of relationships that exist

inside and outside the firm. When companies build a broadfoundation of trust their networks reciprocate withcooperative behavior. Trustworthy firms gain access tostakeholder-controlled resources, lower their transactioncosts and eliminate unnecessary friction betweenthemselves and society. A lack of trust, on the other hand,generates conflict, friction and inefficiencies, whileconsuming management time and company resources withdefensive activities.

The catch is that trust is difficult to build, and even hardermaintain, in a highly transparent environment. Companiescan only build stakeholder relationships based on trust if theexpectation that companies will abide by their commitmentsis continually reinforced in stakeholders' observations ofcorporate behavior. To raise the stakes even further,transparency empowers stakeholders to readily verifywhether or not there is consistency between the valuescompanies profess and their behavior in the real world. Thiscreates an imperative for firms to be proactive abouttransparency, or in other words, to anticipate anddeliberately disclose the information stakeholders seek inorder to provide reassurance that the firm living by itsword. Over time, verification reinforces the notion that acompany's commitments are reliable and that its behavior isconsistently aligned with the values and images it projectsin the marketplace. Consistency and reliability, underpinnedby a commitment to shared values, are the foundation oftrust-based relationships.

Companies that understand this new reality are building anew breed of corporation. These companies will prosper bydesigning systems of corporate governance that drawwisdom and legitimacy from a broad range of stakeholderinputs; by developing products, services and businessstrategies guided by the core values and needs ofcommunities; by creating feedback loops with a continuousprocess of stakeholder dialogue, innovation and reportingthat embeds the optimal set of values and behaviors in theDNA of the firm; and by offering rewards and incentives tofoster corporate cultures based on transparency,

2 © 2003 Digital 4Sight Inc. All rights reserved


“Transparency has to be two-directional. You can'thave Big Brother acting the way he did in 1984 ifeveryone can look back.”

—David BrinAuthor of The Transparent Society

“I think that in the long term, not being transparentis really not an option. You can say truth, likepregnancy, cannot be hidden for long. And even now,your stakeholders will find out one way or another,and you can no longer control the communicationthat's coming in and out of your organization.”

—Susanne StormerStakeholder Relations

Novo Nordisk

accountability and participation. Tracing the evolution oftransparency and the rise of an innovative, values-basedapproach to private enterprise is the chief purpose of thisresearch paper.

Key Research Questions

A major focus of the Leadership in the NetworkedEconomy research program has been to map out this bravenew world of transparency and provide corporateaccountability managers with a strategic lens on how tosteer their companies through these uncharted waters. Thisresearch paper is the culmination of research that has beenassembled by Digital 4Sight over the past eight months. Itpulls together the major threads of our thinking on theimpact of transparency of the future of global enterprisesand applies rigorous case-based analysis to construct newmanagement frameworks for creating and preserving valuein a networked economy.

The investigation is rooted in several key questions:

• What is transparency and how is it intersecting withother global trends?

• What are the drivers and key forces of transparency?

• How is transparency changing the social, political andeconomic context in which companies operate?

• How does transparency affect firms' relationships withkey stakeholders?

• How should firms “manage” transparency and whatchanges are in store for the way firms communicatewith stakeholders, develop strategy, and govern theirorganizations?

• How does transparency create value in the economy andsociety?

• And finally, what are the new management imperativesfor corporate leaders in a networked world?

Structure of the Report

Transparency in the Networked Economy: Rise of theTransparency Network presents answers to our key researchquestions in two parts.

Part one of the paper—sections one through five—presentsa theory of transparency, an account of the drivers of thisphenomenon, and a detailed investigation of how

transparency is impacting the firm and its relationships withkey stakeholders. Close attention is paid to value—how it iscreated and how it is destroyed under increasing levels ofscrutiny. Along the way, part one of the paper makesreference to a wide body of case studies that have informedthis research as it has unfolded between June 2002 andFebruary 2003.

Part two of the paper is a strategic guide to "managing" thetransparency phenomenon. It begins in section 6 with anaccount of the rise of transparency networks—newinternetworked collections of individuals and groups thatscrutinize the activities of firms. Section 7 drills deep intothe transparency network phenomenon with five casestudies of how companies like Wal-Mart, De Beers andUnilever are dealing with the emerging threats andopportunities presented by these loosely-networkedorganizations. Section 8 builds on the case studies to impartnew approaches for managing transparency. Our discussionincludes 8 observations about practices for effectivecorporate communication and stakeholder engagement in anetworked world, as well as management frameworks andstrategic planning tools for building trust with atransparency strategy. Section 8 also addresses the risks andlimits of corporate transparency. Part two concludes with abrief discussion of the key principles for redrawingcorporate governance for a transparent world.

Executive Summary of Our Findings

In the course of research, Digital 4Sight has identified anumber of insights and observations that we believe formthe basis for a revolution in the nature of corporategovernance—a revolution that will forever alter the internalmanagement of the firm, and perhaps more significantly, theway companies interact with the broader world aroundthem. This transformation of corporate governance willunfold in the context of other major developments in theway we govern the global economy. Throughout the paper,we make reference to some of these deep and profoundchanges in society, in the economy, in technology, and inour systems of government and governance. Our focus,however, is on how the firm's relationships withstakeholders are affected as stakeholders gain higher levelsof visibility into the governance and operations of the firm.

The research for this paper points toward a new era ofmulti-stakeholder corporate governance based on principlesof openness and participation. In fact, the case studies we



examined illustrate the urgency with which companies mustgrapple with and embrace a new paradigm in corporatecommunications and stakeholder management as part of awider series of reforms in the way private and publicenterprises are governed. We studied companies with whatwe consider to be traditional command-and-controlorientations toward stakeholder management and corporategovernance. These companies are uniformly experiencingan erosion of their power and effectiveness, as PR, spin andlegal strategies become less potent tools in an increasinglynetworked and complex environment. On the other hand,we studied several companies that have embraced a morenetworked style of engagement, learning and negotiationwith stakeholders, each of which are yielding positiveresults in areas such as their brand and reputation, in riskmanagement, and in their access to social and economicresources.

In consideration of the evidence, we argue that companiesthat adopt transparency as a new operating principle will berewarded with higher levels of stakeholder trust and lowertransaction costs for their business. But most importantly,our research points to the emergence of powerful feedbackloops that will foster a new type of enterprise, one driven byvalues and a constant commitment to innovation and growthdefined in the broadest possible social, environmental andeconomic terms. Digital 4Sight calls this new approach tobusiness the values-based approach to enterprise.

VBEs fuse wealth creation with social values to produce apowerful and sustainable value proposition for theircustomers and the societies in which they operate. VBEswill flourish in a transparent world; their social andenvironmental records will enhance competitive advantageand customer loyalty; and they will accumulate value bydeveloping relationship capital with a broad range of localand global institutions. The VBE concept may seemaspirational, yet we see more and more evidence ofcompanies exhibiting this behavior everyday.

A successful and broad-based transition to multi-stakeholdergovernance and values-based operating principles will notbe easy or automatic. The business case, at present, issometimes weak and often in conflict with other majorforces that are transforming the economy. The behavior ofconsumers, the regulatory strategies of governments, theorganized activities of civil society, the attitudes ofcorporate executives, and the ebb and flow of economieswill all affect the running room available for companies toexperiment and innovate with new forms of values-based

behaviors. But, in an increasingly transparent world, goodvalues will make good economic sense. When transparencyis high, the rewards and consequences of values-basedbehavior are more balanced, if not tipped in favor of values.Indeed, the most strategic of firms will learn how to harnesstransparency and their values-based behaviors to createcompetitive advantages. For now, however, the choice ofwhether to pursue a values-based or bottom-line-focusedstrategy remains for each firm to make, depending on itsunique circumstances and capabilities.

Key Takeaways

Transparency in the Networked Economy: Rise of theTransparency Network will elaborate on a number ofthemes and issues concerning the rise of transparency andits impact on the communications strategies, governanceand operations of global firms. For the purpose of thissummary, we have organized these various themes into aseries of eight high-level takeaways.

1. Transparency is on the rise

Transparency is frequently equated with growing adoptionof information technology, but the real story is actuallymore complex. We scoured the social, political, economicand technological landscapes to identify the root causes andfuture drivers of transparency. Social trends foretell the riseof ethical citizens and a growing transnational civil society,which will act in concert to mobilize broad socialexpectations for transparency and accountability frompowerful political and economic institutions. Political trendssuggest the world is becoming more open as a growingnumber of countries transition to democratic forms ofgovernment; as transparency becomes a more establishednorm in global governance; and as governments introduce awide range of new rules and regimes for informationdisclosure. Technological trends point to a world withincreasingly powerful and pervasive informationtechnologies that will make it technically feasible for alarge portion of humanity to gain immediate access to awide range of incredibly granular information anddisseminate it widely. Economic trends indicate a gradualshift toward a global economy that rewards markets andfirms with sustainable business practices and transparentand accountable relationships with customers, investors,employees, partners and a broad range of publicstakeholders. Collectively, these forces are creating anunstoppable march toward greater transparency in thefuture.





2. The five dimensions of transparency

As transparency increases, it fundamentally changes thefirm's relationship with five sets of stakeholders. The fivedimensions of transparency begin with the firm itself andcascade out into the firm's relationships with business webpartners, customers, markets and society. At the firm level,transparency is about creating a culture of openness andaccountability by sharing information openly amongemployees to foster commitment, empowerment, andresponsible decision-making. In the business web,transparency creates an imperative to develop shared valuesand business practices with the firm's network of partnersand suppliers. Transparency with customers will enablefirms to maintain customer loyalty and build brand equity.Increasing disclosure and openness of financial data in themarketplace helps to create credibility with investors andprovides an antidote to issues such as pricing collusion,corruption and bribery. In the public sphere, trust is earnedby providing visibility into company operations andallowing scrutiny of social and environmental performanceby external stakeholders.

3. Transparency networks are the neworganizational form for corporate transparency

In a networked world, there is a high degree of fluidity andinterchange between and among the five dimensions oftransparency. Actions taken by the public sphere caninfluence the capital markets. Information disclosed aboutaccidents or abuses in the business web can impactcustomer loyalty. Potential employees can be deterred bybad news in the media or company spoof sites posted on anNGO's website. We call these dynamic exchanges ofinformation and viewpoints among people andorganizations within each of the five classes ofstakeholders, a transparency network. In the broadest terms,transparency networks are internetworked collections ofindividuals and organizations that exchange informationabout the policies and practices of particular firms, andsometimes, entire industries. In some cases, firms will bepassive—perhaps even unknowing—players in atransparency network that is aggressively tradinginformation and shaping perceptions about them. In othercases, firms will be actively involved in the debate,spreading information through company reports anddialogue with key stakeholder groups. We argue, however,that participating in transparency networks will not be avoluntary exercise. Firms must learn how to play an activerole in them to meet stakeholders' expectations for open,responsive, and accountable corporate governance.

4. Transparency networks broaden thedistribution of political and economic power

If all transparency did was to increase the supply ofinformation in the world it would not, in itself, be verysignificant. It's when information can be utilized to informperceptions, shape public discourses and ultimately alter thedecisions and actions of individuals and groups thatinformation becomes powerful. For those groups that arecritical of “corporate power” and “corporate globalization,”their basic currency of power is knowledge. Their ability toshape perceptions and influence public discourses is fed bythe increasing availability of information, which becomes aweapon to erode the power of traditional informationmonopolies. In this sense, transparency networks representyet another wave in the historical shift toward greaterdispersion of control over knowledge and the dispersion ofeconomic and political power. With each successivegeneration of communications technologies, increasinglevels of education, and the spread of democratic norms, wesee an evolution in the distribution of knowledge driving adevolution from authoritarian governance and hierarchicalforms of management and control to an increasingly flatsociety where power and authority are much moredecentralized.

5. Transparency is driving a values-basedapproach to enterprise

Transparency heightens the importance of values incorporate management and drives a corresponding shifttoward values-based behaviors. Corporations operatingunder the gaze of stakeholder scrutiny are more likely tocomply with norms that govern the broader community.When information shared with the public revealsinconsistencies between the conduct of corporations andacceptable standards of behavior, network participants putnew forms of accountability in motion. These feedbackloops constrain, or help “correct”, unacceptableperformance, while encouraging new values and behaviorsthat conform to the expectations set by the network. Wemaintain, however that there is no objective or staticdefinition of what constitutes “good” or “responsible”corporate conduct. Values are a moving target, as newexpectations can be instantly mobilized with the changingof public moods and priorities. Corporate managers shouldexpect to “negotiate” standards of responsible behavior onan ongoing basis with their customers, employees, and arange of other influential stakeholder groups.



6. There's an ROI on transparency

Genuine transparency implies volition—a deliberatewillingness to disclose information. Rather than someonerevealing information to deter misbehavior, information isdisclosed in order to signal good behavior, or in otherwords, to provide reassurance to stakeholders. Only thisdeliberate form of transparency creates value forcompanies. In fact, we argue that an effective transparencystrategy creates two key types of value: trust and lowertransaction costs. Trust helps build better relationships withstakeholders in each of the five dimensions of transparency.Higher levels of transparency and trust-based relationshipshelp drive down the costs of doing business. The specificforms of business value produced in each dimension oftransparency are quite diverse. Trust and transparency in thefirm and business web can create enterprise-wide alignmenton values, while lowering transaction costs to increaseproductivity. In the capital markets, trust and confidence ina firm's management builds investor loyalty and reduces thecost of capital. In the public sphere, trust can help create asocial license to operate and lessen regulatory burdens.Capturing the value from transparency, however, requires ahigh level of commitment, extensive dialogue, and acontinuously evolving innovation and reporting system thatcycles good values and behaviors throughout the enterprise.

7. Transparency strategy is the new art ofcommunications in a networked world

The trend toward openness is creating an environment inwhich companies will have less and less control overinformation, and consequently, less control over theperceptions of their firm. Companies need to design theircommunications strategies for a world in which PR and spinare becoming impotent tools. These traditional approachesare grounded in the assumptions of a broadcast world: thatthe media environment can be controlled and that corporatemessages can be pushed out to consumers who will believeand internalize them. In a networked environment, theseone-way conversations fail to build credibility. Perhapsmore importantly, they fail to leverage any of theknowledge and insight that could be gleaned fromthousands, if not millions, of conversations that could beinitiated with a wide range of stakeholders in a moreinteractive model of corporate communications.Transparency Strategy—the new art of communications in anetworked world—is a strategic approach to weaving theseconversations into the fabric of corporate governance. Itrequires the adoption of a transparency strategy: a coherent,coordinated communications and engagement strategy,addressing questions of information disclosure; access; the

context of that disclosure; governance (who decides what todisclose and how to disclose it); and infrastructure (whattechnologies and/or platforms are used to disclose). Digital4Sight's new approach rests on the assumption that trust andcredibility are earned by providing open access toinformation and demonstrating a willingness to be heldaccountable. For companies, it means adopting the logic ofthe network in which the modus operandi is negotiation,learning and active engagement. It does not mean, however,that firms should abandon all of their traditionalmanagement knowledge. Indeed, the most effectivetransparency strategies will be systematic and rigorous intheir classifications of and communications withstakeholders; they will leverage new technologies to createenterprise systems for monitoring, measuring, reporting anddialoguing on key aspects of corporate activity andperformance; and they will change more than perceptions—they will drive real changes in the governance, strategy, andoperations of the firm.

8. Corporate governance is evolving toward amulti-stakeholder system of transparency-based governance

The inevitable conclusion drawn from our research is thatcurrent mechanisms of corporate governance are whollyunsuited to deal with the complexity of the managementchallenges companies face in an increasingly networkedworld. Today's systems of corporate governance, with someexceptions, are insular, secretive, elitist, and plagued byshort-term thinking, financial tunnel vision, and patronage.Boards of directors often fail to tackle tough issues or drawin the right experience and perspectives to guide companiesthrough new challenges as unforeseen social andenvironmental realities land on their doorstep. But, a newsystem of multi-stakeholder governance is challengingtraditional mechanisms of corporate management andcontrol. The promise is that more transparent andparticipatory forms of governance will enable corporationsto become more integrated with the societies in which theyoperate, better attuned to social and environmentalconcerns, and more broadly accountable to stakeholders.Making the transition to multi-stakeholder governance willrequire firms to master three key areas of innovation: 1)fostering the right corporate culture to support transparencyand a values-based approach to enterprise; 2) shifting to anetworked governance and communications model thatcreates space for the inclusion of new issues and voices;and, 3) developing a highly responsive and adaptiveorganization that can sense and respond to changes in itsexternal environment.

2. TRANSPARENCY IN A NETWORKEDWORLD

To provide an adequate account of the rise and significanceof transparency, it's important to think about transparency inthe context of a wider set of forces that are transforming ourworld. Our argument in the following section is that thecontemporary trend toward openness is rooted in theevolution toward an increasingly global, networked, andcomplex world. To help frame the discussion, we examinehow transparency is intersecting with two other key trendsin society and the economy. First, we look at globalizationas it creates increasing levels of interdependence among

people and regions in the world. We suggest thatinterdependence creates a strategic need for transparency tohelp bring stability to a world of time-space compression.Second, we look at the changing relationship betweenglobal firms and society as new expectations fortransparency and accountability are mobilized. Contrary tothe belief that corporations are all-powerful masters of theglobal economy, we argue that firms are moreinterdependent today than they ever have been in the past.Together, the discussion of these two developments—globalization and the changing roles of corporations—helpsilluminate some of the key principles that underlie thegrowing prominence of the transparency phenomenon.



While the transparency phenomenon has taken on great economic and political significance in the past few decades, the meaning of transparency is frequently unclear. The term is most often associated with the global trend toward openness driven by new information and communication technologies, the spread of democratic norms, and the growing influence of civil society. For some, transparency is a powerful new norm constraining the behavior of corporations and governments alike. For skeptics, transparency is merely a buzzword, or at best, a temporary fad. With so much debate, and so many applications, it’s not surprising that a precise definition of transparency remains somewhat illusive.

Ann Florini, a preeminent scholar of transparency at the Brookings Institution, attributes the looseness of the term to the fact that transparency shows up in many issue areas and contexts ranging from government to military affairs to financial markets to drug control to corporate governance. In each application, transparency takes on different meanings and definitions. The Working Group on Transparency and Accountability in the International Monetary Fund highlights the importance of clarity and accessibility for their definition of fiscal transparency. The group defines transparency as “a process by which information about existing conditions, decisions and actions is made accessible, visible and understandable.”1 In government and politics, transparency is usually defined in the context of strengthening the legitimacy and credibility of democratic decision-making. The Consortium for Risk Evaluation and Stakeholder Participation at the University of Washington, for example, defines a transparent decision as “one that allows all people who are interested in a decision to understand what is being decided and why.”2 In national security circles,

transparency takes on a comparatively narrow definition as “the systemic provision of information on specific aspects of military activities under informal or formal international arrangements.”3 In drawing out the common threads in these, and other, various definitions, Florini notes that transparency is always closely connected with accountability – especially as citizens, markets and governments use transparency to hold others accountable for their policies and performance. She defines transparency as “the release of information that is relevant to evaluating those institutions.”4 While broad, Florini’s definition leaves room for flexibility in determining what type of information is being disclosed, how much of it, to whom, and for what reason. Such factors are ultimately influenced by the specific context in which transparency is applied and by the nature of the parties involved. At Digital 4Sight, we couldn’t refrain from offering our own definition of transparency – one that is particularly appropriate in the context of our investigation of corporate transparency. Building on Florini’s work, we define corporate transparency as the release of information that is relevant to stakeholders in their evaluation of corporate policies and performance. We maintain, however, that issues of relevance, access, accuracy, accountability and timing will always be subject to individual stakeholder perceptions and points of view (e.g., information relevant to one stakeholder will not necessarily have pertinence to others). Inevitably, they are matters for negotiation between the firm and its stakeholders. Reaching an agreed definition of transparency – and more importantly, a shared standard of evaluation – is integral to successful stakeholder relationship management.

The Meaning of Transparency

Globalization and InterdependenceThe increasing demand for transparency can be largelyattributed to forces and consequences of globalization. Tobe sure, globalization is not new. As prominent scholarspoint out, it has been a feature of human civilization forcenturies, expanding and retracting, intensifying anddeclining, throughout history.5 Never before though, hasglobalization been so vast, so intense and all-encompassing.Global interdependence has become a defining feature ofour time as people, money, technology and ideasrelentlessly cross borders in a vast network of transactionsand social exchanges.

Figure 1. Global flows and networks

As globalization creates massive transboundary flows thattranscend the boundaries of geographically defined nation-states, it tightly binds together the fortunes and relations ofpeople and institutions around the world. In fact, AnthonyGiddens, director of the London School of Economics(LSE), defines globalization as “the intensification ofworldwide social relations which link distant localities insuch a way that local happenings are shaped by eventsoccurring many miles away and vice versa.”6 In a tightlyintegrated economy, a financial meltdown in one region canimmediately impact the economies on the other side of theworld, while investment decisions made on Wall Street, canrapidly shift money, jobs and production from onecommunity to another. The nuclear meltdown in Chernobylshows that environmental disasters know no nationalboundaries, just as the flow of drugs, diseases and weaponsmoves readily from continent to continent. As the worldshrinks, we become ever more aware of the multi-leveledways our fortunes are overlapping. This phenomenon, oftenreferred to as time-space compression, is intensified as theInternet and a global media system not only render thedistant more proximate, but also reinforce ourconsciousness of this interconnectedness.7

Time-space compression not only reduces spacial barriers, italso brings into acute awareness the many ways our worldis speeding up. Nowhere is the compression of time moreevident than in our contemporary systems of production,exchange and consumption. Improved systems ofcommunication coupled with rationalizations in thetechniques of distribution (e.g., packaging, shipping andinventory control) made it possible to circulate commodities(legal and illegal) throughout the global market with greaterspeed. The advent of electronic banking increased the flowof money, while computerized trading systems makes, asthe saying has it, “twenty-four hours a very long time” inthe global stock markets.

The combined impact of collapsing spacial barriers andaccelerating time is inflicting a deep sense that the world isslipping into disorder. As Manuel Castells, author of TheNetwork Society, states, “The new social order, the networksociety, increasingly appears to most people as a meta-social disorder. Namely, as an automated, random sequenceof events, derived from the uncontrollable logic of markets,technology, geopolitical order or biological determination.”8

It is within this context that random events and decisionscan have rapid and potentially catastrophic impact on thosewho were never consulted, or perhaps were not even awareof the stakes in the first place. And it is this state of affairsthat makes transparency increasingly salient in our attemptsto bring order to the world.

Transparency is a response to time-space compression andthe growing awareness of our overlapping collectivefortunes. The more we become connected andinterdependent as societies the more we want to know aboutthe affairs of others. As Ann Florini says, “Many people areaffected by, and thus want to have a say in, what used to beother people's business.”9 One country's development ofweapons of mass destruction, for example, becomes aconcern for everyone within reach of their devastatingcapacity. Indeed, it's not surprising that arms control has



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"The new social order, the network society,increasingly appears to most people as a meta-socialdisorder. Namely, as an automated, random sequenceof events, derived from the uncontrollable logic ofmarkets, technology, geopolitical order or biologicaldetermination."

— Manuel CastellsAuthor of The Network Society

become one of the predominant applications of transparencyin global politics. Since the end of the Cold War, majorworld powers have agreed to engage in a highly intrusiveregime of mutual scrutiny of one another's military forces.Similarly, environmental problems that cut across nationalborders have increased our awareness of our collectivedependence on common ecological systems and spawned awide range of efforts to monitor and report on the state ofour environment. A new form of “regulation by revelation”has come into existence in which public websites operatedby NGOs shame polluters by disclosing their toxic chemicalreleases in local communities.10 The unifying theme in theseexamples is that new interconnections and increasing levelsof interdependence require a commensurate level of trustand transparency to ensure stability in the world.

Transparency and the Interdependent Corporation

If globalization helps to explain the macro context for therise of transparency, then shifting perceptions about the roleof corporations in society help explain how global firmshave come to occupy to very epicenter of the transparencyphenomenon. This shift is due to an increasingly pervasivesentiment that corporations have too much power andinfluence in the emerging global order. The high level ofmobility that global firms and markets have gained in recentwaves of deregulation and liberalization has created theperception that firms are rootless, amorphous institutionsthat float freely around globe. This mobility of capital has,in fact, reinforced the notion that firms can divorcethemselves from social concerns by liberating themselvesfrom the constraints of national regulatory systems. In aboundless global economy, say globalization critics,corporations are free to follow the ruthless economicimperative of markets to maximize profits for shareholders.This groundswell of concern about “corporate power” hasdrawn a great deal of attention to the activities of globalfirms, making them an even more intense target for scrutinythan governments.

While rooted in some political and economic realities andreproduced by the actions of a handful of “bad” firms, theseperceptions contribute to what we call the myth of the all-powerful corporation (i.e., the idea that powerful privateinterests behind the scenes are secretly pulling the levers ofthe world). Yes, it's a fact that the three largest companies inthe world (Wal-Mart, Exxon-Mobil, and General Motors)have combined annual revenues of $588 billion and employmore than 1.8 million people.11 A study released by the

Institute for Policy Studies in 2000 claims that 51 of thelargest 100 economies in the world are those ofmultinational corporations.12 However, the notion thatcorporations are larger and more powerful than they oncewere is open to question.

Figure 2. The all-powerful corporation

If you look at the situation from a historical perspective,private forms of power are, in fact, on the decline. Consider,for example, the massive, truly all-powerful colonial-eratrading companies that were created to advance the processof resource exploitation in colonial territories. As NiallFerguson of NYU's Stern School of Business argues, theEast India Company exercised so much power that itessentially reached the status of a state when it ruled overmost of the Indian subcontinent, while paying for one of thelargest armies in the world by relentlessly annexing newterritories and taxing their inhabitants.13 No company comesclose to wielding that extent of power today.

Instead, today's multinational enterprises are a microcosmof the global phenomenon of interdependence describedabove. Corporations are enmeshed in an interdependent



"You're not going to have a global informationeconomy without a global civil society."

— Richard HiggotCentre for Research on

Globalization and Regionalization

network of relationships with stakeholders and otherinstitutions in society. This group of stakeholders typicallyextends well beyond the conventional economic definitionof stakeholders as shareholders, customers, and employees.Increasingly, the list now includes community members,government agencies, and civil society groups representinga wide array of issues and interests. What's new is the factthat stakeholders increasingly have global reach and thepower to seek out and disseminate information widely. Andwith the growing recognition that global capitalism cansometimes come at the expense of other values and publicgoods that enable societies to flourish has come theinevitable rise and proliferation of organized groups todefend them. As Richard Higgot of the Centre for Researchon Globalization and Regionalization explains, “You're notgoing to have a global information economy without aglobal civil society.”14

Figure 3. The interdependent corporation

In the end, modern corporations are no more in control ofthings than governments are, and their actions are notwithout consequences or accountability—especially intoday's increasingly transparent and multi-centric world.Like all institutions, their behavior is constrained by forcesbeyond their direct control, whether norms, rules, or thecollective action of stakeholder groups. Indeed, the notionthat companies are accountable only to investedshareholders may be legally accurate, but in ourincreasingly interdependent world, it is, at best,anachronistic and, at worst, a perilous delusion that willerode social, environmental, and economic value.

Digital 4Sight's view is that the fortunes of companies areinescapably tied to their ability to put themselves ahead ofthe curve by learning how to play a role in mediatingbetween the demands of different stakeholders. It is not thejob of corporations to solve all of the world's problems—that is a job properly left to public institutions. On the otherhand, it is the job of corporations to play a role in ensuringtheir activities do not exacerbate them either. Harvard socialscientist Daniel Bell points out that, “Societies have tendedto function reasonably well when there is a congruence ofscale among economic activities, social organization, andpolitical and administrative control units. But, increasingly,what is happening is a mismatch of scale.”15 Part of the taskof managing scale and bringing order to an interdependentworld is to recalibrate the relationship between oureconomy, polity and society.

The argument of this paper is that this means engaging withan ever-expanding web of stakeholders to create thegovernance mechanisms that will guide us to a sustainablepath for private enterprise. But, this is no easy task. Thelarger the corporation, the greater its potential footprint, andthe more extensive its network of stakeholders, the morecomplex the task of maintaining a stable set of relationshipsbecomes. Opacity is not really a viable option under thesecircumstances. Secrecy breeds suspicion and low-trustrelationships, which in turn generates friction, antagonismand unpredictability in a company's network ofstakeholders. Transparency, and a willingness to engage ingenuine relationships with a broader set of stakeholders, isthe only sure route to building sustainable enterprises andsustainable societies.

Thinking Like a Network

Looking at globalization and examining the changingrelationship of corporations to society, we see an underlyingprinciple for the rise and significance of transparency. Aswe said in the beginning, transparency is a manifestation ofan increasingly global, networked and complexenvironment. But more particularly, transparency becomestruly important in highly interdependent environments.

Environment of interdependence include situations in whichpeople or organizations are dependent on one another foraccess to certain resources. For example, firms aredependent on their employees to work productively; oncustomers to buy their products; on investors to buy andhold their stock; and on government to provide human,



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legal and physical infrastructures for economicdevelopment, while each of the aforementionedstakeholders is co-dependent on the firm for particulargoods, services, or resources. Environments ofinterdependence also include situations in which people arecollectively on common resources like the naturalenvironment, or where the behavior of one will affect thefortunes of many others. When people or organizations areinterdependent they have a greater stake in ensuring thebenevolent behavior of others. The phenomenon of time-space compression serves to reinforce our consciousness ofour state of interdependence, enhances the feeling ofvulnerability to uncontrollable events, and thereforeintensifies the demand for transparency.

In interdependent environments, transparency is a tool ofevaluation; it helps provide reassurance that others aredoing what they are supposed to. Investors can be reassuredof the quality of their investments, the internationalcommunity can be certain that no individual nation ispolluting beyond its CO2 emission quotas under Kyoto,while NGOs can be satisfied that the companies theyscrutinize are meeting their commitments to ethicalconduct. In fact, the underlying condition of an environmentof interdependence provides part of the explanation for therise of triple bottom line reporting, product certification andother forms of corporate transparency.

Simultaneously high levels of interdependence andcomplexity will intensify the demand for transparency—particularly in high-stakes issues and decisions. Imbalances,like the scarcity of information or the propensity ofpowerful players to hoard information, erode trust andstability in interdependent networks and lead to poordecision-making and even poorer outcomes for thoseaffected. Indeed, this is the contemporary situation in whichmany corporations find themselves: operating in a highlyinterdependent world, with low levels of trust and stabilityand growing expectations to increase the level oftransparency and accountability around the issues for whichpeople feel most vulnerable.

We argue that to operate in a networked world effectively isto adopt the logic of the network itself. Nodes in a networkact symbiotically with other nodes in a shared networkenvironment. When balanced, their interdependence is theirstrength. When transparent, their interoperability enablesinformation to flow seamlessly to provide reassurance andinform effective decision-making. As we will argue in theconcluding sections, adopting such a wide-reaching change

in approach will require substantial changes in culture,structures, and processes of the firm (see section 8 and 9).But inevitably, companies that want to thrive in comingdecades will learn to think and act like a network.





3. THE EVOLUTION OF TRANSPARENCY

In the previous sections we talked about the rise oftransparency in the context of other major developmentsthat are transforming our world: namely, the rapidexpansion of political and economic interdependencecreated by globalization, and the pervasive change ofthinking about the relationship of corporations to society.The subsequent section attempts to dig deeper into the keydrivers and enablers of transparency, that is, the specificforces that create the social organization, regulatoryregimes, technological platforms and economic rationale forgreater transparency in the future. In doing so, we providean analytical framework for understanding the current stateand likely trajectory of transparency.

Figure 4. Drivers of transparency

Our investigation of the drivers of transparency is rooted inan analysis of the forces and dynamics at play in Digital4Sight's concept of a networked world. A networked worldis, by our definition, a world in which the dominantfunctions and processes of the economies and societies areorganized around networks. Leading sociologist and authorof The Network Society, Manuel Castells, defines networksas “open structures, able to expand without limits,integrating new nodes as long as they are able tocommunicate within the network, namely, as long as theyshare the same communication codes (for example, valuesor performance goals).”16 As Castells argues, networks areappropriate instruments for most contemporary institutionsin society, including “a capitalist economy based oninnovation, globalization and decentralized concentration;for work, workers and firms based on flexibility andadaptability; for a culture of endless deconstruction and

reconstruction; for a polity geared toward the instantprocessing of new values and public moods; and for a socialorganization aiming at the supersession of space and theannihilation of time.”17

For analytical purposes, we have broken down our conceptof the networked world into four key elements: society,polity, economy, and technology. Within these four sphereswe see evidence of profound transformations taking placethat will continue to amplify the transparency of thebusiness environment.18 These social, political, economicand technological forces are described briefly below to laythe foundation for an extensive discussion about theimplications of the transparency phenomenon forstakeholder relationship management, corporatecommunications, and corporate values.

Social Drivers: An Emerging Global Civil Society

In the social realm we identified two critical drivers ofcorporate transparency and accountability. On one hand isthe perceptible change in public opinion on matters ofcorporate accountability and social responsibility acrossadvanced industrial nations and, increasingly, in keysegments of the population in many developing countries.In general, pro-corporate attitudes in the 1980s have givenway to a more skeptical public posture and heighteneddemands for more transparency and accountability,especially from highly visible and recognizablemultinational firms. On the other hand is the increasingreach, legitimacy and influence of a transnational civilsociety consisting of legions of NGOs, communityorganizations, church groups, advocacy networks and othernon-profit associations. Transnational civil society feeds,and feeds off, the shift in public opinion and hasdemonstrated a remarkable ability to increase corporatetransparency in a long series of high-profile campaignsagainst firms like Nestle, Nike, Shell, Exxon, Wal-Mart,Home Depot, Monsanto and Citigroup, to name only a few.

Changing social expectations

A preponderance of evidence suggests that a growingportion of the public around the world want greatertransparency and accountability from global corporations.This fact has been observed time again in researchconducted by polling companies such as EnvironicsInternational, by public relations firms like Edelman, bymedia organizations such as the Financial Times, byfinancial institutions like the Cooperative Bank, by social

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investment funds like the Social Investment Forum, and thelist goes on.19 This shift in expectations has implications forcorporate transparency on several levels.

Social expectations can drive consumer behavior asindividuals show more willingness to enact their values intheir purchasing decisions. Polls show that there is asignificant proclivity to seek out ethical products andservices, but in reality, only a small percentage translatesinto actual behavior.20 However, pent-up demand for ethicalproducts will heighten public pressure for transparency intothe social and environmental impact incurred throughoutproduct lifecycles (i.e., from resource extraction andmanufacturing to distribution, consumption and disposal).Our hypothesis is that a combination of popular demand forgreater product transparency (e.g., food labeling andproduct certification) and technological means (e.g.,wireless PDAs that tap into an online ethical product ratingindex) will increase the information available to consumersat the point of purchase and eliminate much of the frictionand transaction costs that makes it too costly for consumersto buy according to their values.21

Figure 5. Responsible Shopper website

We have also witnessed the explosion of a sociallyresponsible investment industry driven by investors'demand for investment products that apply ethical criteria(social expectations) to investment decisions.22 Typicalsocially responsible investment funds steer clear ofcompanies that are polluters, make nuclear weapons, oroffer alcohol and tobacco as products. They also tend tokeep a closer eye on board independence, optionsexpensing, executive pay and independent auditing. By

actively screening and evaluating their investment decisionsagainst such criteria, ethical investors—both individual andinstitutional—give rise to more transparent corporatebehavior. Indeed, disclosure of social and environmentalperformance is often a requirement for inclusion in ethicalindexes or investment portfolios. Ethical investment alsocrosses over into shareholder activism in which minorityshareholders bring socially or environmentally motivatedresolutions to corporate AGMs. Companies such as Exxon-Mobil and Occidental Petroleum have endured many suchevents in which sensitive company issues rarely fail toattract media attention or get dragged out into publicdebate.

Social expectations set the bar on acceptable behavior forcompanies trying to earn or maintain a social license tooperate. A social license to operate is earned when acompany has the permission and support of a community ofstakeholders to conduct its business, usually because thereis an implicit or explicit agreement that the company willoperate by the rules and norms that stakeholders and thecompany find acceptable. Increasingly, a license to operatewill only be earned when various mechanisms oftransparency such as corporate reporting and stakeholderconsultations enable the public to evaluate companyperformance against those norms and expectations.

Finally, social expectations help shape the regulatoryagenda for transparency. The strength of public opinion oncorporate transparency will influence decisions on criticalfactors in the nature of emerging transparency regimes,including whether these regimes are mandatory orvoluntary, what metrics and standards will be used to guidecorporate disclosure, and how that information will bereported to the public. This point is elaborated in thefollowing section on the political drivers of transparency.

Transnational civil society

In recent decades, momentous changes in the nature of civicassociations have kick-started a significant evolution in theroles and powers of civil society. The civic institutions andorganizations that were constructed around the socialcontract among government, the market and citizens areless and less able to relate to people's lives and values inmost societies. Increased disillusionment with traditionalpolitical and civic institutions however, is occurring at thesame moment that many Western nations are experiencing amomentous transition from membership to advocacy in civilsociety. Citizens are now more likely to drop in and out of



organizations and issues than they are to make a long-termcommitment to membership in apolitical associations.23

Indeed, there has been dramatic growth in NGOs that areactive around an increasingly wide range of issues andprojects at local, national, and international levels.24

The emerging character of civil society is now defined bythe rise of prominent NGO “super brands” like Greenpeaceand Amnesty International (each with multimillion-dollarbudgets and plenty of influence in international decision-making) on one hand, and less formal transnationaladvocacy networks like the ones that descended on Seattle,Prague, and Genoa (which also show demonstrable capacityto shape public discourses and agendas) on the other.Together, NGOs and transnational advocacy networks havebecome a potent force for transparency as they leveragetheir credibility on social and environmental issues andability to influence public opinion to compel companies tobe more transparent.

Figure 6. Growth of NGOs and IGOs over time.

We attribute this growth in power and influence overcorporations to several factors:

1. The sheer size and numbers of organizations on theinternational stage. In the 1990s alone, the number ofregistered transnational NGOs quadrupled from 6,000 to26,000.25 This does not include the tens-of-thousands ofgroups operating in countries around the world, or theinformal transnational coalitions and linkages.26

2. The capacity to network and disseminate informationrapidly using the Internet, making NGOs much lessdependent on location and creating new possibilities foradvocacy in the international arena.27

3. Increasing professionalism among many civil societyorganizations, illustrated by their ability to raise funds,attract top talent, and manage the media effectively.

4. Resonance with growing public skepticism of corporatepower and the public perception that NGOs are workingfor the broader public interest.

5. The diminishing capacity of governments to regulateglobal corporations or play a leadership role in resolvingmajor global issues, opening up a space for NGOs toplay a greater role.28

Most of these developments can be traced to the late 1980sand early 1990s, when a growing number of NGOs beganattracting public attention and wielding influence overcorporate decision-makers in a way once reserved for onlythe most powerful public institutions. Observers link thenewfound authority of NGOs to their ability to fill theleadership void in the global economy. While publicexpectations for greater business responsibility are rising,the capacity of governments to regulate and enforcecorporate behavior is diminishing. In the absence ofeffective government initiatives to address social andenvironmental impacts of global economic activity, NGOsare bypassing government and setting their sights onincreasing the transparency and accountability of globalcorporations.

This type of market campaigning has steadily increased inpopularity and impact since the South African boycottswere effective in hastening the end of apartheid. While theSouth African boycotts took decades to take effect, today'snetworked environment spawns social action of a wholenew magnitude. With the Internet, activists gained apowerful vehicle for communicating, organizing, andmobilizing public opinion. Corporate critics use the Internetto organize far-flung networks, catalogue corporate

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misdeeds, and create protest sites that manipulate and attackcorporate identities. Any company with a reputation andbrand to protect is now vulnerable to these information-agetactics.

Today, few industries have been left untouched as NGOsacross a broad spectrum of issues imposed a range oftransparency and accountability mechanisms on industriesthat would have been thought impossible just a decade ago.Major players in the apparel and retail industry nowsubscribe to codes of conduct that include requirements forthird-party plant inspections and regular public reporting onworkplace health, safety, and environment issues. Theforestry industry has adopted more sustainable forestrypractices while their downstream retail partners work with athird-party certification body, the Forest StewardshipCouncil, to certify that their retail goods are “old-growth”lumber free. Oil and gas companies were some of theearliest adopters of triple bottom line reporting. Thebiotechnology industry has bowed to demands for greatertransparency and dialogue around new products andtechnologies. These, and many other examples, illustratejust how influential the emerging transnational civil societyis likely to be in shaping the future of corporatetransparency and accountability.29

While somewhat out of scope for this discussion, it isinteresting to note that the rise of powerful NGO networksdoes not come without some serious concerns. Many civicorganizations need to establish a more profoundunderstanding of the importance of representation andaccountability in their work. Although many civic activistsmay feel they speak for the public good, the public interestis a highly contested domain. As many companies couldattest, single-issue NGOs are often myopically focused ontheir own agendas—they are not always interested inbalancing different visions of the public good, especiallywhen operating in countries that are not their own, ordealing with corporations whose very existence theyreject.30

Political Drivers: A Rising Global Civil Foundation

While social expectations and civil society tend to provide“soft” drivers for corporate transparency, the political andregulatory environment will bring a “harder” definition andstructure to the emerging era of transparency-basedgovernance. We take as a starting point the notion that ourcurrent systems of governance are in a period of rapid

transformation in the wake of globalization. It is widelyacknowledged that there are acute problems in ourdemocratic systems and that the existing framework ofnational regulations is faltering. In many domains rangingfrom the regulation of financial markets to the governanceof global environmental issues, there is no clear orworkable system set to take its place. Yet, we do not agreewith the perspective that globalization means the death ofpolitics or the demise of the nation-state. On the contrary,we expect that in a post-neo-liberal world there will be arejuvenation of governance, albeit in a much different formthan today, that will lift the global civil foundation aroundthe world.31

With this context in mind, we looked at three politicalforces that will shape the future of corporate transparency.These include the spread of democratization as it gives riseto new political structures, the rule of law, and generalincreases in the transparency of the business environment incountries around the world; the proliferation of newregulatory regimes for corporate transparency; and agradual shift to networked forms of global governance thatwill impose a new brand of political control andaccountability on the global economy.

Democratization

The fall of communism has been a boon for democracy,transparency and accountability. Liberal democracy is nowthe most common form of social and political organizationin modern nation-states, with 61% of countries across theglobe practicing some form of democratic government.32 Inthe 1990's alone the number of democracies doubled,reaching 120 countries with the help of concerted efforts byorganizations such as the United Nations.33 The number ofcountries that ratified the six major human rightsconventions grew from 10% to 50% of all countriesbetween 1990 and 2001.34 These statistics point to a moredemocratic future—a prospect that seems largely assuredwith advanced industrialized countries like the US makingthe promotion of democracy a core tenet of foreign policy,and institutions such as the World Bank and the NationalEndowment for Democracy devoting enormous resources tothe cause.

With the spread of democracy comes the emergence offreedoms and institutions that dramatically increase thetransparency of the business environment in countries thattransition to democratic rule. Such freedoms and institutionsinclude the expansion of civil and political rights, the



cultivation of deliberation and public discourse, theconstruction of new legal and political structures andprocesses, the development of a civil society and politicalparties, the creation and enforcement of rules and laws, theintroduction of new communications technologies, theentrenchment of a free press, and the general liberation ofinformation from the clutches of authoritarian rulers.

These elements of democratization constitute what is oftencalled “good governance.” More specifically, they providethe institutional structure for the effective, honest,transparent and accountable exercise of power by variouslevels of government. Countries with good governance inplace are more likely to implement and enforceenvironmental and human rights laws, to insist on goodcorporate governance, to have policies and mechanisms forinformation disclosure, and comprise an active citizenry andcivil society that plays a role in monitoring bothgovernment and private sector activities.35 Clearly,corruption and crony capitalism continue to underminegood governance in many fledgling (and advanced)democracies. However, the long-term trend is toward thedevelopment of democratic institutions and the deepeningof democratic values in societies. With the trend towarddemocratization will come the strengthening of institutionsthat enhance the transparent, accountable and effectiveperformance of the market.

New rules for information disclosure

Throughout the 1990s, there has been relentless growth inrules or regimes for information disclosure. This trend isclosely linked to a broader trend toward liberalization,deregulation and privatization of national economies. Asone legal expert noted, “Almost all of these reforms aremarket-oriented; that is, they either substitute markets or theprivate sector for regulatory regimes or have publicagencies use market approaches, structures, and incentivesto achieve their regulatory goals.”36 The EU, for instance,now delegates much regional standards-setting to theprivate sector, and the US government has also reduced oreliminated government action in some areas in favor of themarket.37 It is against this backdrop that transparency-basedgovernance has emerged as a major force in governingglobal economic activity.

Transparency has become an integral mechanism ofgovernance in many areas, including, the environment,banking and financial markets, international security,corporate accounting and auditing, labor practices,

multilateral development assistance and anti-corruption andpublic sector governance.38 Examples of transparency-basedgovernance mechanisms aimed specifically at globalcorporations are numerous.39 They include corporate codesof conduct, third-party monitoring agreements, productcertification arrangements and corporate reporting;advocacy campaigns that expose their corporate behavior topublic scrutiny; and websites that aggregate and disseminateinformation contained in public databases in an accessibleand understandable form. They range from formalinstitutions to informal arrangements, from voluntaryagreements to mandatory compliance, from state-ledinitiatives to initiatives led by the private sector or NGOs.

The expanding rule system for corporate transparencyoperates at multiple levels. At the international level, globaland regional institutions have developed a range ofinitiatives that attempt to make corporate transparency partof the basic requirement for participating in theinternational community. These include the UN GlobalCompact, the OECD Guidelines for MultinationalEnterprises, and the European Union Green Paper onCorporate Social Responsibility, to name a few. The UNGlobal Compact is an initiative between the UN and thebusiness community aimed at upholding and promulgating aset of core values in the areas of human rights, laborstandards, and environmental practices. Five hundredcompanies worldwide participate in the compact's values-based platform, which utilizes the power of transparencyand dialogue to identify and disseminate good practicesbased on universal principles.40 In a similar vein, the OECDGuidelines for Multinational Enterprises is the onlycomprehensive code of corporate conduct agreed to bymultiple nations. The recommendations provide guidanceon appropriate business conduct across the full range ofcorporate activities, including transparency. The EU GreenPaper on CSR articulates a strong policy position oncorporate transparency and responsibility, but contains onlyvoluntary prescriptions for corporations.

At the national level, governments around the world areimposing laws that expand the requirements for disclosureacross a broad spectrum of issues. In the environmentalarena, one of the first disclosure laws of its kind was TheEmergency Planning and Community Right-to-Know Act,drafted by the US government in 1985, contained aprovision called Toxic Release Inventory (TRI) thatempowered the EPA to collect emissions levels on 328deadly chemicals in use in commerce. Since then, countriessuch as Denmark, Norway, the Netherlands, France and





South Africa recently made even broader systems ofCorporate Environmental Reporting mandatory fordomestically registered businesses, while countries likeJapan have put voluntary guidelines in place and the UKhas publicly requested that companies be more transparent.

Finally, there are the multiple “self-regulatory” transparencyinitiatives advanced by non-state actors. These includeNGO-led initiatives from groups such as CERES, theRainforest Action Network, the Workers' RightsConsortium, and the World Wildlife Fund and those led bythe private sector, including industry associations like theInternational Chamber of Commerce, the World BusinessCouncil for Sustainable Development, and sector-specificgroups like the Chemical Manufacturer's Association.NGOs, in particular, have been very aggressive in pursuinga whole range of codes of conduct that have sweptcompanies and entire industries in sectors as diverse asretail, manufacturing, forestry, mining, and pharmaceuticals.Examples of such codes include the chemical industry'sResponsible Care program, the Marine Stewardship Councilcreated by Unilever and WWF, and the Fair LaborAssociation, which was formed through a partnership ofmanufacturers, NGOs, unions and governmentrepresentatives. One of the standards requirements of thesecodes is to report publicly on the performance goals laid outin the agreements. Third-party verification of such reportingis increasingly common.

Figure 7. Global Reporting Initiative

The most outstanding and significant of the manytransparency-based governance mechanisms that haveemerged from the NGO community is the Global ReportingInitiative (GRI), which was established in 1997 to “lead aworldwide, multi-stakeholder effort to establish standardsfor how corporations report their economic, environmentaland social performance.” Since the launch, over 150companies have used the GRI guidelines to drive theirsocial and environmental reporting.41 In April 2002, the GRIbecame a permanent, independent, international body with amulti-stakeholder governance structure. The GRI nowseems well-positioned to play a dominant role in devisingthe rules and standards that will shape corporate reportingin the future.

The explosion of new rules sets and regimes represents anattempt to codify and institutionalize many of the informaland patchy approaches to transparency, which havedominated the landscape until recently. While the currentlymessy system, with many competing standards andapproaches to regulating transparency, will persist for sometime to come, a few trends seem clear: Corporate disclosureis irreversibly broadening beyond financial dimensions toregularly include social and environmental performancemeasurements; NGOs are leading the agenda on theintroduction of new rules and standards for corporatedisclosure; and significantly, voluntary regimes are poisedto become mandatory in many jurisdictions around theworld, thus enshrining a triple bottom line approach toreporting in the legal books of governments.

An evolution in global governance

A historic change is underway in the way we govern theglobal economy—a change with far-reaching effects oncorporate transparency and accountability. The genesis ofthis shift lies in the contemporary phase of globalization. Asnoted earlier, we live in an era in which many of thedominant processes and functions of society are configuredin global networks that span across regions and continents.So-called “boundary problems” are challenging the capacityof the nation-state to regulate in many areas. Theglobalization of economic processes, for example, hasdramatically outstripped the capacity of social and politicalorganizations and control units to keep up. Daniel Bell ofHarvard University warns that such an imbalance haspotentially dangerous implications. He notes that the “olderstructures [of the political order] are cracking becausepolitical scales of sovereignty and authority do not matcheconomic scales.”42



It is our contention, however, that rather than leading to theend of the state, globalization is stimulating a range of newgovernment and governance strategies, and in somefundamental respects, a more activist state. Indeed, asDavid Held, professor of government at the London Schoolof Economics, notes, public and private bodies operating atnational, regional and global levels are already deeplyenmeshed in decision-making and regulatory activities indomains such as trade and weapons of mass destruction.43

Recent trends suggest that the emerging system will not,however, entail a simple re-tooling of the state in its currentform. The forthcoming era of governance will not begeographically determined. The nation-state itself will nolonger be the only legitimate source of power and authorityin the world. Prominent scholars of globalization andgovernance identify at least three distinct trends to supportthese claims:44

1. The territorial boundaries of systems of accountabilityare being recast so that many issues that escape thecontrol of the nation-state can be brought underdemocratic governance. The ability of individuals to usethe court systems of foreign powers, namely the US, tosue companies for negligent behavior is one of the mostrecent and controversial examples.45

2. The role of regional and global regulatory andfunctional bodies is being rethought so that they canprovide a sharp focal point for international publicaffairs. The future shape and role of the UN in globalgovernance is an example of one of the most activeinternational political debates today.46

3. The agencies, associations and organizations of theeconomy and civil society are adopting structures ofrules and principles that make them more compatiblewith democratic governance. For example, NGOs arebeginning to consider how to deal with issues ofrepresentation and accountability within theirorganizations, while corporations are adopting processesfor stakeholder engagement and opening up somedecision-making processes.47

The rising world order will be defined by a multi-layeredform of governance in which the basic building blocks willbe groups, associations and government agencies thatcoalesce in multiple and overlapping networks of power.The exact form and limits of a global system of governanceare a matter of intense political debate and speculation. AtDigital 4Sight we believe that two primary models suggestthemselves:

• New international constituent assemblies that formaround specific issues and draw representatives fromgeographically defined communities as well as interest-based associations of market and civic actors that meetcriteria for intra-organizational democracy andrepresentation.48

• New inter-governmental structures that unite politicaljurisdictions to resolve common issues such as theEuropean Union and other subcontinental alliances ofnation-states, as well as groupings of subnationaljurisdictions or even local confederations that crossexisting boundaries to form regionally based governancebodies.

Figure 8. Evolution of global governance.

In either scenario, the implications of a shift to globalgovernance for corporate transparency and accountabilityare many-fold. The primary effect will be to strengthen andextend some of the trends discussed previously: Namely, thetrend toward democracy, the creation of new rules fordisclosure and the rise of NGOs as a powerful force ingovernance.

First, most proposals for new systems of global governanceplace an emphasis on the necessity of reframing markets tocounter the social and environmental costs they sometimesgenerate.49 There is a great deal of variance in what thismeans specifically. Some advocate incorporating social andenvironmental responsibilities into the articles ofassociation for economic entities. Others opt forcentralizing and coordinating economic policy-making andgovernance in a global body that would amalgamate thefunction of institutions like the IMF, the World Bank, theOECD, the WTO, and the G8. It is debatable whether suchmeasures will come to pass. In the more immediate term,most observers do agree that many of the emerging self-regulatory systems for corporate transparency will beconsolidated in a global regime (or set of global regimes

Globalfirms

NGOsNGOs

Nation-states Nation-statesNation-states

Nationalregulations

Voluntarycodes of conduct

Global rules

GovernmentGovernment

NGOsNGOs

IndustryIndustry

Global institutions& regulations

GovernmentGovernmentIndustryIndustry

FollowersFollowers

IndustryIndustryleadersleaders

Codes ofConduct

NGOsNGOs

organized around issue areas) that vastly increases the scopeand effectiveness of transparency-based governance ofbusiness conduct.50 Advocates of such an approach suggestthat regulating multinational corporations may be donemore efficiently by promoting full disclosure of theiractivities, rather than relying on multiple bureaucracies inmultiple countries that provide multiple opportunities forcorruption.51

Second, global governance will speed and reinforce thedemocratization and accountability trend on two levels. Atthe national level, global governance will overlay regionaland global regulatory regimes for governing globaleconomic activity. Such measures will help raise regulatorystandards in developing countries, thus lifting the civilfoundation around the world. They will also increase thelevel of political surveillance of corporate activities at thelocal level in regions or countries where effective systemsof monitoring or control never existed before. At theinternational level, global governance will help forge newdemocratic structures that extend representative institutionsand concepts of franchise and constituency beyondgeographic definitions. This key advance in reshapingaccountability could establish a series of checks andbalances that flow through multiple political arenas andcover existing institutional gaps.

Third, global governance will further legitimize andstrengthen the role of NGOs in monitoring the social andenvironmental performance of corporations.52 Indeed, NGOsare seen by many as one of the key vehicles enhancingpolitical accountability and openness in internationaldecision-making. Proponents claim that civic groups arebetter positioned than any other institution to take the leadin capturing the frustration of a disaffected citizenry andtransforming it into increased interest and participation inbuilding new international civic institutions. The increasingprominence of NGOs in global governance will strengthentheir institutional mandates, raise their profile with citizensand the media, and enhance their supply of funding. Thekey implication for corporations is the presence of aformidable “third force” in global governance. Corporateleaders will have to contend with civil society in the sameway they have poured significant resources into maintainingrelationships with governments, except the process ofnormalizing relationships with civil society will beinherently more difficult and unpredictable (see section 8 inparticular).

Economic Drivers: An Evolving CapitalistEconomy

The capitalist economy is undergoing a fundamentalrestructuring that is driving new forms of transparency inthe marketplace. In our analysis of this restructuring, webring together three distinct trends. To begin, we take abrief look at how several key characteristics of economicglobalization create new economic incentives fortransparency. In particular, we examine global trade and theliberalization of international markets, the integration ofglobal financial markets, the shift to a network model of thecorporation, the heightened competition for foreign directinvestment (FDI), and the rise of global economicinstitutions. Next, we look at the increasing value ofintangible assets like reputation, knowledge andrelationships in a progressively more knowledge-basedeconomy, paying special attention to the fact that protectingsuch intangible assets creates a requirement for greatercorporate transparency. Finally, we discuss the potential fornew economic measures of social and environmental valueto increase the transparency—and hence our knowledge—ofthe true impact of economic activity on social andenvironmental systems.

In some ways, these three processes will clash with oneanother as the capitalist economy continues to evolve. Onone hand, a recalibration of the economy's relationship tosociety and the natural world is taking place as betterindicators of sustainability enter the economic lexicon andthe nature of “value” broadens beyond an orthodoxmonetary definition. On the other hand, the economicimperatives set by the twin processes of globalization andliberalization can undermine sustainability because of thepropensity of globalization to lock firms in a globallycompetitive battle to reduce costs and increase profits. Wedon't suggest that sustainability and globalization areirreconcilable. In a later discussion, we consider the impactof this tension on the prospects for the Values-BasedEnterprise, and suggest that the rules of the game can bechanged. For now, we limit the discussion to describingthree key economic forces that are driving higher levels oftransparency in the economy: economic globalization, theincreasing centrality of knowledge and intangibles in valuecreation, and a gradual shift to new forms of sustainabilityaccounting.





Globalization and liberalization

The forces of economic globalization have created ahistorically unprecedented level of integration andinterdependence in the world economy.54 The sharp increasein the volume of international trade and capital flows nowlink the relations and fortunes of people and organizationsaround the world. The expansion of corporations across theglobe has created structures of global production andcompetition between firms. It is now possible to speak of asingle global economy composed of major regional blocksthat compete for economic advantage. In our analysis, theglobalization of the economy consists of three interlinkedprocesses—global production, global trade and globalfinance—each with their own rationale for transparency.55

Collectively, these forces stimulate a demand fortransparency that weaves its way through the multipleprocesses (e.g., production, trade, finance, policy-making)and institutions (e.g., corporations, trade associations,financiers, regulatory institutions) that comprise the globaleconomy.

• Global production. Multinational corporations arereorganizing economic activity on a global scale byforging new internetworked sets of geographicallydispersed enterprises, teams, and individuals that cometogether to create value for customers.56 Networkedenterprises come in three primary forms: producer-driven supply chains in which production is controlledby large, integrated industrial enterprises; buyer-drivensupply chains in which large retailers and merchandisersset up decentralized production networks in exportingcountries; and virtual supply chains or marketplaces inwhich producers and consumers self-organize toexchange good and services. (For a lengthier discussionof business webs, see section 5.) Orchestrating thesesometimes highly structured, sometimes highlyamorphous global networks requires a high level oftransparency to enable a coherent “single-enterprisesystem” with the ability to compete on the basis ofefficiency, profitability and time to market (see also ourdiscussion of transaction costs in section 4).57 Morerecently, companies have also been deploying integratedinformation systems to manage social andenvironmental performance across the entire supplychain.

• Global trade. International trade agreements facilitateliberalization and stimulate the global movement ofcapital, goods, and services throughout the economy.While stimulating economic growth, global tradeimposes limits on state autonomy and induces shifts indomestic policy as nation-states become participants in

regional and international trade regimes such asNAFTA, APEC and the WTO. As Sylvia Ostry of theUniversity of Toronto explains, the intrusiveness ofcontemporary international trade agreements like theWTO is due to a shift from the GATT model of negativeregulation—what governments must not do—to positiveregulation—or what governments must do.58 Thisgrowing public awareness of trade policy issues andtheir implications for national sovereignty has helpedfuel criticism that most trade liberalization agreementshave been negotiated far from the public gaze. The“Battle of Seattle” and other subsequent events reinforcethe notion that the days when international decision-makers in financial institutions can sit behind closeddoors are waning. Ostry and many others cite the needfor the WTO to shed its secretive culture andcommunicate better with the general public to build abroader popular constituency for trade liberalization.Economic organizations—including corporations,financial institutions and the regulatory agencies thatgovern their activities—are currently outliers in therejection of transparency and participation comparedwith other institutions operating in rapidly evolvingpolicy environments. The broader lesson of the WTO isthat market institutions will not be able to resist theadvance of new players or the scrutiny and participationof the public for long.

• Global finance. The explosive growth of globalfinancial activity has created a new imperative for fiscaltransparency. As global financial flows increase, so toodoes the complexity and interdependence of the internalfinancial markets and national economies. Speculativeflows can have rapid and dramatic domestic economicconsequences. Financial difficulties faced by a singleinstitution or firm in one country can destabilize the restof the sector in other countries. Given the volatile natureof financial markets, and the instant diffusion ofinformation between the world's financial centers, therisks generated by local financial crises for the entireglobal financial system create strong incentives toincrease market transparency. As the Group of 22 arguesin a recent working group report “Better information onthe economic and financial affairs of governments,banks and corporations will strengthen market discipline(encourage lenders to ration credit to borrowers who failto take the steps needed to maintain their financialstability) and help policy-makers to identify the need forcorrective action.”59 Thus, the trend toward deregulatingfinancial markets has, in some ways, been tempered asfinancial markets are re-regulated, except this time withhigher levels of transparency rather than governmentintervention.

Finally, the globalization and liberalization of the economydrives two secondary phenomena that are increasing thetransparency of the market. First, there is a globalcompetition for foreign direct investment (FDI) that isdriving intense efforts of national governments to tackleissues of corruption and increase the transparency of theirmarkets to make them more attractive to risk-adverseinvestors. Enhanced global transparency allows investors toassess the quality and risks of their investments in a broadrange of countries. Second, these national efforts are backedby institutions such as the OECD, the World Bank and theIMF, which have dedicated extensive resources andintroduced new regulatory strategies to fight corruption andincrease transparency, particularly in the wake of the Asianfinancial crisis of 1997. For example, the IMF created aSpecial Data Dissemination Standard that specifies whateconomic and policy information countries should disclosewhen seeking access to international capital. Thesetransparency-enhancing initiatives are part of the broadermandate of these global organizations to stabilize markets,boost economic productivity and steer economicdevelopment.

Intangibles and the knowledge economy

The rise of intangibles as a primary driver of value creationplays an important role in the growth of corporatetransparency. Intangibles are factors that affect business andeconomic outcomes but are not easily recognizable,measurable, or quantifiable in economic terms. Theyinclude knowledge, relationships, goodwill, experience,social capital, and brand recognition. It is easy forcompanies to focus on tangible factors to the exclusion ofsuch intangibles. Indeed, corporate managers focus onquestions regarding tangibles primarily (e.g., Is revenuegoing up or down? Have we sold more or fewer productsand services? What are our costs per unit? Is productivityimproving or declining?). The focus on tangibles, albeitimportant, can overshadow the intangible dimensions ofhow value is created in the economy. Recently, however,business literature has begun to broaden our notion of howintangibles affect the performance of business enterprises inthe marketplace. This shift in thinking has given rise to newmanagement processes that help cultivate and leverageintangibles, as well as accounting practices that attempt toadd them to the balance sheet.60

The centrality of intangibles is linked to the changingeconomics of the information-based economy.61 In aninformation economy, companies no longer compete solely

on the price, quality or availability of their products—although these fundamentals are still important. Firms mustprovide much higher value at much lower costs to captureand retain the scarce attention of customers. This meansthey need to compete more on the basis of their ability tocreate knowledge, sustain relationships and build areputation as a great company. Increasingly, the ability tocompete on these assets is tied to whether the vision,values, ethical stance, and leadership of the company are inalignment with the expectations of a broad set ofstakeholders. Until recently, however, the importancetransparency in managing intangible assets has beenoverlooked.

Figure 9. Value in the 21st century

In our view, transparency is key to the intangiblesdiscussion. As we noted earlier, transparency is central tocreating trust, which, in turn, is essential to sustainingknowledge-based relationships with stakeholders and apositive reputation in the marketplace. On one hand,companies that keep secrets and barricade information areless likely to be successful in building relationships,creating knowledge, or cultivating a good reputation.Ironically, these companies make their knowledge,reputations, and relationships more vulnerable to attack byactivists who have become more adept at attacking theseassets to increase transparency or influence corporatebehavior. On the other hand, open and transparentcompanies that deliberately share information create theconditions for trust-building and knowledge creation withexternal communities of stakeholders and internalcommunities of practice.62



ValueCreation

PhysicalFinancial

Knowledge

Supplier driven

Mass production

Customer driven

Service enhancedcustomization

Resources

• Physical assets• Price and quality

• Intangible assets• Reputation,

knowledge, and relationships



Sustainable economics

There is one other critical macroeconomic driver oftransparency looming. Ever since the 1992 Earth Summitand the release of the Bruntland Report: Our CommonFuture laid out the roadmap for sustainable developmentthere has been an intensification of efforts to transform theway we measure growth and development. A growingnumber of economists claim that inefficiency in theeconomy is masked because growth and progress aremeasured in money, and money does not give usinformation about ecological or social systems, it only givesinformation about financial systems. As Paul Hawken,author of Natural Capitalism: Creating the Next IndustrialRevolution, puts it, “the massive inefficiencies ofindustrialism are not more apparent because they aremasked by a financial system that gives improperinformation.”63

Take, for example, the infamous Exxon Valdez oil spill offthe coast of Alaska. The environmental consequences of thedisaster cannot be measured or recognized in economicterms, but the massive clean-up bill can. Indeed, the jobscreated to remedy the mess gave a boost to the localAlaskan economy and the Gross Domestic Product (GDP)of the US. The economic valuation of common ecologicalresources provides illustrative examples as well. Theeconomic value of trees, for instance, is only accounted forwhen they are converted from raw materials into lumber,paper, or furniture. The services that forests provide increating oxygen or removing carbon dioxide from theatmosphere are not accounted for at all. Similarly, marshesand swamps are valued as real estate, not for their well-documented ability to filter and absorb massive quantitiesof air and water pollutants. Why are these servicesundervalued in economic terms? Primarily, because nobodyowns or pays to use them—they are part of globalcommons. Thus, when these essentially “free” services orcommon ecological goods are destroyed, or converted into“productive capital,” we don't register a deficit on ournational balance sheets.

A system of full-cost accounting or sustainable economicsthat more accurately measures the value or servicesprovided by ecosystems is now emerging as an alternativeto standard measures of growth like the GDP. The rationalefor such a system is that ecological systems and the naturalcapital stocks contribute to human welfare, both directlyand indirectly, and therefore represent part of the economicvalue of the planet. Economists like Robert Costanza andHerman Daly at the University of Maryland point out thatmost of this value (either the creation or destruction of it) isunrecognized by our current accounting systems. Costanzaclaims that “ecological systems and the natural capitalstocks contribute an average of US$33 trillion per year tothe economic value of the planet—most of which is outsidethe market.”64 The Genuine Progress Indicator (GPI),proposed by Costanza and Daly as an alternative measure ofsustainable growth, is now under serious consideration byorganizations like the OECD and the UNCTAD andcountries such as Sweden, Denmark and Israel. Theirstudies show that while GDP has shown a steady upwardtrend since 1950, the GPI climbed more modestly untilabout 1975, and has gradually drifted down since. In otherwords, according a sustainable measure of growth, we havebeen in recession for the past 27 years.65

The potential adoption of accounting systems based on theprinciples of sustainability is important for our analysis ofthe drivers of transparency (factors that cannot beunderstood or measured cannot be transparent). In a sense,the rise of sustainable economics represents an extension ofthe previous discussion of intangibles in a knowledge-basedeconomy. Like knowledge, brand, reputation andrelationship capital, social and environmental intangiblesform part of the invisible fabric of value creation (ordestruction) that is currently hidden in, indeed excludedfrom, our economic assumptions and measurements. Theaddition of social and environmental intangibles into ouraccounting and economic thinking helps to fill aninformation vacuum in our understanding of therelationships between markets, society and the environment.By providing a broader set of metrics by which to measuregrowth and progress, it allows us to get a better picture ofthe tradeoffs we make when we put economic capital aheadof the state of our social and natural capital. It can exposethe massive waste of resources or help us pinpointparticularly unsustainable industries that need to berestructured with new incentives and penalties. Thisultimately leads to a more efficient and transparenteconomy. Indeed, embedding such indicators in theaccounting systems of individual companies could lead to a

"The massive inefficiencies of industrialism are notmore apparent because they are masked by a financialsystem that gives improper information."

— Paul HawkenAuthor of Natural Capitalism:

Creating the Next Industrial Revolution

better alignment of profits with genuine social progress andan acute awareness of the true costs of economic activity.From there, it is possible to imagine the economy couldquickly recalibrate itself to maintain balance and synergybetween economic, social, and environmental goals.

Technological Drivers: The Emerging Hypernet

As the Internet evolves, it edges closer to fulfilling thedream of its originators to become the universalcommunications substrate linking all humankind and itsartifacts in a seamless global network. Digital 4Sight hasnamed the next instantiation of the Internet, particularly asit embraces wireless connection of an overwhelmingdiversity of edge devices, the “Hypernet.” We define theHypernet as a global network of people, objects, agents,devices and organizations interacting in an open, intelligentenvironment. The reason for coining a different name is thatwe believe the Hypernet is qualitatively different in severalsubstantial ways from the “old” homogeneous PC-and-browser-based Internet, and dwelling on these differencesand their implications is a critical component ofunderstanding the impact of information technologies on thetransparency phenomenon.

The Hypernet is what the Internet will become over the nextfew years, say, between now and 2005. Over this timeperiod several successive waves of innovation will breakover the Internet. In approximate order of appearance(because it is foolhardy to make specific predictions) theseare the advent of mobile Internet-connected devices (e.g.,mobile phones and PDAs), the proliferation of broadbandconnection, and the steady penetration of Internet-connectedcomputer power into the objects of everyday life, from carsto light switches, creating an invisible infrastructure thatpervades every facet of our lives. It is at the intersection orconvergence of these new technologies with the continuinggrowth of the traditional Internet that the full potential ofthe Hypernet is realized.

As we explored the key properties of the Hypernet, wepinpointed four trends that will coalesce to create a morerobust communications platform for transparency than hasever existed before. These trends include: the growingaccessibility of information and communicationtechnologies; the increasing granularity of informationabout the world; the immediate access to informationprovided by an “always on” environment; and thecollaboration and self-organization enabled by onlineapplications for networking people and organizations.

Accessibility

The information revolution has made the ability to produceand consume information more accessible than anytime inhistory. Yet, the digital divide is still a pervasive problem.Three core factors, however, suggest that the scale of theHypernet will dwarf today's Internet. First, the economics ofcheap devices, mobile connectivity and inexpensivenetwork technologies will help extend access to newdemographic groups and under-served regions in both thedeveloped and developing world. Second, the networkeffects stimulated by self-organizing peer-to-peerapplications that enable rich interpersonal communicationsand interactivity will attract more users and drive highervolumes of Internet traffic. Finally, the development of newportable computing devices and Internet-ready mobilephones and the proliferation of smart or “informated”objects that can interoperate and interact with each otherwill lead to unprecedented levels of access to informationnetworks. Indeed, we are quickly moving into an era inwhich access to even the most powerful surveillancetechnologies—including high-resolution satellite imagery—will extend from a handful of government agencies to amuch broader audience.66

New devices like the Simputer provide a good example ofthe promise of information technologies to lessen the gapbetween information haves and have. Developed in India,the Simputer is a relatively low-cost computer with anatural user interface that even an illiterate user can operate.While the cost of the device is still about US$183, theSimputer has been designed for shared, community-basedusage by embedding a smart card feature that allows forpersonal information management at the individual level foran unlimited number of users.67

Another telling example is the crucial importance of themobile phone in the rapid mobilization of citizen protesterswho overthrew the former president of the Philippines,Joseph Estrada. In the Philippines, the economics of mobilephones make this form of wireless communication more



"The telephone shares the capacity of othertelecommunication technologies—to reveal what wasonce hidden, to repeat what was meant to be secret,and to pass on messages that were not meant for thoseoutside of a particular circle."

— Vincente RafaelProfessor

University of California



accessible, reliable and affordable than land-line telephonesor computers.68 While President Estrada's impeachmenthearings proceeded, mobile phones were effective inspreading rumors, jokes, and information that steadilyeroded the legitimacy of his administration. Bypassing themainstream TV or radio, mobile phone users becamebroadcasters, receiving and transmitting both news andgossip. Commenting on the event, Professor VincenteRafael of the University of California, San Diego imparts apowerful lesson about the impact of cheap and accessiblecommunications technologies for corporate transparency,“The telephone shares the capacity of othertelecommunication technologies—to reveal what was oncehidden, to repeat what was meant to be secret, and to passon messages that were not meant for those outside of aparticular circle.”69

As the ability to easily and cheaply produce and consumeinformation finally becomes a reality for billions of peoplearound the world, companies can expect to see a muchgreater number of users in the global network and a sharpincrease in the demand curve for transparency. Expandingaccess to information technology will vastly increase theflow of information and the opportunities for many morepeople to retrieve and share this information. Companieswill also have totally new demographics, cultural traditions,languages and worldviews to address in theircommunications with an increasingly diverse web ofstakeholders.

Granularity

Our knowledge of the world is limited by the quality of theinformation we gather about events around us. When thedevices we use to capture and process such data aresparsely distributed and intermittently connected, we get anincomplete, and often outdated, snapshot of the real world.As information technologies become more ubiquitous in ourenvironment we have the opportunity to access a muchmore granular picture of—or transparent view into—thestate of our world. Take, for example, technologies likeremote satellite imaging, which allows us to monitor theenvironment from afar, or the development of tiny micro-sensors and video cameras, which, when scattered aroundour environment, can report back to us on local conditions.The World Resource Institute's Global Forest Watch, forinstance, uses satellite imagery to catalogue the rate offorest depletion around the world and could be used topinpoint illegal logging operations.70

Figure 10. Global Forest Watch

The Hypernet allows us to cull staggering quantities of datafrom a plethora of connected intelligent sensors and devicesthroughout natural and built environments. Research andpilots in university and private labs around the world aredemonstrating the feasibility of embedding—in all kinds ofobjects and environments—low-power intelligent wirelesssensors that measure everything from temperature tomovement to chemical composition and report the results inreal-time. The California Institute of Telecommunicationsand Information Technology (Cal-IT2), for example, isdeveloping the technology to produce—for the first time—a continuously updated data set about environmental qualityfrom any location in which the sensors are placed.According to Cal-IT2, everyone from local environmentministries to global organizations will soon possess thetools and information to “detect and forecast climatevariability, manage natural resources, preserve and restoreecosystems, and carry out crisis management in a cost-effective and increasingly accurate manner.”71

These technological breakthroughs will increasetransparency and enhance our capacity to produce a muchricher virtual model of the world. Understanding of theecological effects of global climate change, for example,will improve as remote sensors placed in sensitive naturalenvironments give us instant access to current indicatorsand such data are fed into real-time modeling programs.The granularity and timeliness of information culled fromour environment will help establish greater certainty aboutthe current and future impact of economic activity onsociety and the environment and inform appropriate policyresponses. Similarly, more comprehensive data about the

social and environmental dimensions of products andservices could provide consumers and investors with richerfeedback on how to improve or target spending andinvestments. These are just a few of the ways increasinggranularity of information will drive transparency.

Immediacy

At the same time the Hypernet provides us withincreasingly granular information to construct a richermodel of the world, it enables us to gain more immediateaccess to such information. Immediacy is the directconsequence of two properties of the Hypernet:pervasiveness, the notion that more and more physicalobjects are connected to the Hypernet, and always-onconnectivity, in which the ability to collect, send, andreceive information more frequently is infinitely greater.Pervasiveness and always-on connectivity means that dataabout an object or an event can be captured immediately,reported instantaneously to some intended recipient, andimmediately acted on. In other words, many moresignificant events can now be tracked and reported on inreal-time (i.e., events that may not make breaking newsheadlines in the media). Immediacy is also inherent tosynchronous communication, in which two playerscommunicate with each other at the same time, whetherthrough conventional voice conversation or instantmessaging chat.72

While immediacy does not necessarily enlarge theboundaries of what is transparent, it certainly increases thespeed at which information can travel to stakeholdersgroups. Indeed, it is the increasing speed of the flow ofinformation that makes transparency so hard to manage. Ina world where information is instantly available, bad newstravels more quickly than ever before. The cycle time ittakes for an accident in the supply chain (e.g., a toxic spill)to be reported to the public is drastically reduced in analways-on environment. A disgruntled employee can start arapid-fire rumor that spreads through the organization,causing uncertainty, doubt, and anger, long before an“official” response can be mustered. The consequence ofinstant transparency will be the need to accelerate decision-making and response protocols to the point where they cankeep pace with a rapidly changing environment.

Another key factor is the role that new aggregators of dataare playing by taking granular data sets and convertingthem into a format that provides people with convenient andimmediate access to usable information. Environmental

groups, for example, have been empowered by thewidespread deployment of geographic information system(GIS), Web-enabled databases, and computer simulations, tocollect, manage and distribute large volumes ofenvironmental data. Websites that aggregate such data areincreasingly popular and powerful enablers of transparencythat take environmental information that was previouslyinaccessible to the public and render it usable in everydaydecision-making. The US-based Environmental DefenseFund, for example, runs Scorecard, an online service thatcombines 400 scientific and government databases toprofile local environmental problems and the health effectsof toxic chemicals.73 Visitors to the website type in their zipcodes to get instant access to information about pollutionsources in their regions. Scorecard also provides actionrecommendations and phone numbers of plant managers atlocal polluters, helping translate information into immediateaction. While Scorecard is not yet at the level where peoplecan get access to real-time information about toxic releases,it's a significant leap forward from the days whenindividuals would have had to file a request for informationfrom a government department to obtain such information.

Figure 11. Scorecard.org

Collaboration and self-organization

Finally, the Hypernet is giving rise to an exciting range ofnew collaborative mechanisms. Some examples includeBluetooth technology, which enables devices or computersto share tasks and even “talk” to one another; peer-to-peertechnologies that groups of individuals can use to establish





ad-hoc wireless networks; enterprise application integrationsoftware and XML implementations that enableorganizations to integrate their business processes, sharedata, and collaborate in real-time; and location-basedservices that facilitate users' finding someone in proximitywith a common purpose or task to accomplish. Over time,collaborative mechanisms will extend throughout social andpolitical systems, corporate supply-chains, workplaces,homes, and countless other environments.

The collaboration enabled by Hypernet technologies isenabling the creation of new forms of organizations thatlean toward self-organization rather than hierarchy. Thesenew patterns of organization are self-organizing becausethey arise spontaneously out of the system's own resourcesand are not the result of an external or hierarchicalimposition. In social systems, self-organization is emergingbecause the advantages (some would say requirements) ofhierarchical coordination are muted in a world that ischaracterized by increasingly dense, extended, and rapidlychanging patterns of reciprocal interdependence. But moreimportantly, cheap and effective ways of collaboratingonline are enabling people to coordinate complex activitiesin the absence of established institutions and hierarchicallymanaged processes.

Examples of self-organizing systems are abundant.Collective action, for example, is becoming less labor-intensive as people use technology to identify and link-upwith others around the world, or perhaps more importantly,with people nearby. People that share similar goals, valuesor interests can readily form just-in-time organizations withno identifiable center or locus of control. Bring thiscapacity for self-organization together with low barriers toInternet publishing and you have a potent recipe fortransparency and a means to empower small players to havea significant impact on public discourse. The most strikingexamples of this phenomenon are the new decentralized,self-organizing publishing sites that provide alternatives totraditional news outlets. This point became evident at theWTO meeting in Seattle, when an independent, self-organizing website called the Indy Media Center gave CNNa run for its money when it began broadcasting real-timecoverage from the streets of Seattle to a worldwideaudience.74 Local activists set up a small media studio in thevicinity of the protest and used it to upload images, video,and text to the site, which was updated minute-by-minute.This alternative publishing mechanism was much moreadept at capturing and relaying protestors' diverse messages,which were largely absent from the coverage by mainstream

media outlets. Referring to the WTO negotiations in arecent post-mortem panel, Sylvia Ostry, former chair of theEconomic Council of Canada, pointed out that because ofthe Internet “the whole process has become infinitelycontestable. What used to be a monopoly of governmentsand the private sector is now available to everyone 24 hoursa day.”75

Figure 12. Independent Media Center

It's a Transparent World — Get Used To It

To briefly recap, transparency is an increasingly pervasiveand powerful phenomenon driven by social, political,technological and economic forces. Social trends foretellthe rise of ethical citizens and a growing transnational civilsociety, which will act in concert to mobilize broad socialexpectations for transparency and accountability frompowerful political and economic institutions. Political trendssuggest the world is becoming more open as a growingnumber of countries transition to democratic forms ofgovernment; as transparency becomes a more establishednorm in global governance; and as governments introduce awide range of new rules and regimes for informationdisclosure. Technological trends point to a world withincreasingly powerful and pervasive informationtechnologies that will make it technically feasible for a

large portion of humanity to gain immediate access to awide range of incredibly granular information anddisseminate it widely. Economic trends indicate a gradualshift toward a global economy that rewards markets andfirms with sustainable business practices and transparentand accountable relationships with customers, investors,employees, partners and a broad range of publicstakeholders. These combined forces are creating anunstoppable march toward greater transparency in thefuture.

Transparency drivers: timescales and intensity

Not all of the transparency drivers are working onequivalent timescales. Nor are they exerting equal levels ofinfluence or intensity. Some, like social expectations, arequite immediate and intense (and potentially short-lived).The rise of civil society is also immediate, but we havereason to believe that civil society is merely at thebeginning of a very significant evolution of its roles andpowers in governance. The emergence of the Hypernet isoperating on an intermediate time scale (five years ormore), while the shifts to global forms of governance andthe adoption of sustainable economic accounting models areunfolding and intensifying over a longer period of time (10years or more). We put together a chart of the transparencydrivers and mapped them against these various timescalesand levels of intensity. The implication of this chart is thatwe expect to see a very uneven development oftransparency across the four dimensions of the networkedeconomy, with each dimension generating successive wavesof transparency that will wash over society and theeconomy with increasing regularity.

Figure 13. Transparency timescales and intensity

Given the strength of the transparency phenomenon, it'shard to see the long historical trend toward enhanced levelsof openness in the economy and society being reversed.Indeed, taking a historical view, transparency has alreadymade great leaps forward. The contrast between the levelsof transparency several decades ago and those today isastounding across all issue areas. Ann Florini points out that“fifty years ago, few countries routinely releasedinformation about their economies—indeed, many treatedsuch information as state secrets. Now scores of countriespost the details on the IMF's website… A half-century ago,no country had laws specifically requiring governmentofficials to provide information to their citizens. Now thereare scores of them. Until as recently as the 1980s,environmental regulation consisted largely of governmentstelling corporations what production processes to use. Nowregulation is increasingly about telling them they simplyhave to report what they're polluting, and make thatinformation public.” The trend is not irreversible, but it ispowerful.

As we explore in the next couple of sections, transparencyis already well on its way to establishing itself as apowerful norm in corporate governance and atransformative force within the firm and its stakeholderrelationships. First, we present a high-level discussion ofthe business value of transparency as a force for buildingtrust and lowering transaction costs, in order to set the stagefor a more specific account of how companies aredeploying transparency to create value with five differentclasses of stakeholders.



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5. FIVE DIMENSIONS OF TRANSPARENCY

While all organizations—corporations, governments, evencivil society groups—are subject to demands fortransparency, the winds of change have been most fast andfurious for today's global corporations. Corporations havecome under an unprecedented level of scrutiny as the worldbecomes increasingly open and information flows morefreely. As Susanne Stormer of Novo Nordisk puts it, “In thelong term, not being transparent is really not an option. Youcan say truth, like pregnancy, cannot be hidden for long.And even now, your stakeholders will find out one way oranother, and you can no longer control the communicationthat's coming in and out of your organization.”91 Companies,like Novo Nordisk, that have already found themselvesoperating under the microscope, increasingly realize thattransparency is redefining the way companies relate to widerange of stakeholder groups, ranging from employees,shareholders and trading partners, to communities, NGOs,and government agencies.

Digital 4Sight has developed a transparency framework thatillustrates the multiple layers of transparency managersmust pay attention to if they want to build and maintainrelationships of integrity with all of the firm's keyconstituents. The five dimensions of transparency beginwith the firm itself and cascade out to the firm'srelationships with business web partners, customers,markets and society.

Figure 13. Five dimensions of transparency

• Firm transparency. Creating a culture of openness andaccountability in the firm by sharing information openlyamong employees to foster commitment, empowerment,and responsible decision-making.

• Business web transparency. Arriving at shared valuesand business practices with the firm's network ofpartners and suppliers by distributing informationthrough single enterprise systems designed to driveconsistency and high performance.

• Customer transparency. Maintaining customer loyaltyand building brand equity by being open and fair withcustomers and responsive to a wide array of customerconcerns.

• Market transparency. Increasing disclosure andopenness of financial data and market transactions tocreate credibility with investors and providing anantidote to issues such as pricing collusion, corruptionand bribery.

• Public transparency. Improving public trust byproviding visibility into company operations andallowing scrutiny of social and environmentalperformance by external stakeholders.

These five dimensions of transparency are considered ingreater length below. In particular, we sketch out the keyparticipants and issues in each layer of transparency andprovide some recommendations on how firms can build andleverage value in each of these critical relationships.

Firm Transparency

Transparency quite appropriately begins within the firm. Weargue that creating a culture of openness and accountabilityin the firm is a precondition for all other forms oftransparency. Without transparency and trust amongemployees and managers, transparency can hardly becreated with outside stakeholders. Companies create firmtransparency by sharing the right kinds of informationopenly among employees to foster commitment,empowerment, and responsible decision-making.

Management strategies for attracting, retaining andmanaging employees are hardly new. But they take on newdimensions in a transparent world. We take twoperspectives on the nature of this change. The firstperspective presents a cautionary tale about what happens toemployee loyalty in an opaque environment, especiallygiven their access to new information technologies and theirdense linkages with other stakeholders in society. We also



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argue that transparency is a critical enabler of employeeretention and attraction, and integral to the process ofembedding corporate values in the DNA of the firm.

The first significant change is the power of networkedtechnologies to give employees more access to informationand a mechanism by which to create transparency in thefirm where none existed before. In the industrial age,corporations functioned as independent silos controllinginformation flowing in and out of the organization.Management possessed the authority and structure tocontrol how information was shared, with whom and atwhat time. Today, employees are armed with ubiquitouscommunication technologies and have the power to acquireinformation and engage in peer-to-peer dialogue withthreatening speed. As a result, the ability of management tocontrol information in the firm has dramatically diminished.

Perhaps more threatening, however, is that firms competewith a network of other stakeholders that can more readilyinfluence employee behavior and perceptions.

When firms misjudge what employees need or want toknow they risk alienating their workforce. Gaps emergebetween the information employees have and theinformation they feel entitled to know. In thesecircumstances, employees are more likely to seek alternatesources of information and support. This is precisely whathappened when Wal-Mart employees began to perceive thattheir employer was straying from its core values.

When Sam Walton founded Wal-Mart, he insisted thecompany would honor two core values: respect foremployees and respect for customers. In a recent series ofcost-cutting moves, however, Wal-Mart rolled back anumber of employee benefits and entitlements and firedemployees suspected of wanting to form a union. Norationale for these actions was forthcoming from themanagement. Upset employees didn't feel they knew allthey needed to know. There were no channels for gainingmore information and no dispute resolution mechanisms forworking out the problems. Even former managers spoke outagainst Wal-Mart's concerted union-busting tactics.92 In theabsence of transparency and dialogue, Wal-Mart employeeshave formed continent-wide networks and are makingcommon cause with groups operating websites likewalmartsucks.org, walmartwatch.com, walmartyrs.com andretailworker.com. These alternate online channels allowemployees to network, discuss problems online, disseminatesensitive Wal-Mart information and make their grievancesknown to the public.

Figure 17. Wal-martyrs.com

The consequences of this misalignment are quite tangible.The reputational hit aside, Wal-Mart recently settled (one ofmany) class action suits for $50 million with employees thatsued the company for forcing them to work off the clock.While Wal-Mart actually has a policy against such behavior,the company's structures and incentives effectively rewardmanagers for contravening the stated values of thecompany. This brings us to the second perspective on firmtransparency.

The other significant change is the growing importance ofcorporate social responsibility. As demographic trends andthe changing character of the workforce create a “war fortalent,” companies are coming under increasing pressure tobe responsive to employee values.93 A growing number ofpeople are making corporate transparency and responsibilitya condition for taking employment. Attracting, motivatingand retaining these employees requires a commitment byfirms to satisfy not just their demands for input andinformation, but also for meaningful work that links theirefforts to the company and society as a whole.

A related challenge concerns the need to create alignmentbetween corporate values, individual employee actions andbusiness practices across the enterprise. This has alwaysbeen important, but institutionalizing corporate values takes



"If companies are going to react quickly to changesin the marketplace, they have to put more authority,accountability, and information into the hands of thepeople who are closest to the product and thecustomers."

— Robert HaasCEO

Levi-Strauss

on new relevance in a transparent and quickly changingmarketplace. Robert Haas, CEO of Levi-Strauss recentlysaid, “If companies are going to react quickly to changes inthe marketplace, they have to put more authority,accountability, and information into the hands of the peoplewho are closest to the product and the customers.”94 Asorganizational structures become more decentralized andlower-level employees make decisions of great consequencefor the firm, it's important that corporate values are broadlysocialized and respected to minimize the risk ofmisconduct. Further, as Haas suggests, “Values provide acommon language for aligning a company's leadership andits people.”95

Both the war for talent and the need for enterprise-wideconsistency on values suggest a fresh model for embeddingnew values and competencies into corporate cultures isneeded. One company that has attempted to pioneer a newapproach is Whole Foods, the largest US retailer of naturaland organic foods with fiscal year 2000 sales of $1.8billion. Through its “declaration of interdependence,”Whole Foods tries to instill a clear sense of interdependenceamong various stakeholders, but especially employees. Inparticular, Whole Foods has built structures and processesthat reward and empower employees to perform inaccordance with corporate values. Consider the followingexamples:

• The company practices an open book managementphilosophy, which provides complete financialtransparency with all employees at all levels of thecompany. Even employees in the bakery see the balancesheet and are fully empowered to make decisions aboutlabor spending, ordering, and pricing to enhance theprofitability of their unit.96

• All employees are hired by a referendum that existingemployees participate in. The store leaders initiate theprocess by screening candidates and recommendingthem for a job on a specific team. A two-thirds vote ofthe team, after a 30-day trial period, enables a candidateto become a full-time employee.

• The company administers a moral survey at severalpoints throughout the year to assess employeeperceptions. It's described as a no-holds-barred exercisethat attempts to probe employee attitudes pertaining toconfidence in leadership and fears and frustrations aboutcompany deviations from its values.

Whole Foods provides a fairly unique example of how firmtransparency aligned employees around the values andmission of the organization, while ensuring they are not

only committed to the job, but empowered to create a highperformance organization as well.

From the Wal-Mart and Whole Foods stories, we learn thatdeveloping a pervasive culture of transparency and ethicalleadership within the firm drives the need for increasedknowledge-sharing and greater opportunity for all levels ofemployees to participate in shaping and taking ownership ofcorporate values. Employees don't simply want valuesdictated from up high; they want a meaningful stake ininfluencing the values and behaviors of the companies theywork for. Embedding values in the “DNA of the firm” islargely about finding a compromise between the top-downcorporate socialization and bottom-up participation increating corporate policy. But it also requires a high degreeof firm transparency. If the entire workforce is capable ofassessing information and making judgments based on thefirm's core values, and furthermore, if the management isseen to be respecting those values in the way they run thebusiness, then employees will be better equipped, and moremotivated, to make responsible decisions that enhance andprotect the economic position of the firm.

Business Web Transparency

The business web layer of the transparency model includesa firm's network of business partners and suppliers.Business web transparency creates or accentuates threeprimary issues or effects: the growing importance of ethicalsourcing, the ethical dimensions of trading practices andpartner relationships, and the possibility of enhancedbusiness web efficiency. Since efficiency is dealt with insections 4 (under transaction costs) and section 3 (undereconomic drivers of transparency), we focus on the formertwo issues.

In analyzing the impact of transparency on ethical sourcingand ethical trading practices in the business web, it'simportant to note that not all supply chains are the same.Some business webs are long, linear value chains that arehierarchically organized to manufacture and deliver aproduct from “soup to nuts.” Other business webs aggregateproducts and services. The supply chains of large retailersand merchandisers, for example, consist of decentralizedproduction networks that draw from a vast array ofsuppliers and exporters. These business webs share acommon feature in that they are usually dominated by onelarge firm that controls the supply chain (as well as thevalue proposition, brand, pricing and the flow oftransactions). In a more transparent world, these



producer/buyer-driven business webs give rise to what areoften called ethical sourcing issues—the procurement orproduction of goods and services in an ethical manner (thisis open to interpretation of course, but it might includedimensions such as fair wages and safe working conditionsfor workers and minimizingenvironmentalharm).

Figure 18. Cisco value map

Increasingly, business webs are less linear and morenetworked, especially for those companies that focus oncreating virtual or information-based products and serviceslike consulting services, software or insurance. Thesebusiness webs are likely to be more “egalitarian” in nature,and less hierarchically organized than their linearcounterparts. For example, there are alliances of companiesthat bundle their products and services together into acoherent offering, like the Wintel Alliance led by Microsoft.Other alliances address common industry needs such asstandards development, regulatory issues, and publicrelations. The most virtual business webs can be entirelyself-organizing, like the network of computer programmersthat created the Linux operating system. In networkedbusiness webs, transparency issues tend to be defined by therelationships between business partners, or what we callethical trading practices. In this case we are talking abouttransparency, and the quality of relationships, amongpartners in a business web, although such issues can alsohave bearing on stakeholder relationships outside of theimmediate business web. To flesh out these distinctions weprovide two examples below.

Until recently, ethical sourcing was not a very big issue.The production systems of multinational enterprises werelargely invisible, and even irrelevant, to consumers andother groups in society. Consumers cared about the priceand quality of a product, how it was produced was hardly ofconsequence. Labor unions cared whether their jobs athome were being protected. Today, global supply chainshave become highly politicized as the level of outsourcingand overseas manufacturing has skyrocketed.

In an ironic twist of recent history, many of the costs thatfirms recently shed through outsourcing in the 1970sand 1980s have come full circle in today's transparentworld as intense monitoring and scrutiny makes socialand environmental consequences of these systems moretransparent to consumers and other stakeholders.Multinational enterprises are now being heldaccountable for the social and environmentalperformance of the most distant sub-contractedsuppliers. Not having ownership of the entire supplychain may protect the firm from some legal liabilities,

but it doesn't protect their brand or reputation fromconsumers and other stakeholders that equate control (notjust ownership) with accountability. The onus is now onlead firms to provide goods and services that are ethicalsourced. Increasingly, this means working with the entiresupply chain to create single enterprise systems designed toincrease transparency and drive higher levels ofperformance on social and environmental issues.

The diamond supply chain controlled by De Beers providesa fairly typical example of the ethical sourcing dilemma.The diamond supply chain is extremely opaque.97 Thisopacity makes it difficult to track the true source of roughdiamonds. The inability to track the source of diamonds iscritically important because it contributes to the problem ofwhat are known as “conflict diamonds” or “blooddiamonds.”98 According to Global Witness, an NGO that hashelped boost the awareness of the conflict diamond issue,“Diamonds that originate from areas under the control offorces that are in opposition to elected and internationallyrecognized governments, or are in any way connected tothose groups should be considered as conflict diamonds.”The problem of conflict diamonds is not a small one.Conflict diamonds are estimated to account for as much as3.7% of the world's multibillion-dollar rough diamondtrade.

Two factors make it challenging for De Beers to keepconflict diamonds out of its supply chain. The first is theopacity of the supply chain itself. Diamonds move easily



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from one country to another, making it difficult to pinpointtheir true origin. De Beers' own aggregation, sorting, andreselling only compound the difficulties of tracking thesource of these diamonds. Second, as a cartel, one of DeBeers' primary business goals is to control supply ofdiamonds. In the past this meant mopping up diamondsources wherever they could be found. As a result, it'shighly unlikely that De Beers hasn't come into contact withconflict diamonds through one channel or another. Theprovenances of diamonds found in Antwerp's markets areespecially suspect. It's widely acknowledged that many ofthe diamonds from conflict areas can be found there, so it'snot surprising that a large buyer like De Beers would beunable to avoid them.

Another issue for De Beers is the protection of the image ithas so carefully crafted for diamonds. On one hand, DeBeers markets diamonds as objects of love, targeting oldand young couples alike in campaigns designed to assurediamonds are an essential part of romantic relationships.This image stands in stark contrast to the harsh realities ofthe diamond supply chain. The human rights violations thatdiamonds fund are completely at odds with the purity andclarity of the images sold to consumers. The risk thatconsumers will start to make an association between thetwo as transparency increases threatens the foundation ofDe Beers' marketing activities. This makes it essential forDe Beers to deal with the conflict diamonds issue before thedamage is done.

Over the last two years, the Kimberly process has beenposed as a solution to the conflict diamond process. It's asolution that calls for a certification and trackingmechanism for diamonds, from the mines where they areunearthed to where they are cut and polished. The system isdescribed as a “chain of warranties” that would create anaudit trail for any given diamond, ensuring its origins areknown.

After lengthy discussions, the Kimberly process finallyreached a landmark agreement in Switzerland in November2002. The agreement was between De Beers, several NGOs,and 45 countries. While there will clearly be manychallenges in implementing such a drastic change, it marksthe first step in the drive toward a more transparentdiamond supply chain and better information about theorigins of rough goods.

Figure 19. Amnesty International conflict diamond campaign video

The agreement is a win-win for both De Beers and NGOswishing to eliminate conflict diamonds. Its implementationwould help remove conflict diamonds from the supply chain(or certainly make it more difficult for them to enter), yet itmeets De Beers' goals as well. De Beers not only is able toprotect the image and brands which it has cultivated bycertifying its diamonds as “conflict free”, but the conflictdiamond label is a very effective one for controlling thesupply of rough diamonds as well.

The De Beers situation is far from isolated. The linkbetween first-world products and services and third-worldhorrors will only increase as consumers and otherstakeholders gain the tools to see all the way down theglobal supply chain. Given this level of visibility,companies involved in such supply chains can do what DeBeers did by proactively addressing the problem before itbecame a mainstream consumer issue. Or, they can join theranks of Nike, as in 1992 when the sweatshop-labor issueemerged. We argue that proactively increasing thetransparency of the supply chain to better illuminate theproblem and put in place incentives to change the behaviorof supply chain partners, can be less costly than fightingprotracted public relations and legal battles. This means thatsupply chain leaders (both producer- and buyer-driven) willneed to create alignment around values and businesspractices that filters throughout a vast web of businesspartners. Some of the leading practices for managing ethicalsourcing issues include implementing new market-basedgovernance mechanisms and codes of conduct for globalsupply chains; applying ethical procurement policies andproduct certification instruments for retailers; creating newdecision criteria for choosing business partners andsuppliers; and identifying and integrating civil societypartners that can help set benchmarks and monitorperformance.

The ethical trading practices dimension of business webtransparency is well illustrated by Microsoft's attempt tointroduce a new system for identity management,nicknamed Hailstorm (later renamed MyServices).99 Underits system, Microsoft centralizes identity profiles and acts asa gatekeeper for identity information.100 It is designed toallow users to control their personal information profiles,determining which companies can have access to particularpieces of information and which ones can't.

However, contrary to Microsoft's high expectations for theservice, Hailstorm was met with a lot of resistance in themarketplace. The resistance came not only from privacyadvocates who worried about the centralization of so much

information under the control of one company, but alsofrom prospective corporate customers and individual userswary of sharing their customer information with Microsoft.The situation has been aggravated by Microsoft's reputationfor poor trading practices with its business partners.Especially in the shadow of anti-trust concerns, all of thesefactors have made it difficult for Microsoft to lead this newinformation supply chain.

All of the scrutiny by customers, privacy advocates, andanti-trust watchers, has placed Microsoft in a highlytransparent environment. Every action and decisionMicrosoft has taken has rapidly resonated throughout thiscommunity. The result is that Microsoft has been held to ahigh ethical standard and is under substantial pressure tomeet the concerns of its stakeholder groups. One can onlyspeculate whether Hailstorm would have faced similarhazards had it been launched a less scrutinized competitor.

In April 2002, Microsoft abandoned the launch ofHailstorm, citing “incredible customer resistance.”101 Incontrast, a competing identity system, the Liberty Alliance,was extremely successful at getting major companies toagree to use it. These companies were seeking an identitysystem that offered them greater control over customer data.The Liberty Alliance espoused that individual companies(not individuals or Microsoft) were ultimately in control ofcustomer data, and that a distributed (not centralized)system was needed to share that information. Thisdistributed management philosophy has been critical to themomentum and success of the Liberty Alliance, despite thefact that its technology and specifications were behind thoseof Microsoft.

In the end, high transparency forced Microsoft to maketrade-offs that better reflected the interests of its businesspartners. Microsoft launched a new product calledTrustBridge, which provides a “federated”, or lesscentralized, identity system. In exchange for giving up someof their control over their identity management system,Microsoft hopes TrustBridge will find the marketacceptance that Hailstorm could not. It's an importantillustration of the impact that partnership relationships canhave, and the subtleties involved in attempting to build newinformation supply chains in a highly transparentenvironment.

Having made the distinction, it is important to note thatethical sourcing issues are not unique to verticallyintegrated supply chains, just as concerns about ethicaltrading practices are not limited to networked business





webs. Indeed, the issues can and do easily cross over. Forexample, the use of genetic information by insurancecompanies that want to improve their risk profiles raisesissues of ethical sourcing in an information-based supplychain. Wal-Mart's practice of squeezing suppliers to lowertheir prices introduces some doubt about whether itsrelationships with suppliers are ethical. Both ethical tradingpractices and ethical sourcing raise very tough issues forfirms.

The toughest issue of all is balancing accountability andcontrol in transparent environments. Too much controlwithout accountability can lead to self-interested behaviorthat may not meet the needs of the larger system.Accountability without control leaves companies vulnerableto, and often responsible for, issues beyond their power tochange. Business webs that share information and controlare more likely to also share accountability with theirnetwork of partners and suppliers. Aligning accountabilityand control is critical for effective decision-making andbusiness web performance. This issue is picked up again insection 4 of the transparency management guide, where weoffer frameworks for managing accountability and controlin networked enterprises.

Customer Transparency

Customer transparency is about giving customers theinformation they want and need to know to provide themwith the best possible customer experience. The challengesof providing that special experience are heightened byincreasing levels of transparency and the changing nature ofconsumer behavior in a networked economy. Our discussionof customer transparency brings together three convergingtrends that will reshape the way companies buildrelationship capital with customers in a transparent world.These include the increasing demand for a larger role invalue creation, the growing consumer adoption of tools forself-organization, and the diversification/fragmentation ofcustomer needs, in particular, the rise of ethical consumers.

Customers have more power than ever before. Most of thispower stems from the unprecedented information andknowledge customers have about companies and theirproducts and services. As Tapscott, Ticoll and Lowyobserve in Digital Capital: Harnessing the Power ofBusiness Webs, “Customers have the power of choicebecause the move to a new supplier is only a click away.They have the power of customization, as new technologies

increase their expectations that vendor offerings will matchtheir unique needs and tastes. They have the power comingfrom near perfect information … and customers havecollective power.” With knowledge comes power, and withpower comes more control over both the context and thecontent of a customer's experience.

• The context refers to the overall circumstances in whichcustomers are enabled to conduct transactions. Thisincludes when and where they are and what they'redoing at the time. As mobile technologies permit timeand space independent transactions, the potential toaccess a world of suppliers becomes possible on ananytime, anywhere basis.

• The content refers to the features or attributes of theproducts and services that people consume. Increasingly,customers want a greater role in “managing” the value-creation process. They want specific qualities that reflecttheir lifestyle, persona and value system embedded orreflected in the products they buy.

In an economy where customers have more power over thecontext and content of their consumption habits, businessesmust be more responsive to customer demands. Companiesneed to “open up” the value-creation process for greatercustomer participation, which is in itself a force for greatertransparency into the production process. Of course,customers are not homogenous and their needs are oftenmore complex than companies sometimes give them creditfor. Global corporations increasingly sell to a globalmarketplace of consumers with a wide range ofexpectations, needs, preferences, values and income levels.Figuring out how to co-develop and market products tosuch a diverse and fickle group has never been tougher.

Take, for example, the record industry's problems infiguring out an appropriate business model for selling musicto the upcoming generation of teenagers brought up withMP3 and Internet technologies. Viscerally appealing to the'Net generation demographic, MP3 attained critical mass in1998. Millions of technology-literate kids and teenagers

“Smart mobs are a serious realignment of humanaffairs in which leaders may determine an overallgoal, but the actual execution is created on the fly byparticipants at the lowest possible level who areconstantly innovating."

— Howard ReinholdAuthor of Smart Mobs: The Next Social Revolution

now use the Internet to freely create and share MP3software tools and music content. Open formats like MP3leverage network effects to achieve ubiquity quickly, andhelp build critical mass. They maximize choice andflexibility for customers and put users in control of theirmusic experience. Open formats also engender a sense ofcommunal ownership by encouraging industryparticipants—including customers—to be stakeholders inadvancing the format. More than anything, MP3 illustratesthat customer value, not control, is the answer in thenetworked economy. These novel dynamics, however, haveturned the record industry on its head. Rather than embraceMP3, the industry has adopted a defensive posture.Obsession with control, piracy, and proprietary standards onthe part of large industry players has only served to furtheralienate and anger music listeners.

Compounding issues like those presented by phenomenalike MP3, is the fact that customers are not only moreengaged in value creation, they are also equipped with thetools for self-organization. The key to the power ofcustomer self-organization is a vast array of new mobiletechnologies, including hybrids like two-way pagers,BlackBerry e-mailers, personal digital assistants mergedwith phones, wireless laptops, and phones merged with two-way radios. These technologies liberate people from theirdesktop telephones and computers, extending onlineactivities out into the much larger portion of life thatencompasses wherever and whenever humans roam. A goodexample of customer self-organization is the rise of whatHoward Rheingold, the digital technology guru who coinedthe term “virtual community,” calls “smart mobs” or“swarming.” Smart mobs emerge when communication andcomputing technologies amplify human talents forcooperation.

Rheingold points to Manila where environmentalists aredeploying smart mobs to combat air pollution. Known asSmokebelchers Watchdog, individuals using cell phones andmobile text messaging can report vehicles they see emittingexcessive clouds of pollution to a central database. AmeliaJudones, a college student, is among the volunteers. “I do itin the car, on my way to class,” she says. “It costs menothing, and I feel I can contribute something to the fightagainst pollution.” Most complaints are against trucking andcommercial vehicle companies. At the end of each week,the environmental group leading the effort compiles a list ofvehicles with five or more complaints against them andsends it to the Land Transportation Office (LTO)—the arm

of the Department of Transportation and Communicationsthat issues licenses to such companies. The LTO thensummons offending vehicle owners to their offices for anexhaust test. In the first two weeks of the campaign, whichlaunched June 6, 2002, 123 vehicle owners were called in.“The volume was so great that we now receive thecomplaints not weekly, but every day,” says RobertoLastimoso, chief assistant secretary of the LTO.102

Smart mobs are a classic example of how once-isolatedindividuals are discovering a new way to organize order outof chaos, without guidance. “Smart mobs are a seriousrealignment of human affairs in which leaders maydetermine an overall goal, but the actual execution iscreated on the fly by participants at the lowest possiblelevel who are constantly innovating,” Rheingold says.103

Smart mobs respond to changing situations withoutrequesting or needing permission. They also reverse theidea that geography, in an Internet age, has becomeirrelevant—the whole point is to bring people together inone location for face-to-face contact. The implication forcorporate transparency is that customers can now beorganized on the fly. More importantly, their decisions canbe more readily influenced while they are out on the street,in their car, or in the shopping mall, where they are closestto the point of purchase.

Bring the increasing demand for a role in value creation andthe power of self-organization together, and combine themwith a rise in ethical consumers, and you have a very potentrecipe for customer transparency.104 Yet, ethical consumersdiffer from all the rest in the sense that they care more thanjust about the end product, they care about the means bywhich it was produced and it's impact on society and theenvironment. The Internet provides these consumers withmore information about company activities, while the toolsof self-organization increase their capacity to create virtualnetworks, and reduce the transaction costs associated withboycotting “unethical” brands and finding alternative“ethical” suppliers. It is here that customer transparency,business web transparency, and public transparency mostoften overlap.

One response to this dilemma has been the rise of ethicalbrands. Products and services with ethical labels, or thosedesigned with ethical consumers in mind, are becomingmore common. A diverse range of industries now offerthem, including the automobile industry, the apparelindustry, the food and grocery industry, and the investment



and financial services industry. We use the example of FairTrade coffee to illustrate how the landscape for ethicalproducts is changing and to draw out the implications ofthis trend for customer transparency.

Today, the healthy premium paid for a latté at the localStarbucks masks a collapse in coffee prices that's happenedbehind the scenes. From highs of $2.50/lb reached in themid-1990s, coffee prices have plunged to record lows.These days, as little as $0.50/lb makes its way into thepockets of third-world producers.105 This fall in prices hasdevastated the coffee supply chain. The small independentproducers that account for most of the world's coffeeproduction have been hit hardest by the price declines.Subsistence wages are displacing many from their land,causing them to migrate to the cities in search ofemployment. In the extreme cases, some farmers have evenabandoned unpicked crops, the economics makingharvesting too costly for such meager returns.

As important as these concerns are for individual coffeegrowers, the situation is rarely recognized further up thesupply chain by coffee buyers. Part of the challenge is thatthe price of coffee makes up such a small fraction of thecost of a latté. This is compounded by the fact that coffee isbought and sold as commodity; there is little awareness (ortransparency) of what happens behind that marketplace.Most consumers are unaware of the problems faced bygrowers, and as a result, the issue gets little traction bylarge coffee buyers. In fact, it's quite the opposite; pricedeclines benefit large buyers directly because of the costsavings.

The Fair Trade Federation is an organization that hasattempted to solve some of these problems.106 In 1998, anorganization called Transfair began to market a Fair Tradecertified coffee in the US. In return for their “fair trade”certification, Transfair imposed strict restrictions on thecoffee buyers. Fair Trade coffee buyers are required to offerproducers the following:

• Floor prices of $1.26/lb (plus a $0.16 premium fororganic coffee)

• Access to credit of up to 60% of contractual values

• Long term contracts (i.e., between one and 10 years)

While all of these measures increase costs for coffee buyers,the concept is that the products that originate from a fairtrade-certified supply chain actually have greater value toconsumers. So while product cost may increase, fair trade

supporters argue that they are recovered though increaseddemand for the product. For a product like coffee, a smalldifference in the retail price can make an enormousdifference for producers.

While some purchases are driven by customer demand,others are driven by pressure from NGOs and otherinterested groups. These organizations are working to buildthe awareness of issues within the coffee supply chain andthe fair trade alternatives. In some cases, organized protests(or the threat of them) have been the key to securingcontracts with large coffee chains. Starbucks is one of thesecompanies. Anxious to avoid protests at its locations,Starbucks agreed to not only offer fair trade coffee for saleat its 2,300 locations (one million pounds annually)107, butthey have also agreed to brew Fair Trade certified coffee ona regular rotating basis. Endorsement by such a major brandis an important win for Fair Trade coffee and the customersand NGOs that endorse it.

Fair Trade makes up a very small slice of the coffee supplychain, but it's an interesting example of using an “ethicalbrand” in an attempt to increase the demand for a product,passing more value to workers at the ends of the supplychain. Rather than creating a zero-sum scenario wherecoffee buyers are asked to simply pay more to producers,the creation of a sustainable brand coupled with anawareness campaign helps to create mutual interest in fairtrade solutions.

Collectively, MP3, Fair Trade coffee, and SmokebelchersWatchdog point to the emergence of a more empowered andvalue-and-values-driven consumer/citizen than ever before.This new cadre of consumers are a significant and growingsegment of the world population that regularly assert theirdemand for greater responsiveness to their individual valuesand preferences. Ethical consumers will increasingly use theInternet and other tools to pepper corporations with detailedinquiries, monitor private-sector behavior, and aggregateand swap insights and intelligence with one another.Companies must take critical look at the demographics andattitudes of ethical consumers, understand their uniqueneeds and expectations, and develop products,communications, and marketing strategies geared towardwinning their trust and loyalty. Building brand equity andcreating customer loyalty also means being transparentabout values and business practices. It's simply no longerenough to address customers' sensitivity to price, quality,and image in a transparent world.



Market Transparency

In the market layer of the transparency model we includekey participants in the financial markets that lend money orprovide capital to corporations. Our primary focus is withthe firm's primary investors—its shareholders. But theimportance of a wide array of other market players,including banks, institutional investors, market regulators,financial institutions and rating agencies, should not beoverlooked. Market transparency means that companiesengage in transparent relationships with all of these capitalmarket stakeholders. It requires firms to abstain fromengaging in practices that undermine the fair and efficientoperation of the market. Above all, it underscores the needto reform corporate governance in order to maintain accessto capital in globally competitive financial markets.

The Enron scandal and all that followed in the summer andfall of 2002 brought home the importance of markettransparency. A recent Business Week report on corporategovernance noted that “while Enron's culture emphasizedrisk-taking and entrepreneurial thinking, it also valuedpersonal ambition over teamwork, youth over wisdom, andearnings growth at any cost. What's more, the very ideasEnron embraced were corrupted in their execution. Risk-taking without oversight resulted in failures. Youth withoutsupervision resulted in chaos. And an almost unrelentingemphasis on earnings, without a system of checks andbalances, resulted in ethical lapses that ultimately led to thecompany's downfall. While Enron is the extreme case,many other companies show the same symptoms.”108 Morethan anything, Enron, WorldCom and other companiescaught up in the “summer of scandals” displayed a dismalfailure of corporate governance to provide adequate levelsof market transparency and accountability.

In the post-Enron environment, investors and regulators arenow on high alert for fraudulent financial information andcomplex corporate structures that provide low visibility intothe performance of separate business units. Investorconfidence will be increasingly tied to their perception of a

company's credibility and trustworthiness. Now more thanever it is clear that honest disclosure of financial data iscritical to establishing credibility in the marketplace. Thosethat push the boundaries of candid reporting put theircompanies' credibility—and all of the value of theirenterprise—at risk. Once that credibility is gone, it canrarely be regained.

We argue that consistent, accurate and timely reporting offinancial information, not only protects credibility, it helpsbuild relationship capital in the capital markets. As QorvisCommunications notes, however, credibility is notdependent on perfection. “If you communicate honestly andcandidly, keeping investors focused on the vision, you willhave investors who will support management over a longerperiod of time, tolerating stumbles and problems on the wayto realizing a vision.”109 A firm with a high degree of markettransparency can establish loyalty with investors, protect itsshare price from wild fluctuations, and build long-terminvestor relationships that help ensure a steady flow ofcapital. It also needs to be noted that a growing number ofethical or socially responsible investors and investmentfunds will be applying social and environmental metrics totheir investment decisions. Ethical investors will increasethe broader capital market's awareness of social andenvironmental ramifications of business behavior, thusadding a new and significant dimension to the waycompanies' share prices and risk profiles are set by themarket.

Market transparency also extends to keeping the firm clearof unethical practices like pricing collusion, corruption andbribery and other opaque practices that create inefficient ordistorted markets. The issue of corruption, for example, hasrecently come under the spotlight. Global corporations, inparticular, are under increasing pressure to manage theexpectations for increased transparency with the realitiesthat opacity and corruption are prevalent in many of theemerging markets where they operate and invest.Companies operating in these markets often find itnecessary to pay bribes or make facilitation payments toexpedite service.110 Such instances of bribery can occur onmany different levels—not only in transactions with localgovernments but also within transactions between thecorporation and its supply chain. Some firms believe thatbribery is merely the cost of conducting business overseas.However, the risks and costs of being exposed are gettinghigher.



"If you communicate honestly and candidly, keepinginvestors focused on the vision, you will haveinvestors who will support management over a longerperiod of time, tolerating stumbles and problems onthe way to realizing a vision."

— Qorvis Communications

Figure 20. Transparency International

On the risks side of the equation, a growing number of civilsociety groups like Transparency International (TI) andfinancial institutions like the World Bank are on the prowlfor incidents of corruption. TI, for example, not only haslocal chapters in over 80 countries, it produces theCorruptions Perceptions Index (CPI) and the Bribe PayersIndex (BPI) on a regular basis. The CPI ranks countries byperceived levels of corruption among public officials,whereas the BPI addresses supply-side corruption byranking the leading export countries according to theirpropensity to bribe. Media, governments, and businessespay close attention to these indices and other TIpublications and activities. On the costs side of theequation, an increasing number of governments are enactinglegislation that criminalizes corruption and bribery.111

Evidence also suggests that bribery can translate into largebusiness expenditures and constrain a firm's ability tocontrol its direct and indirect costs.112

As a result, a growing number of companies are choosing toadopt a consistent global approach to increasingtransparency and eliminating corruption and bribe-payingfrom their organizations. Royal Dutch/Shell, for example,has maintained a strong position against bribery since themid-1970s when its business principles were first codifiedto distinguish itself from many other multinationals thatwere embroiled in high-profile corruption scandals duringthat time. As a result, Shell has an extensive list ofguidelines and governance mechanisms to monitor theGroup's behavior and provides an example of a large globalenterprise that has successfully implemented a consistentcode of conduct throughout its operations. As Shell hasfound, however, creating a culture of transparency is aboutmore than just rulemaking. It also requires providingpositive incentives for employee compliance. Bottom-upalerting requires genuine whistle-blowing protection and

proper training to ensure employee buy-in and commitmentto anti-corruption strategies. In 2001, Shell reported 13cases of bribery, and nine employee dismissals, whilecanceling 100 contracts with suppliers and removing eightcontractors from supplier lists. While Shell states that itoccasionally loses business from its zero-tolerance stance, itbelieves that it is a “net beneficiary” in the long term as itsreputation makes it a “partner of choice.”113

Creating market transparency brings the critical nature ofeffective corporate governance to the forefront. While theshareholder relationship is central in the market layer oftransparency, the role of corporate boards is to provide thenecessary leadership to ensure that a wide range of capitalmarket relationships are managed with integrity. But, as thecorruption issue illustrates, market transparency entailsmore than simply following the rules, because rules willalways be broken. Boards must take the lead to createcorporate cultures that encourage and reward integrity asmuch as creativity and entrepreneurship. Building integrityinto the firm means reinforcing good corporate values withappropriate decision-making and enforcement structures,along with incentives for employees to take ownership ofthese values. Above all, market transparency is aboutprotecting and enhancing the credibility of the firm in themarketplace. A firm that fails to be ethical and transparentin its business practices, let alone its social orenvironmental practices, is not a firm that will be inbusiness for long.

Public Transparency

The public sphere is a diverse amalgamation of groups thatexist outside of the firm, the firm's business web, and themarketplace. In many ways, this group is the most distantfrom the firm, yet they are no less influential. The publicsphere includes private citizens, not-for-profit groups, andappendages of the state. By our definition, we break publicstakeholders into four categories: civil society groups,communities where companies operate, governmentagencies with jurisdiction over company affairs and themedia. The media is an odd category because much of themedia these days is controlled by large enterprises withcommercial interests as well as public interests. Each ofthese groups can be further delineated into smallercontingents—each with differing interests, attributes, andmandates or intentions. The following chart stratifies a fewexamples from each category of public stakeholders.



The public sphere is becoming much more important tocompanies in an increasingly transparent world. Thetransparency issues in the public sphere largely relate to theimpact that companies have on public interest concerns likethe environment and social cohesion. As noted in section 3,the public now has much higher expectations of businesswith respect to such issues. An overwhelming majoritywants companies to work in the broader interests of society.These expectations help create norms or accepted standardsof behavior that companies violate at their peril. In manycases, these expectations get encoded in laws and rulescreated by the state. In other cases, they simply form part ofthe value system that governs the conduct of variousinstitutions of society. As the public gains greater visibilityin the operations of firms, it becomes increasingly critical tomaintain synchronicity between the values and expectationsof society and the behavior and business practices of thefirm. Indeed, the perception that many companies aretrading off the public interest to reap rewards for othervested stakeholders like their shareholders has fueled ademand for even greater transparency of corporateactivities.

The public sphere has also become more activist and moresophisticated in its means to organize and agitate for greatertransparency and accountability. Today, companies facerelentless demands from governments, communities, civilsociety groups and the media to disclose a broad array ofinformation about their social and environmental policiesand performance (which most companies didn't even haveuntil recently). Communities want to know how muchwaste a company creates, how many resources it consumes,whether it pays fair wages, and how much it gives back tothe community. NGOs are scrutinizing supply chains and

setting up anti-sites that mock corporate brands.Governments are following the beat of public opinion andintroducing an expanded set of rules for disclosure, not onlyfor financial areas, but also for social and environmentalperformance dimensions as well. And, the spectacle ofcorporate battles with the public sphere is an increasinglypopular media story, for as long as it attracts ratings.

To make things more complicated, these groups all interactand feed off one another to create very complex networksthat are hard for companies to understand or penetrate. Inthe forthcoming section we introduce the notion of thetransparency network. Suffice for now to provide a brief,but recent, example of public transparency. On December 3,1984, a chemical plant owned by Union Carbide explodedin Bhopal, India, killing at least 2,500 people, injuring200,000 and scaring the local community for decadesafter.114 The incident triggered several interlinked effects.One, it stimulated an international movement to givecommunities the right-to-know when dangerous chemicalsare being produced in their neighborhoods. Two, thismobilized governments to introduce new disclosure rulesfor toxic chemicals, most notably the Toxic ReleaseInventory in the US Three, disclosure rules gave NGOs theammunition they needed to mobilize public concern and tocompel the chemical industry to report regularly on how itis addressing environment, health and safety issues. Four, itgave the media a great story to report the whole time, whichhelped to tarnish the reputation of all chemical producers,not just Union Carbide. The Bhopal example clearly showshow communities, civil society groups, governments, andthe media all interact to increase corporate transparency.

Many companies rightly fear public transparency. Publicstakeholders have agendas and motives that may be at oddswith corporate interests. The culture, attitudes and antics ofNGOs and advocacy networks seem dangerously foreign tobusiness managers. Releasing sensitive information topublic stakeholders is also risky. Too many companies havehad their brand smeared on an anti-corporate website orfull-page ads in The New York Times. Most of thesenegative instances of outside-in transparency occur,however, when companies attempt to cover up secrets orchoose to take an adversarial approach to dealing withstakeholders in the public sphere.



Local government agencies National government agenciesInter-governmental agenciesRegulatory bodiesPolicy and public service bodiesLegal bodies

Physical communitiesVirtual communities

Diasporic communitiesNGOs/relief agenciesChurch groups/charitiesPolitical partiesVoluntary associationsAdvocacy networks

Online mediaCommercial mediaPublic and community media

Government

Communities

Civil society

Media

Public sphere stakeholders

Table 1

"[Unilever] will only be able to maximize shareholdervalue and prosper in the long-term if we operate in amuch more sustainable way."

— Niall FitzgeraldChairman, Unilever

We argue for a much more proactive agenda of publicsphere transparency and engagement. Stakeholderengagement is a regular system of dialogue and reportingthat enables firms and stakeholders to co-evolve arelationship built on trust and relationship capital. Unilever,for example, is a leader in harnessing the insights ofenvironmental NGOs to a build a more sustainableenterprise. From Unilever's perspective, sustainability is ahard-edged commercial imperative. The company'schairman, Niall Fitzgerald, states that “[Unilever] will onlybe able to maximize shareholder value and prosper in thelong-term if we operate in a much more sustainable way.”115

More than two-thirds of the raw materials used in Unileverproducts come from agricultural crops and livestock,fisheries and other potentially renewable sources. Expertsare concerned that deteriorating soil fertility, increasing soilerosion, loss of biodiversity and declining availability ofclean water will undermine the ability of Unilever to sourcethese resources at predictable prices and quantities. Thecompany has been reaching out to stakeholders to help themachieve sustainability in agriculture, fish and waterresources.

Figure 21. Marine Stewardship Council

To help find a solution to the rapid decline of global fishstocks, Unilever is working in partnership with the MarineStewardship Council (MSC) and WWF to encouragesuppliers to move toward MSC certification. Unilever hascommitted to only buy fish from sustainable stocks by 2005and is working with suppliers to meet this target. Unileveralone purchases approximately 20% of Europe's fishcatches, and is well positioned to make a considerableimpact. And, by raising the transparency of the issue withthe MSC labeling scheme, Unilever may be able to forcecompetitors to do the same.

The potential rewards for companies with effective publictransparency strategies are compelling. Companies thatregularly communicate with public stakeholders todemonstrate that they are meeting—or working toward—their social and environmental performance goals canimprove their reputation and earn a deeply-rooted license tooperate; develop co-operative working relationships thatenhance innovation and business opportunities; lessen theprocessing times on requests for permits, patents, reviews,and regulatory approvals; and anticipate and understandstakeholder concerns before they become problems (formore on the processes of stakeholder engagement seesection 8). Most importantly, engagement with publicstakeholders is not about appeasing anti-business activists,as is often claimed. It is about creating a broad foundationof public trust that undermines the legitimacy of suchactivists in the first place. But as Susanne Stormer fromNovo Nordisk reminds us, this is no easy task. As she says,“Trust is earned by a willingness to deal with dilemmas.”116

Information Demands and Transparency ValueDrivers

The five dimensions of transparency each generate differentdemands for information from the firm. Employees demand(and need) different kinds of information than communitymembers do. Supply chain partners may seek similarclasses of information as investors and regulators do, butfor different reasons and through separate channels. NGOsand the media often exchange information about firms(directly and indirectly), but regularly do so independent ofthe firm's knowledge or control. These multiple flows ofinformation underscore the importance of creating acomprehensive transparency architecture that maps classesof information to a taxonomy of stakeholders—a theme wereturn to in the transparency management guide. For now,we created a chart to list the most common classes ofinformation that have come up in our research on thedemand for transparency in each layer of the model.

At the same time, firms generate different forms of value bysharing these various classes of information withemployees, partners, customers, investors and the public. Insection 4 we argued that transparency creates two key typesof value: trust and lower transaction costs. Trust helps buildbetter relationships with stakeholders in each of the fivedimensions. Higher levels of transparency and trust-basedrelationships help to drive down the costs of doing business.



Yet, the specific business value produced by trust and lowertransaction costs in each dimension of transparency arequite diverse. As outlined above, trust and transparency inthe workplace can create alignment on values, while lowertransaction costs help to increase productivity. In the capitalmarkets, trust and confidence in a company's managementbuilds investor loyalty and reduces the cost of capital. Todelineate these forms of value, we have also listed the keytransparency value drivers in each of the five dimensions.

Transparency Networks Traverse the Layers

The final point to make about the five dimensions oftransparency is that the separation between the layers oftransparency is, in reality, artificial. The five categories of

stakeholders do not exist in a vacuum. Nor do they operateindependently. The analytical value of the five-dimensionaltransparency model is that it allows us to think about theparticular dynamics of the relationships firms have withdifferent institutions in society. In the real world, there is ahigh degree of fluidity and interchange between and amongthe layers. Actions taken by the public sphere can influencethe capital markets. Information about accidents or abusesin the business web can impact customer loyalty. Potentialemployees can be deterred by bad news in the media orcompany spoof sites posted on an NGO website. We callthese dynamic exchanges of information, and viewpointsthat traverse the five dimensions, a transparency network.

Figure 22. Transparency network

Transparency networks represent a veritable new force thatis changing the nature of corporate communications in ahighly interconnected world. They illustrate the folly oftrying to treat each set of stakeholders as separate entitiesthat can be managed independently of all of the others (asmost companies do by virtue of creating distinctdepartments like investor relations, public and regulatoryaffairs, human resources, corporate communications, andnow, corporate social responsibility). In the forthcomingsection, we explore the rise of transparency networks as theprimary organizational model for transparency. We alsoexamine five case studies in which companies arestruggling to engage with their own transparency networks.Then we proceed to argue (in section 8) that transparencynetworks demand an entirely different approach managingcommunications with stakeholders, an approach we calltransparency strategy.



Customers

PublicSphere

Firm

CapitalMarkets

BusinessWeb

The value of transparency

Table 2

Classes of information

· Core values and policies

· Human resources information

· Social and environmental performance

· Company performance goals

· Financial information· Financial information· Product information· Operational

information· Performance goals· Core values and

policies· Social and

environmental performance goals

· Product features· Price and quality· Social and

environmental performance

· Financial data· Performance targets· Trading practices· Social and

environmental risk profile

· Social and environmental performance

· Overseas labor practices

· Community contributions

· Financial information

Transparency value drivers

· Employee retention· Employee attraction· Alignment on values· Responsible decision-

making· Productivity

· Operational efficiency· Reduced liability· Lower costs· Shared purpose/values· Partner-of-choice

status

· Customer loyalty· Customer attraction· Brand equity· Revenue

· Reduced capital costs· Stable share price· Investor loyalty

· Lower risk profile· Predictive capacity· Social license to

operate· Lower regulatory

burden· Favorable media

coverage· New opportunities

Dimension

Firm

Business web

Customers

Capital markets

Public sphere

6. THE RISE OF TRANSPARENCYNETWORKS

In December 1996, labor leader Isidro Gil was shot dead atthe gates of a Coca-Cola bottling plant in Carepa,Colombia, just steps from the Coca-Cola sign marking thecompound. Such violence, however, is not really news inColombia. Drug cartels, paramilitary violence, widespreadcrime, impoverishment, and low government control andauthority are very much part of the landscape in a countrywhere traditional rules of law and order don't always apply.In fact, the murder of unionists in Colombia, approximately1,500 in the last decade, accounts for three out of every fivetrade unionist murders in the entire world. It's not surprisingthen that the Coca-Cola Company didn't make much of theevent. Indeed, Coca-Cola has only arms-length relationshipswith its global network of independent bottlers, wherenaming, packaging, and pricing are customized to localmarkets. The issue, however, did not fade away as Coca-Cola might have hoped.

The news of paramilitary killings made its way through anetwork of trade unions, and eventually reached thepowerful Pittsburgh-based United Steelworkers of America.In July 2001, United Steelworkers launched a lawsuit, notjust against the independent bottler in Colombia, but againstCoca-Cola headquarters in the US as well. The lawsuit hassince catapulted the issue into the public consciousness.

A full-fledged transparency network has emerged tomonitor the issue. Cokewatch.org is the hub of the network,disseminating information and rallying consumer action.Other groups have also popped out of the woodwork.Student groups at universities such as Harvard and TheUniversity of Montana are organizing to remove Cokevendors from their campuses; a coalition of protest groupsshowed up at Coca-Cola's annual meeting in New York;media coverage of the issue has been extensive in bothmainstream and alternative publications; one angrycustomer on a consumer alert website said “sure I love thetaste of Coke, but the company bites.”117 As Edgar Paez, aworker in the Carepa bottling plant put it, “We're giving ourown global answer to their global operations.”118

Rodrigo Calderon, a Coca-Cola executive based in Mexico,said the lawsuits contained “outrageous allegations”designed to grab headlines and promote “a politicalagenda.” “The company or the bottlers had nothing to dowith the attacks,” said the executive.119 Calderon may beright. But, for a strong brand like Coke, the question of

responsibility relies on far more than issues of ownership; itembraces many other components, including intent,derivation of benefits, knowledge, brand perceptions, anddegree of control. And increasingly, transparency networksare making these connections more visible than ever before.

Defining Characteristics of a TransparencyNetwork

In the broadest terms, transparency networks areinternetworked collections of individuals and organizationsthat share and consume information about the policies andpractices of particular firms, and sometimes, entireindustries. Our research suggests that every company, infact, every organization, operates within a transparencynetwork that traverses all of the layers of transparency andfacilitates information flows between each stakeholdergroup. Not all networks are the same, of course. In fact,they are highly variable (see discussion of variability in thenext section). Some company's transparency networks maybe small and quite ineffective in the larger scheme. Othertransparency networks are large and influential, crossingmany issues areas and drawing in people and organizationsfrom around the world. (Monsanto's transparency networkis a good example.) We expect to see more and more ofthem in the future. But, most importantly, we predict, basedon the evidence we accumulated on the drivers oftransparency, that their power and influence will grow overtime.

How would you know a transparency network if you sawone? And, what makes them new? To help answer thosequestions, we identified five essential characteristics oftransparency networks.

1. Transparency networks are not traditionalorganizations

Unlike traditional organizations and bureaucracies,transparency networks rarely have an identifiable center ofoperations or a command structure. This does not mean theyhave no structure at all. Rather, they tend to adopt a multi-nodal, many-to-many configuration in which different nodesplay complementary roles. One node may act as aninformation clearinghouse, another will act as a liaison tothe company, while several other nodes work to rally andsynchronize the local actions of other participants. Someparticipants in the network—especially those at the edges ofthe network- may not even be fully aware that theycollectively operate as a coherent entity. Employees that



stumble across an anti-corporate website may participatepassively—but given the right (or wrong) incentives fromtheir employer, they may become full contributors,anonymously leaking company information to the website'sbulletin board.

What distinguishes transparency networks from traditionalorganizations is their dispersed and decentralized nature,and their capacity for rapid self-organization, both of whichconfound the modern management apparatus of “command-and-control” organizations. Even the more institutionalizedaspects of transparency networks (which we discuss infollowing sections) are usually embedded in vastly deeperand wider networks. It could appear illogical to think thatsuch disparate and decentralized operations could have anymeaningful effect at all. Yet, we believe that it is preciselythese characteristics that make transparency networks sodifficult to detect, so hard to control, and so surprisinglyeffective in accomplishing their goals.

Figure 23. Many-to-many network

Self-organizing systems are more adept at managingcomplexity and handling anomalies and exceptions becauseintelligence and decision-making power is distributedthroughout the system. They are more scalable—self-organizing systems tend to grow exponentially rather thanlinearly. Moreover, like the Internet itself, they are robust tothe extent that they are capable of resisting local failure: ifone node in the network fails, the system itself will notcollapse. After all, it is the aggregate effect of the combinedactions and information exchanges of thousands ofparticipants operating independently that leads us to believethat the transparency they impose on their targets can havea profound impact.

2. Transparency networks draw participants fromall sectors of society

A transparency network can originate at any and all layersof the five dimensions of transparency. In other words,transparency networks are not just a fancy term fornetworks of NGOs (although NGOs do form adisproportionate number of transparency networks at thisstage). Even at these early stages we have spottedtransparency networks forming across a number of keystakeholder relationships. This includes the networks ofemployees that share information around the virtual watercooler. It includes the ever-present advocacy networks, aswell as the more formal arrangements for monitoring supplychains, verifying corporate reports and certifying products.It includes the local community members that want ameeting with company management, and the self-organizingconsumer and citizen actions spawned by websites thatdisseminate information provided by government disclosurelaws. Even weary investors that swap information to helpverify the accuracy of financial reports are formingtransparency networks in the capital markets. The key point,however, is that no matter where they originate, or whomthey incorporate into their activities, the pervasiveness ofinformation enables transparency networks to affectrelationships in all layers of the five dimensions oftransparency.

The Nike sweatshop issue generated what we might call aquintessential transparency network. As the well-knownstory goes, the discovery of “sweatshops” in Nike's supplychain set off a broad public debate about labor standards inthe developing world and the degree of responsibility thatcompanies should have for the quality of life of workers inoutsourced production factories. While the network wastriggered by NGO activity, the effects of their disclosurerippled throughout Nike's multiple stakeholderrelationships. Many customers (but not all) were affected bythe stigma of wearing shoes made in sweatshops,employees were discouraged by bad press, supply chainpartners were forced to raise standards and participate innew monitoring systems, and investors endured a temporarydip in the share price.120

3. Transparency networks generate fluid andreciprocal flows of information

In the industrial age, the technologies of masscommunication were concentrated, monopolized and scarce,and thus more amenable to the central control ofinformation. The central broadcaster had an exclusive



Customers

Capitalmarkets

Supply chain

GovernmentCivil

society

Firm

Localcommunity

Media

monopoly as provider or inhibitor of information. But thetables are turned in the information age, as networkedcommunication technologies play a key role in disruptinghierarchies and undermining any attempt to establish ormaintain a monopoly on information and communication.Digital age computer networks enhance both freeassociation and the free flow of information and knowledgethrough unmediated and instantaneous channels—twopowerful prerequisites for more autonomous and influentialstakeholders.

Figure 24. The dispersion of information

Transparency networks take advantage of this reduction inthe cost and time-space barriers to effective communicationand coordination. By actively generating, transmitting andreceiving information in a network of global media, theyform part of the backbone of popular culture and publicopinion in the information age. There are different types ofinformation flow, ranging from highly unmediated (e.g.,online chat), to highly mediated (e.g., product certification).But, in general, transparency is a bit like osmosis:information flows freely from areas of high concentration toareas of low concentration, where it disseminates rapidlyacross space and time. In other words, opaque environmentsand information monopolies are only maintained byextreme degrees of control or coercion. As the cyber-libertarian mantra goes, “information wants to be free.”

4. Transparency networks are in a constant stateof flux

Part of the nature of a transparency network is to changebehavior rapidly and sometimes unpredictably.Transparency networks fluctuate between states of low andhigh intensity (the volume of interactions), low and high

extensity (the size and scale of the network) and low andhigh velocity (the speed at which information travelsthrough the network). If we examine a transparencynetwork's behavior over time, we see different levels ofactivity along these three dimensions. We have identifiedtwo different states of activity in particular: the stable stateand the vortex state.

The stable state is defined by fairly regular informationflow, a small number of participants and a generally benignimpact. In other words, stable states exhibit low intensity,low extensity and low velocity. We consider this to be thelatent or dormant state of the transparency network. When anetwork is dormant, it's easy for companies to not realizethey are there. But this is a big mistake, as many companieshave learned. Networks are inherently unstable—they easilyand rapidly tip into what we call the vortex state.

Figure 25. Transparency network modalities

Vortexes are event-driven accelerations of activity andinformation flow. They are characterized by high levels ofintensity, extensity and velocity as a greater number ofparticipants exchange larger volumes of information atincreasing speeds. Companies can get sucked into thevortex, as Nike did in 1992. And, it is in the vortex statethat we see the potential for high impact as viral messagesabout the firm pervade the public consciousness. Even oncethe transparency network subsides, it can easily rear itshead again, as Nike learned, nearly a decade later, when amischievous customer requested to have his Nikescustomized to say “sweatshop”, initiating a viral e-mailblitz and eventually landing him an interview on GoodMorning America.



Time

Level ofactivity

Vortex state

Stablestate

In fluctuating between stable and unstable states,transparency networks respond most aggressively tonegatives. This is largely because some of the most stridentand vocal participants in the network see themselves asguardians (or gatekeepers) of issues (e.g., human rights andthe environment) and their role as one of monitoring andcensure. These minutemen of the network swing into actionat a moment's notice to defend their credo against “attack”by the corporation. Any attempt to quash the vortex usuallymakes things worse. Indeed, the vortex is amplified whenthe company attempts to cut off the feedback loops in thenetwork. To the contrary, ensuring robust feedback paths isone of the primary ways to ensure stability in thetransparency network.

5. Transparency networks cause shifts in valuesand behavior

Transparency networks are overtaking government as theleading forum for public debate and discourse in anetworked world. In democratic societies, the main vehiclefor legitimate debate on public policy issues has historicallybeen the institutions of government.121 Today, the stagnationof politics, the lack of open and inclusive policy debates,the perceived irrelevance of government, and the one-way,broadcast orientation of the mainstream media have left feweffective channels through which people can express theirconcerns or discontent. As a result, the location for publicdiscourse and debate is shifting to transparency networksthat operate outside the control of governments.122

Ironically, by changing the context of democratic debate,transparency networks are making public discourse moreopen and accessible to everybody. Increasingly, this meansthat societies can't maintain consensus around decisionsformed by small groups of elites or, for that matter, hide theactivities of the powerful behind closed doors. This intenselevel of scrutiny and unmediated debate has a discipliningeffect on the organizations that are drawn into thetransparency network. Indeed, mere participation in thenetwork exposes values, assumptions and behaviors of itsparticipants. We argue that transparency networksencourage self-reflexivity. Firms caught up in them aresubjected to continual critical examination in unmediateddebates. Corporations operating under the gaze ofstakeholder scrutiny are more likely to comply with normsthat govern the broader community. When informationdisclosed to the public reveals inconsistencies between theconduct of corporations and acceptable standards ofbehavior, network participants put new forms of

accountability in motion. These feedback loops constrain, orhelp “correct”, unacceptable behaviors, while encouragingnew values and behaviors that conform to the expectationsset by the network.

These feedback loops drive what we describe as values-based behaviors. These behaviors occur when firms decideto allow values to guide their behavior rather than thefinancial bottom line. In the past, a conflict has often (butnot always) emerged between values-based behavior andthe fiduciary responsibility of the owners of the firm. But inan increasingly transparent world, good values make goodeconomic sense. When transparency is high, there isbusiness logic in pursuing value-based behaviors becausethe rewards and consequences of values-based behavior aremore balanced, if not tipped in favor of values. Ultimately,the choice of whether to pursue a values-based or bottomline-focused strategy remains for each firm to make,depending on its circumstances and capabilities (thesechoices, circumstances and capabilities are further discussedin Digital 4Sight's Business Case for the Values-BasedEnterprise). But, as we discuss below, firms will not have achoice about participating in transparency networks.

Transparency Networks: Willing or Unwilling

One way or another, participation in transparency networksis not a voluntary exercise. Transparency networks ofteninclude firms as unknowing participants. But, ultimately,members of the transparency network will make themselvesknown and it will come down to a choice of what type ofengagement will define a firm's relationship with itsstakeholders. In some cases, firms will be passive—perhapseven unknowing—players in a transparency network that isaggressively trading information and shaping perceptionsabout the firm. In other cases, firms will be activelyinvolved in the debate, spreading information throughcompany reports and dialogue with key stakeholder groups.This largely depends on the network itself and the existinggap between the value systems of the firm and the networkparticipants.

Values gaps can be bridged, but as leading firms like BP,BT, Hewlett Packard, Novo Nordisk, Royal Dutch/Shell,and Unilever (to name a few) have learned, it takesenormous effort at times to build the right relationships withstakeholders. We argue that these firms are successfulbecause they have learned how to play an active role inthem to meet stakeholder expectations for open, responsive,



and accountable forms of corporate governance. In doing sothey have learned how to leverage value from theserelationships. This is not a static or painless process. Itrequires a high level of transparency, extensive dialogue,and a continuously evolving innovation system that cyclesgood values and behaviors throughout the enterprise. Inaddition, a good reporting system drives information out tostakeholders and then collects feedback and funnels it backinside the firm where it drives more learning and innovation(see Digital 4Sight's report on Next Generation Reporting).The most strategic of firms will learn how to harness theirvalues-based behaviors to create competitive advantages(again, see Digital 4Sight's business case).

In the discussion ahead, we take a more in-depth look attransparency networks and outline some top-levelrecommendations on how to engage with them. We begin,in section 7, with a look at six transparency networks thatwe have mapped out to explore their dimensions. Next, welook at six key dimensions of variability in transparencynetworks, digging out some of the key lessons from thecase studies and identifying the salient trends in theevolution of their role in corporate transparency andgovernance. Then, in section 8, we lay out some of the keylessons we have learned about the nature of transparencynetworks and the strategic implications for corporatemanagers tasked with figuring them out.



7. CAUGHT IN THE WEB: TRANPARENCYNETWORK CASE STUDIES

This paper draws on the insights gleaned from observing atotal of 28 cases of companies that have encounteredtransparency networks in one shape or form.123 Of those 28cases, we examined the transparency issues facing fivecompanies in particular. They include De Beers, HomeDepot, Monsanto, Unilever, and Wal-Mart. Each companyhas faced its transparency network in different ways andwith varying degrees of success. The stories of most ofthese companies have already been presented in previoussections of the paper. In the following section, we lookmore closely at the companies' transparency networks. Webegin the discussion by describing the nature of eachnetwork and follow up with some observations about thetrends and implications we see arising from the research. Amore detailed discussion of the corporate strategies werecommend based on our case study learnings is presentedin section 8, including a series of new transparencymanagement frameworks.

Case Study Methodology

The case study research we conducted assesses the online,interlinking practices between corporations andtransparency network participants to appraise the status ofonline debates about “corporate responsibility” issues withrespect to each case. Using third-party network mappingsoftware that crawls the Internet to identify links associatedwith specific issue areas, we have created visual maps ofthe transparency networks, which had been a theoreticalconstruction until this point. The network maps enable us toidentify the key participants that cluster around specificissues and companies, who they are networking with, andthe relative weight of their influence in the overall network.The approach is limited because it only captures the onlineenvironment, and therefore, misses the dynamics oftraditional media sources like print, radio, and television. Amore comprehensive analysis would have to take theseadditional sources into account. However, there are somebenefits to our approach.

Unlike actively observing an issue via news reporting, forexample, online transparency network analysis gets to the“ugly” bits of what is not reported by traditional mediasources—it exposes the underbelly of these transparencynetworks. Furthermore, the debates that unfold in the onlineenvironment are growing to be much more influential as the

Internet becomes an increasingly pervasive and popularmedium for media consumption. Indeed, it is alreadycommon for such online events to be picked up by themainstream media. And, as we argue in section 8, it wouldbe a mistake to underestimate the importance of trackingthis element of the transparency network. After all, it isoften at the “edge of the network” where powerful vortexstates can emerge to rapidly spin out of control before acompany knows what hit it. In the end, we believe onlinetransparency network analysis is a fairly dynamic method ofidentifying important players in transparency networks andthe key venues for online debate about issues in whichtoday's leading companies are deeply enmeshed. While notyet comprehensive, transparency network analysis providesa starting point for designing a transparency strategy.

The goal in each case examined here was to identify thepredominant storyline of each network map by describingthe stories told by its interlinking patterns. This approachdoes not fully assess how effectively each company isplugged into the issue network (much engagement mayoccur off-line, for instance) but it does identify the majorissues surrounding different players in any given debate.And, from what we know about the issues from our “off-line” research, we find that these maps tell a very similarstory to what we understand to be the reality of the situationfacing each of the case study companies.

De Beers

For a long time, diamonds have been associated with allthings pure. Diamond suppliers like De Beers operatedquietly in the background, attracting little public attention.This all changed, however, as a well-organized transparencynetwork has emerged to call attention to what has becomeknown as the problem of conflict diamonds, or diamondsthat are implicated in the brutal civil wars that plaguediamond-producing countries in Africa. By threatening totaint the image of diamonds, this issue has compelled thediamond industry to adopt an unprecedented level oftransparency through the multi-lateral Kimberely processestablished in November 2002 (for more background on theconflict diamonds issue and the Kimberely process, see thebusiness web transparency discussion in section 5).

The De Beers transparency network reflects the diversegroup of organizations that intersect with the conflictdiamonds issue. The key node in this network is aninfluential left-leaning weekly newsmagazine The Nation.



The Nation has run several stories on the conflict diamondsissue and has strong links to NGOs that are active in thedebate about the diamond supply chain, including TheCoalition to Stop the Use of Child Soldiers (child-soldiers.org), Partnership Africa Canada(partnershipafricacanada.org), Global Witness(globalwitness.org), and Africa Action (africapolicy.org).Another key node in the network is AllAfrica.com, thelargest electronic distributor of African news andinformation. AllAfrica.com has also published extensivelyon the activities of De Beers and problems of associatedwith diamond mining in countries such as Sierra Leone,Angola and Liberia. AllAfrica.com links to other prominentplayers in the issue including the UN, the World Bank, andHuman Rights Watch. The density of exchanges amongthese groups suggests the network is still in a mild vortexstate, which is not surprising considering the multi-lateralnegotiations that established the Kimberely process werejust winding down at the time of this research.

The make-up of the network suggests that the public debateabout conflict diamonds is happening largely outside thesphere of influence of De Beers or the wider diamondindustry. Organizations such as the UN, Partnership AfricaCanada, and Global Witness have published extensivereports, case studies, and points of view on their websites,each of which are interlinked with other players in thetransparency network. These websites describe the conflictdiamonds issue in vivid terms. They refer to diamonds inthe context of their association with issues like childslavery, war, poverty, and resource exploitation, which arejuxtaposed against the indulgence of affluent Westernconsumers and the massive profits of companies like DeBeers.

Global Witness, which claims to be first NGO to bring theissue of conflict diamonds to the attention of the diamondtrade, world governments and the United Nations says,“Conflict diamonds used to be the diamond industry's best-

kept secret … TheConflict Diamondcampaign exposes howthe internationaldiamond industry hasoperated for years withno rules or regulationsand how this lack ofcorporate responsibilityhas wreaked havoc insome of Africa's mostprolific civil wars.”124

Global Witness andothers in thetransparency networkcontinue to advocate forlegally bindingregulations imposed bygovernments on theinternational diamondindustry to ensure thatdiamonds no longerfund conflict in Africa.

Having come underpressure, the diamond industry is only now beginning totake steps to increase their profile as leaders in solving theconflict diamonds issues. This effort comes after negativenews hit the mainstream media as a result of awareness-raising campaigns by NGOs. De Beers and the WorldDiamond Council (WDC), an industry association, for



Vortex State [ 6 ] Intensity [ 2 ]Extensity [ 2 ]Velocity [ 2 ]

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Figure 26. DeBeers network map

example, recently posted position papers or statements onthe Internet. While it would now be impossible for theindustry to avoid taking some responsibility for the issue,statements from industry players indicate they are clearly infavor of a self-regulatory approach to managing thediamond supply chain. The WDC posted a press release onits website, saying “we fully accept the industry'scontinuing responsibility to play an active role in assuringthat the practices envisioned by the Kimberley process havereal impact over the long term. Governmental action, whilecritical to the program's success, is insufficient by itself.The self-regulation required of WDC constituents is vital aswell …”125 Interestingly, the press release goes on to saythat, “We are also sensitive to the sentiment of some allieswho contend that the Kimberley process regimen does notgo far enough. While we understand the basis for thatviewpoint, we are persuaded that to attempt any changesnow, on the brink of global implementation, would serve todelay implementation—perhaps indefinitely.”126 TheDiamond High Council (HRD), the official representative ofthe Belgian diamond industry, hasgone further than the WDC infostering greater industrytransparency about problems in thediamond supply chain. HRD hasdeveloped an entire website(conflictdiamonds.com) dedicated totracking news on the issue. The sitealso hosts an extensive progressreport on the measures the Belgiandiamond industry is taking to solvethe issues.127

Despite these recent attempts attransparency, the points of view ofthe diamond industry are notrepresented in the transparencynetwork. While the diamondindustry has done a better job ofentering the debate, its messages donot appear to be penetrating the webof opinions that are being propagatedby critics of the industry. While the Kimberely process hasbrought these disparate points of view together to forge anagreement for eliminating conflict diamonds from thesupply chain, it's not clear whether this will result in greater“integration” between the diamond industry and thetransparency network that scrutinizes its behavior. Indeed,with many of the NGOs now playing the role of monitors ofthe diamond supply chain it's pretty safe to say that they

will want to keep their distance from De Beers and otherindustry entities. And fundamental differences over legallybinding legislation versus self-regulation will continue to bea divisive issue, especially if the international trade indiamonds continues to fuel vicious civil wars on the Africancontinent.

Home Depot

The Rainforest Action Network (RAN) is a relatively smallUS-based advocacy group with a mission to reduce thenumber of rainforest trees being cut down for the benefit ofNorth American consumers. Yet, this well-organizednetwork has been able to exert considerable pressure on theforestry industry. Part of RAN's success can be attributed toits decision not to appeal to governments to intervene withimport restrictions on “old growth” lumber when it wantedto eliminate rainforest destruction—it took its fight to themarketplace instead.

Facing an entire industry value chain extending fromloggers to homebuilders, singled out Home Depot—thelargest retailer of “old growth” lumber at the time. It was1997 when RAN initially contacted Home Depot'sexecutives to request that they stop selling products



Figrue 27. Home Depot network mapStable State [ 3 ] Intensity [ 1 ]

Extensity [ 2 ]Velocity [ 0 ]

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containing rainforest lumber. Home Depot declined,claiming it was impossible to track the wood sources of its50,000 products. Subsequently, RAN escalated thecampaign.128

Two years of hard campaigning blended anti-Home Depotwebsites, full-page ads in The New York Times, andsynchronized storefront picketing across North America.Home Depot faced a mounting pile of bad PR and growinglocal resistance to new store locations.129 In 1999, HomeDepot signed a landmark agreement with the RAN,committing the company to phasing out old growth lumberfrom its product lines by 2002. Home Depot's suppliers arecurrently working with environmental and forestry groupsin the Forest Stewardship Council (FSC) to certify that itswood products are not taken from endangered areas.Furthermore, Home Depot now boasts proudly on itswebsite that it works diligently to educate itself and itssuppliers about forestry issues.130

Taking a snapshot of Home Depot's transparency networkalmost four years after RAN and Home Depot came to anagreement reveals a transparency network in remission. Weinclude Home Depot's transparency network because itillustrates dynamics typical of a network in its stable state.The number of participants is relatively small comparedwith those in a vortex state. The key node in the network isoneworld.net, a major Internet portal serving non-profitorganizations and those interested in a vast array of socialand environmental issues. Given the site's mandate, it is notunexpected that it would have extensive links into HomeDepot's transparency network, including the FSC. RANitself is the only other hub in the network that links to otherparticipants. But, in general, there is a very low level ofinterlinking in the network. Furthermore, most of thewebsites we visited in the network did not feature HomeDepot prominently. Information about the company or itsenvironmental policies was often buried several links down.

We attribute these stable state dynamics to the fact that, forHome Depot at least, the rainforest lumber issue hasmatured and public pressure subsided. With the companynow engaged in a formal product certification processthrough the Forest Stewardship Council, the transparencynetwork has become somewhat institutionalized. HomeDepot, however, should be wary of becoming complacent.While RAN publicly recognizes the company's goodbehavior, the organization raised the bar recently by callingon Home Depot to “to use its power as the market leader to

drive change within the forest products industry.”131 As wediscussed in section 6, transparency networks can be highlyvolatile and react quickly and powerfully to bad news. Alow level of activity in the network today does notguarantee one tomorrow. One misstep is all it would take toreactivate the various groups and individuals who viewthemselves as guardians of the world's rainforest.

Monsanto

The Monsanto saga is well-known. The beleaguered lifesciences company has endured a difficult public relationsbattle over biotechnology ever since groups like Greenpeaceraised the specter of “frankenfoods” and widespreadenvironmental contamination. Today, this battle is beingfought on multiple fronts. Environmental groups, farmers,regulators, consumers, organic food enthusiasts, and anti-”bio-piracy” advocates have all raised unique concernsabout the implications of Monsanto's core business. Anddespite trying to make some changes in its approach toengaging with critics, Monsanto continues to face anextensive and intense campaign that threatens to undermineits business in the near future.

As expected, Monsanto's transparency network is veryextensive in scale and scope. The largest nodes in thenetwork include the Organic Consumers Association(organicconsumers.org and purefood.org), a rallying pointfor organic food enthusiasts that see Monsanto as a threat tothe safety and purity of the foods they eat, andnotmilk.com, an “anti-milk” megasite containing vastamounts of information about the alleged dangers of milk,including Monsanto's Bovine Growth Hormone product.Both of these sites link to a number of sites associated withvegetarian or vegan lifestyles, and also to regulatory bodieslike the FDA. Other prominent nodes include Greenpeaceand Envirolink, which put forth an environmental critiqueof Monsanto's business; the Institute of Science in Society(i-sis.org), which has rallied the scientific communityagainst the patenting of life forms; and the Third WorldNetwork (twnside.org.sg), which is primarily concernedwith bio-piracy issues and the rights of peasant farmers.Tweaking the parameters of the network mapping softwareilluminates an even more expansive network of stakeholdersites, including a significant number of agricultural links togroups such as Farm Animal Reform Movement(farmusa.org) and Percey Schmeiser's personal website (seenetwork map 2).132



But, Monsanto's transparency network was not all that weanticipated. What was surprising about Monsanto's networkwas the lack of apparent interlinking among these disparategroups. Unlike the De Beers case, the various constituenciesthat have rallied against Monsanto for their own particularinterests do not seem to overlap in any significant way. Thelack of interlinking suggests that a broad-based and unifiedmovement against Monsanto has failed to materialize(online at least), even as individual communities continueon their separate paths of protest. Like the De Beersnetwork, however, the overall tone and language of thenetwork participants is overwhelmingly negative. Based ona scan of the websites in the network, the level of activityand information exchange within each community issimilarly high, with significant coverage of Monsanto ontheir websites.

Monsanto, on the other hand, has been unable to inject itspoint of view into the network. Indeed, attempts to shift thebiotechnology debate with the launch of the BiotechKnowledge Center website, have only invited furtherridicule. Critics like to point out the inconsistencies inMonsanto's approach to transparency. For example, aparody website (earthsummit.biz) that exposes what it callsGreenwash at the Earth Summit awarded Monsanto Runner-up for Lifetime Achievement in the Green Oscars, “fortireless promotion of transgenic crops that just happen touse Monsanto's own Roundup herbicide as the solution toworld hunger, and for publicly promoting open discussionof genetic engineering while lobbying against publicinformation disclosure rules and labeling of geneticallyengineered foods.”133 In a paper entitled, “In Biotech WeTrust?,” the Pesticide Action Network (panna.igc.og)questions whether claims on the Biotech Knowledge Centerwebsite should be trusted.134




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Figure 28. Monsanto network map1

The activists are not convinced; but are Monsanto's tacticsinfluencing the broader public? Evidence suggests thatMonsanto is losing here too, especially in Europe where thequestion of genetically modified organisms (GMOs) seemslikely to kick-start a trade war with the US.135 A pollconducted by MORI in Britain concluded that only 18% ofpeople thought the benefits of GM outweighed the risks.When it came to labeling of GM foods, 76% backed theEU's position that consumers should be told productscontained GM ingredients and only 6% supported the US'sposition that labeling should not be compulsory, with 20%having no preference either way.136 Even Hendrik Verfaillie,the company's former chief executive, admitted in an

interview with the Financial Times that such is the publicresistance to GM crops that Monsanto is now assumingthere will be no progress in Europe until 2005 at theearliest.137

Unilever

In our discussion of public transparency (see section 5) wereported that Unilever had successfully engaged a numberof environmental NGOs, scientists, and community groupsin an attempt to move the company toward sustainability.138

Unilever gets a fair amount of recognition for its




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Figure 29. Monsanto network map 2 (the extended view)

accomplishments. The Dow Jones Sustainability Indexranks Unilever as the market leader in the food productsindustry, describing its performance as “excellent.”139

SustainAbility, a UK-based consultancy, lists Unileveramong its top 50 best-practice sustainability reporters.140

Even many environmental groups concede that Unilever is aresponsible company, or at least headed in the rightdirection. Indeed, Jonathon Porritt, a leadingenvironmentalist in the UK and advisor to Unilever,said,”I've no doubt that Unilever could be somewhat fleeterof foot in meeting these challenges … but I still feel thatUnilever's science-based, socially-responsible approach todeveloping more sustainable agricultural practices over timegives it a real edge over its competitors.”141

Figure 30. Unilever network map

In part, Unilever's transparency network is a reflection of itsgood relationships and reputation with a number of keyallies. For example, in April 2002, Unilever, in partnershipwith the World Conservation Union (IUCN) and EarthwatchInstitute (Europe), held a workshop, “Biodiversity Plans for

Business,” during the 16th Session of the GlobalBiodiversity Forum.142 A key node in Unilever's networkturned out to be the IUCN (iucn.org). The IUCN links outto organizations such as the United Nations DevelopmentProgram (undp.org), the World Bank (worldbank.org), theFood and Agriculture Organization (fao.org), and FarmingSolutions (farmingsolutions.org), each of which make small,but complimentary mentions of Unilever's sustainabilityactivities. While Unilever's website is not included in thenetwork map, it does link to the sites above, enablingvisitors at either end to find out about Unilever's goodwork. Furthermore, these references and relationshipsestablish a great deal of credibility in the claims thatUnilever makes about its environmental policies and

performance. There is,however, a dark sideto Unilever'stransparency network.

Even good companiesare never perfect. InAugust 2001, BBCNews reported thatHindustan Lever, aUnilever subsidiary,was illegally dumpingtoxic mercury wastesbehind its mercurythermometer factoryin Kodaikanal, India.143

The incident sparkedoutrage in thecommunity andbeyond. Theallegations initiallyprovoked denials fromHindustan Lever.Unilever quicklystepped in, admittedwrongdoing, and has

since agreed to permanently close the factory and clean upthe mess-not before the damage was done, however. Twoother key nodes in Unilever's transparency network includethe Centre for Science and Environment in India(cseindia.org) and Greenpeace India. Both helped to exposethe Hindustan mercury spill and have fought hard to ensurethat Unilever's headquarters was held accountable forcleaning up the spill. Navroz Mody, Greenpeace's ToxicsCampaigner in India argues in a Greenpeace campaignarticle that “Unilever's mission statement may read like




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poetry; but their actions in Kodaikanal expose them as toxictraders who run polluting industries in developing countriesto service the markets of the rich nations.”144 CorporateWatch, another node in the network, has seized the mercurydumping as evidence that Unilever is violating certainprinciples of the United Nation's Global Compact, of whichUnilever is a flagship member. Visitors to the CorporateWatch site can even see a list of several allegedinconsistencies between Unilever's statements on the issueand the recorded facts of the situation.145

This incident is a reminder that even seemingly distantissues, far removed from a firm's direct control, can easilyseed a transparency network with harsh criticism andaccusations of hypocrisy. Curious individuals will be able tofind records of events archived online for some time tocome. While nowhere near fatal for Unilever or itsreputation, such incidents do chip away at the trust that thecompany has built with stakeholders like the IUCN. As thesaying has it, sometimes the bad can chase away the good.

Wal-Mart

Wal-Mart is the world'sbiggest company byrevenue. Indeed, thecompany is very successfulby most measures,especially those valued bythe capital markets.According to Fortune, thebig-box retailer is amongthe “Most AdmiredCompanies in America”and was one of the “100Best Companies To WorkFor” in 2001.146 TheFinancial Times includesWal-Mart on its list of the“Most RespectedCompanies in theWorld.”147 But, a growingnetwork of employees tellsa different tale. As wedescribed in our discussionof the transparency in thefirm (see section 5), someWal-Mart employees believetheir employer has strayed

from its core values of respect for employees andcustomers. To get their message out, they have created anetwork of websites on which they discuss their problems,disseminate protest information, and chronicle instances ofwhat they allege to be unfair labor practices and union-busting tactics. The issue just recently made it to the pagesof Time.148 And, as Time reports, the employees now havebig backing. Major union groups such as the AFL-CIO(aflcio.org) and the United Food and Commercial Workers(ufcw.org) have launched lawsuits and organized eventsagainst Wal-Mart, whose growing market share has raisedsome alarm among union leaders.

The transparency network map reveals that the Wal-Martnetwork is dominated by two kinds of sites. There are unionsites, of which there are several, including the UFCW, TheNational Labor Committee (nlcnet.org) and the UnionNetwork International (union-network.org), a key node inthis network. Then, there are the do-it-yourself employeewebsites that have sprung up across the US.Walmartyrs.com, a site dedicated to “sharing the Wal-Martexperience worker to worker,” is the central node of theseven employee websites included in the network map.




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Figure 31. Wal-Mart network map

Another important node in the employee network is thewalmartdayofaction.com site, which provided an onlinelogistical center for the unions and supporters. The othersignificant constituency represented in the network is themedia, which have reported on Wal-Mart's labor troubles.Finally, the network map includes walmartstores.com, Wal-Mart's store locator site. It is the first time a website relatedto a company in question has appeared. It's interesting tonote, however, that the the site is linked from the Wal-Martworkers' site in Las Vegas, which points to it to helpsupporters find stores to picket.

The prominence of employees makes Wal-Mart'stransparency network unique compared with the othersstudied here. The networks monitoring De Beers, Monsanto,Unilever, and Home Depot were composed of multiplestakeholder groups (even if the majority were NGOs of onekind or another), but did not include any significantemployee presence that we could detect. The network isalso national rather than international in scale, as most ofthe others were. Yet, Wal-Mart's network map reveals themost active and interlinked transparency network we haveobserved. The collection of organizations is highlyinterwoven, with most websites connecting with each otherdirectly. Wal-Mart is featured prominently on these sitesand the news and information appears to be updatedfrequently. We speculate that the focused nature of thenetwork and the timeliness of the network analysis (wecrawled the network a week prior to the National Day ofAction Against Wal-Mart on November 21, 2002) bothcontribute to the high states of intensity, velocity, andextensity.

The degree to which this transparencynetwork will affect Wal-Mart's behaviorremains to be seen. So far, the company hasshown no sign of relenting, or apologizing forits preference for a non-union environment.Wal-Mart rejects all of the claims of thenetwork participants. While John Sweeney,president of the AFL-CIO, claims “thecompany is dragging wages and benefit levelsback to 19th century standards,” Wal-Martcounters by asking “If the jobs are so bad,why are so many people working for Wal-Mart?”149 Maintaining a good image, however,is important for Wal-Mart, because it willneed to add some 800,000 employees in theUS alone over the next five years. Wal-Martmay do well to be more conscious of the

messages that are propagating in the transparency network,especially if it wants to maintain the same levels ofemployee productivity it has today. Indeed, Wal-Mart'slabor troubles may already have had something to do withthe fact that America's largest employer was recentlydropped from Fortune's 2002 edition of the 100 BestCompanies to Work For.150

Dimensions of Variability in TransparencyNetworks

The case studies presented above illustrate howtransparency networks assume many different forms. Theyfluctuate in size and behavior in response to the actions andpronouncements of the firm or industry that has come underscrutiny. The political dynamics of the issues at handsignificantly influence the disposition of the participantsand vice versa. Some networks have becomeinstitutionalized, partly reflecting the maturity of the issueand the extent of alignment between the values and goals ofparticipants. Most, however, are highly decentralized,amorphous, and confrontational in nature. Some networksfocus on local, single-company issues, while others aretransnational in scale and more ambitious in the scope oftheir agenda. In our study of six in-depth case studies, andby drawing on our broader scan of 20 additionaltransparency networks, we tracked several waystransparency networks differ from one another. In doing so,we project some of the key trends in transparency networksand shed light on their likely path of evolution. In thefollowing discussion of these differences, we identify sixdimensions or axes of variability.



Firm Business Web Customers Capital markets Public sphere

Network leadership

Uncodified, informal Codified, formal

Institutionalization

Conflict CollaborationGoal congruence

Voluntary, normative Mandatory, legalisticCompliance mechanisms

Local National Regional GlobalScale

Firm-centric Issue-centricIssue definition

Figure 32. Six dimensions of variability

Network leadership and participants

Transparency networks vary according to the nature of theirparticipants, as well as the location and authority of theirleadership (if any). Some networks are composed primarilyof civil society groups that will attempt to draw otherstakeholders like customers, investors, the media, andgovernment into the network. As the Wal-Mart casesuggests, employees of the firm can sometimes form thecenter of a transparency network. It is rare to seegovernments or firms leading a transparency network, asthey tend to be counter-cultural to the inclinations ofhierarchically organized institutions. But a growing numberof networks will see intense involvement of firms andgovernments as power and authority is shared, bartered, andstruggled over by diverse forces from the five layers of thetransparency network.

The institutionalization of transparency networks

Transparency networks vary by the degree to which theirstructures and processes are institutionalized. Many of thenetworks we have identified have uncodified rules and tendto have less formal processes and more networkedorganizational forms. Networks like the vast alliance ofgroups that have rallied against Monsanto (and geneticengineering more broadly), do not share a commonheadquarters or institutional structure. Leadership may beprovided by Greenpeace, Friends of the Earth, and otherlarge nodes in the network, but Monsanto's transparencynetwork generally consists of dispersed, small groups thatcommunicate, coordinate, and act in a fashion akin to theInternet—often without central leadership. While lesspredictable and even unstable, networks appeal to actorswho prefer not give up their independence and autonomy.The degree to which there is any system of governance, it isusually by virtue of a shared set of norms, understandings,and values.

An increasing number of networks are developing codifiedrules, formal processes, and, to some extent, organizationalbureaucracies that manage their affairs. The MarineStewardship Council, the certification body created byUnilever and WWF is an example of the institutionalizationof one aspect of a broader transparency network thatmonitors the state of the world's fisheries. The GlobalReporting initiative is an attempt to bring greater structure,consistency, and inclusive dialogue to the process of settingand governing standards for corporate reporting on triplebottom line issues. Institutionalization has many

advantages. It establishes stability and predictability; it canoften lead to greater consensus, efficiency, and productivity;it also infers legitimacy when a broad range of playersagree to work collectively through a common institutionalframework. Achieving a stable state of institutionalization—without bogging down into bureaucratic stagnation andirrelevance—is not easy to achieve, especially given theoften contentious nature of the issues being debated intransparency networks. The extent to which transparencynetworks evolve into institutions depends largely on theamount of integration and goal congruence among thenetwork participants, which we discuss below.

Integration and congruence of goal and values

Transparency networks differ considerably over the degreeto which they gravitate toward collaborative, trust-basedrelationships between participants on one hand, and conflictand divisiveness on the other. Many factors come into playhere. They include the degree to which the behavior andcommitments of other participants can be relied on; the pre-existing alignment or misalignment of the variousinstitutional goals or mandates; the degree to which oneparticipant may have control (perceived or actual) over thefinal outcome; the degree to which there is sharedknowledge among participants, particularly their level ofawareness of each other's interests and of the consequencesof their behavior; and finally, the willingness of allparticipants to compromise their objectives in order to reacha common ground.

The Kimberley process represents an instance where mostparticipants in De Beers' transparency network couldestablish enough common ground to agree on a singleprocess and institutional framework for increasing thetransparency of the diamond supply chain to help eliminateconflict diamonds. The chocolate industry, NGOs andgovernments recently reached a similar agreement byestablishing a monitoring process to help eliminate slaveryfrom the coca supply chain (see below).151 In each case, adegree of shared knowledge and common values, and asufficient overlapping of goals and objectives amongnetwork participants, helped to facilitate a mutualunderstanding of and commitment to the necessary courseof action to resolve the issues.

In many situations, the goals of network participants andthe object of the network (i.e., the firm or industry underscrutiny) are difficult to reconcile. In these situations, more



transparency and engagement is often not enough.Underlying the demands for transparency are morefundamental disagreements related to the nature of thebusiness the company is in or the way it is run.Biotechnology, and Monsanto in particular, stands outabove all others as an example. On one hand, a lack oftransparency, especially in the early stages, limited thepublic's knowledge of biotechnology and left the publicdiscourse open to the opponents of the technology. Byfailing to win public trust, they brought an entire sectorclose to disaster. But, the problem is deeper now. Monsantooperates within a transparency network that rejects outrightthe safety and legitimacy of its products. In the absence ofany serious attempt to reconcile its business objectives andpractices with the norms and values of societies, Monsantowill drive an even deeper wedge between itself and manykey stakeholders. The degree of polarization has alreadymade it quite difficult for Monsanto to negotiate withgroups that would prefer to see the company go out ofbusiness, despite Monsanto's recent commitment to greatertransparency and dialogue. Today, after decades of researchand product development, the size of the industry is only afraction of what most observers had anticipated it wouldbe.152

Another notable example is the oil industry, although, inthis case, not all players in the industry are being paintedwith the same brush. Exxon-Mobil has been picked on forits aggressive stance against Kyoto and its practice ofinformation barricading. Exxon's very fractured and divisivenetwork of stakeholder relationships, however, stands incontrast to other players in the oil industry such as BP,Nexen, Shell, and Suncor. These companies and others haveall made much more substantial efforts than Exxon toimprove their relationships with stakeholders by adaptingtheir long-term strategic goals to reflect societies' changinginterests and releasing much more information about theiractivities to their transparency networks.

Compliance and accountability mechanisms

Transparency networks vary in the nature of theircompliance mechanisms. Compliance mechanismsgenerally range from voluntary and normative standardswith weak enforcement to mandatory rules with legalbacking. In most of the emerging transparency networks,including the institutionalized forms, participation (to somedegree) and compliance is voluntary and normative. Rulesset by the network tend to be enforced through the sanctionof public opinion or the discipline of the market. An

example includes the Fair Labor Association, which wasformed through a partnership of apparel and footwearmanufacturers, NGOs, unions, and governmentrepresentatives, in which companies voluntarily submit theiroverseas factories to third-party inspection and verification.Voluntary, transparency-based governance mechanisms areexpected to become much more common. As Charles Sabelof Columbia University argues, this is largely because themachinery to compel global companies to adopt consistentinternational standards for their sectors does not exist andwill be quite hard to build.153 Transparency-basedgovernance represents a more flexible, market-friendlyalternative.

Transparency networks with mandatory and legallyenforced compliance mechanisms are rare. A direct, or well-defined, line of accountability to democratic bodies orgovernment agencies is even less common. A number oftransparency networks do, however, build off rulesestablished by governments. Scorecard.org, for example,harnesses the information disclosed by the US government'sToxic Release Inventory (TRI) to spawn a self-organizingnetwork of citizens and environmental groups that use thewebsite to target polluters (see discussion of immediacy insection 3). So while firms must comply with the TRI, it'scompletely within their discretion to decide whether or notto listen to the complaints of citizens and environmentalists.This is not to say, however, that governments will notdecide to make some of the voluntary disclosure rulescreated by transparency networks legally binding in thefuture (see discussion of information disclosure rules insection 3). Indeed, a number of governments have alreadyindicated some willingness to do so, but the outcome willlargely depend on the level of compliance achieved byvoluntary rules.

The scale and reach of transparency networks

Transparency networks differ according to the scale of theiractivities and their sphere of influence over corporatebehavior. Transparency networks can be local, national,regional and international in scale. In fact, they oftenvacillate between low and high states of intensity—risingand falling in scale with the ebb and flow of the issues andcompanies they monitor. Wal-Mart's transparency networkstarted with employee protests in a local Wal-Mart in LasVegas. But even seemingly local issues can catch authoritiesoff guard by taking on national and internationaldimensions. Thanks, in part, to the Internet, and also topowerful unions like the Teamsters and the United Food



and Commercial Workers, the protests have now spread toover 30 Wal-Mart locations in 16 states. Indeed, given theincreasingly global scale of corporate operations, mostnetworks have a propensity to extend the reach of theiractivities as far as possible. Some larger networkssuccessfully link up local, national, and international bodiesin a coordinated effort or meta-network. For example, theAssociation for Progressive Communication, a globalfederation of 24 non-profit Internet service providers, hostswebsites and distributes information to over 50,000 NGOsin 133 countries.154 Some networks achieve scale by findingtheir institutional home in international bodies like theUnited Nations. As of December 2002, 628 companies fromover 40 countries around the world subscribe to the nineprinciples of the UN's Global Compact.155

For companies, the implication of this trend towardinternational scale, and the explosive speed at which localissues can erupt into transnational networks, is the need topay close attention to local disturbances that can easily flyunder the corporate radar. Sometimes putting out local firesearly can prevent larger issues from burning out of control.Inevitably, the growing scale of transparency networks alsoraises challenging issues for companies trying to understandand engage with networks that intersect with differentpolitical traditions, languages, and cultures around theworld. While networks typically have much less troubleincorporating diversity into their structure and logic, mostcompanies are ill-prepared for this reality. Many companieshave a hard enough time communicating with AmericanNGOs, let alone a peasant movement from the southernstate of Karnataka, India, which recently burned a fieldplanted with Monsanto's genetically modified Bt Cotton,launching the so-called “Operation Cremate Monsanto” as apopular movement among farmers in India.156

Scope and boundaries of transparency issues

Finally, transparency networks vary according to the waythey define the scope of the issues they address. Somenetworks focus on specific issues such as toxic waste,human rights, and labor standards, while companies getcaught in the crossfire of their larger political ambitions andactivities. Other times, companies are the primary focus,like the transparency networks that coalesced around theinfant formula-inspired boycotts of Nestle in the 1970s and1980s. This difference is not as trivial as it may first appear.The issues are more clear-cut for companies, like Nestle,that get targeted because of their specific business practices.These issues are often more directly within the control of

the firm. Nestle had a choice about what to do, if anything,about its practice of marketing infant formula to mothers indeveloping countries, and a fairly straightforward set ofparameters by which to evaluate its decision.

On the other hand, companies that come under scrutiny fortheir role in broader issues that are beyond their individualcontrol, like climate change, paramilitary violence, ormodern-day slavery in Africa, can get stuck in a complexsituation. For example, chocolate companies were recentlyaccused of complicity in slavery, after a documentary airedon BBC revealed several cocoa plantations in the IvoryCoast using slave labor to produce the raw materialseventually sold to chocolate retailers like Nestle, Cadbury,and Hershey.157 Chocolate manufacturers, however, don'town the cocoa farms—they don't even have arm's lengthcontracts with them. Rather, they buy raw materials onagricultural commodity exchanges. That lack of ownershipor direct control of the situation forced chocolatemanufacturers to negotiate with a wide range of cocoagrowers, NGOs, international organizations, andgovernment agencies to work out a long-term solution tothe problem. Similarly, Coca-Cola's arms-lengthrelationships with suppliers have raised questions aboutwhether it is responsible for helping to stop the murders ofunion leaders in Colombia. In the eyes of its transparencynetwork, Coca-Cola's control of the brand (and fair share ofthe profits), makes it responsible. But given Coca-Cola'slack of control over paramilitary violence in Colombia, thecompany is in a nearly impossible situation.

Transparency networks also exhibit a tendency for “scopecreep.” Networks that start with one company can easilyspill over into other companies, industries, and issues. Forexample, when the Rainforest Action Network becameemboldened by its “victory” over Home Depot, it decidedto move on some of Home Depot's competitors, effectivelybroadening its old growth-free campaign to the entire homeimprovement industry. In November 1999, HomeBase andWickes Lumber—the sixth and tenth largest US homeimprovement retailers—both signed similar agreementswith RAN. Lowe's Lumber, Mitsubishi, and Staples allagreed to phase out old growth products in 2002. RAN alsoclaims to be at different stages of negotiation with severalothers large US home improvement chains.158



Key Lessons

From our analysis of these six cases, we learn a lot abouthow the issues are being defined and debates structuredwithin transparency networks. These case studies also tellus a great deal about the nature of transparency networks,their points of differentiation, and the likely trajectories fortheir development over time. Looking forward, our analysissuggests that while a plurality of transparency networks willalways exist, a few trends are discernable among the sixaxes of variability discussed above. We do, however,acknowledge that it is still quite early in the life oftransparency networks to make predictions with certainty.

• Most of the corporate transparency networks we studiedare embedded in larger issue networks (e.g., labor,human rights, the environment) that are shaping politicaland corporate agendas, while influencing the broaderenvironments in which these companies operate. Muchof Monsanto's network is concerned not just withMonsanto, but with the broader social, environmentaland health concerns that biotechnology raises. Themovement has been a powerful catalyst for broad publicand political discussion about biotechnology. WhileWal-Mart's issue pertains to its own labor practicesessentially, their current and former employees arereaching out to a broader network of people andorganizations concerned about protecting the rights andentitlements of union members around the world.

• There is still a striking absence of any real companypresence or participation in these networks. Manycompanies, including most of the ones we have studied,are engaged in some level of social and environmentalreporting. Almost all have some formal policy statementon the Internet, many supply news and points of view

on issues, and some actually publish their social andenvironmental performance metrics online. However, ofthe cases we studied in detail, only Unilever turned upany “allies” in its transparency network. And even then,neither Unilever nor any of its sustainability sub-sites,appears in the core transparency network. This was truefor all of the network maps we have made to date. Thissuggests that companies are inadequately prepared, andin some cases unwilling, to engage in online debatesabout their social or environmental policies orperformance, leaving themselves vulnerable toindividuals and groups that have harnessed this form ofcommunication to their advantage.

• Transparency networks will become moreinstitutionalized over time. Home Depot and Unileverillustrate how new institutional processes fortransparency can emerge out of transparency networks.But, as is common with many emerging issues, therewill be a period of uncertainty, a certain degree ofchaos, and the gradual introduction of new institutionalstructures as residual forms of command-and-controlregulation fade away. This not to say, however, that rivalnetworks and organizations will not rise up to contestinstitutionalized forms of transparency. There are manytough issues to be resolved in the 21st century, andmany of them will clearly be divisive. In this context, itwould be naïve to believe that there will always be anincreasing amount of congruence among the goals andvalues of stakeholders that cluster around such issues.For firms, this will be especially true aroundcontroversial new (and old) products and services forwhich there is a significant public interest angle.

• The trend toward voluntary rules and participation willcontinue for some time but it seems increasingly likelythat many of the current transparency-based regulatory



Table 3

Case study variabilityDe Beers Home Depot Monsanto Unilever Wal-Mart

Network participants

Institutionalization

Goal congruence

Compliance

Scale

Issue definition

NGOs, government agencies, media, customers

Formal, informal

Consultation

Voluntary

International

Issue-centric

NGOs, associations, media, regulators, citizens, farmers, scientists

Informal

Conflict

Voluntary

International

Issue-centric

NGOs, scientists, community members, media, government agencies

Formal, informal

Collaboration, conflict

Voluntary

International

Firm-centric

Employees, unions, media

Informal

Conflict

Voluntary

National

Firm-centric

NGOs, media, regulators

Formal, informal

Consultation

Voluntary

International

Issue-centric

schemes will become part of the architecture of a newsystem of global governance in which governments willplay a major part. (This trend will also bolster theleaning toward institutionalization). The Kimberleyprocess, for example, provides a new international self-regulatory process for the trade in diamonds, whilecertification schemes like the MSC and FSC couldpotentially expand in scope and scale to provide newglobal mechanisms monitoring commercial activities inthe world's fisheries and forests. Mandatory rules couldstill be imposed (to the extent possible), if self-regulatory or co-regulatory systems fail to meet publicpolicy objectives.

• Our collection of 28 case studies show that transparencynetworks are real, they are measurable, and their effectson corporate behavior are considerable. We concludethat transparency networks will only increase their reachand broaden the scope of the issues they focus on overtime. The forces of transparency, like the growth ofpublic awareness and activism and the declining costs ofcommunicating and networking, will ensure that thoseorganizations and individuals that are critical ofcompanies, for whatever reason, have an effectivevehicle for finding out information, sharing it withothers, and organizing.



9. TRANSFORMING CORPORATEGOVERNANCE: CONCLUSIONSAND KEY LESSONS

In the final analysis, transparency strategy is more than justinteractive communications: it is a new form of engagementwith a broad range of stakeholders in society that helpsguide and inform corporate governance. In this sense,transparency strategy serves a dual purpose. On one hand,transparency strategy is externally facing: it creates asystemic and dynamic approach to engaging in publicdebates, shaping perceptions about the firm and buildingtrust with key constituents. But, as we have argued,transparency strategy is not a one-way conversation. Manyof the stakeholders firms engage with will feed back tothem, and they will demand much more than superficialchanges in corporate strategy and behavior in exchange fortheir loyalty. On the other hand, transparency strategycreates a necessary link between the messages firms hearfrom their stakeholders and an internal process ofinnovation and change management. Taken to its logicalconclusion, transparency strategy is really about reshapingcorporate cultures, structures and processes—even productsand services—to prepare companies to meet newexpectations for values-based behavior in an increasinglytransparent world.

It is our conclusion that transparency strategy must beembedded in a broader system of organizational learningand corporate governance. It should drive a continuous anddynamic learning and innovation system that feeds theinformation and knowledge firms collect from theirenvironment back to the managers and employees engagedin key business functions and processes across the firm. Yet,the inevitable conclusion drawn from our research is thatcurrent mechanisms of corporate governance are whollyunsuited to deal with the complexity of this challenge.

Today's systems of corporate governance, with someexceptions, are insular, secretive, elitist, and plagued byshort-term thinking, financial tunnel vision, and patronage.Boards of directors often fail to recognize and tackle toughissues or draw in the right experience and perspectives toguide companies through new challenges as unforeseensocial and environmental realities land on their doorstep.Given this reality, it is easy to see why corporateproclamations about the changes they are embracing oftenseem divorced from real action. The governance

mechanisms and leadership to guide, embed, and enforcethese changes are failing, and in some cases, they are non-existent.

This dearth of leadership has created a vacuum. Whilecorporations are being asked to take on new roles andresponsibilities in society, they have no effective systems ofgovernance to help them manage these changes withintegrity. This vacuum has, in effect, created more space fornew entrants to play a role in governing the behavior of thefirm. But these forces operate externally, and often in directopposition to corporations. The antagonistic dynamics canforce firms into defensive and reactive postures, whichundermine their ability to address long-term trends in theeconomy and society with foresight and planning.

A New System of Multi-Stakeholder GovernanceEmerges

The eroding legitimacy of conventional approaches tocorporate governance is rooted in the widening gap betweencorporate images and assurances and the realities ofcapitalism that stakeholders see in the world around them.Bridging this divide will require more than slickercommunications strategies. Firms need to shed their often-skeptical view of the competence of other stakeholders tohelp corporations make substantial strides toward creating amore efficient, equitable, and sustainable economy. Indeed,we argue that corporations should embrace a morerepresentative, multi-stakeholder approach to corporategovernance as the heart of their efforts to reform the waythey set long-term strategies and make policies to governtheir behavior.

Making the transition to multi-stakeholder governance willrequire firms to master three key areas of organizationalinnovation:

1. Culture: fostering the right corporate culture to supporttransparency and a values-based approach to enterprise.

2. Structure: shifting to a networked governance andcommunications model that creates space for theinclusion of new issues and voices.

3. Process: developing a highly responsive and adaptiveorganization that can sense and respond to changes in itsexternal environment.



Creating a culture of learning and engagement

A firm that isn't open to change can't embrace it. Creating aculture of learning and engagement is about building aninherent capacity to recognize change and adapt to it. A corechallenge then, is to put vision, leadership, and integrity atthe center of corporate governance. In today'sinterdependent environment, this means fostering a cultureof governance based on openness, collaboration, andknowledge-sharing.

Changing the culture of corporate governance begins with acommitment from the top to greater transparency,participation, and accountability in corporate governance. Inthe first instance, this requires firms to develop a strongercapacity to seek, share, and integrate new information.Executives and board members need to spend more timetalking to non-traditional stakeholders, exchanging points ofview, and understanding different perspectives. By sharinginformation with a large network of organizations, firms canput a little bit of knowledge and effort in, and draw out alarge amount of knowledge and opportunities for buildingsocial capital. Hiring younger employees from more diversebackgrounds is another, arguably more proactive, way toinfuse the firm with new thinking.

Second, there must be a cultural disposition toward a moreconsensual and inclusive decision-making process for issuesthat merit it. This will require firms (and governments) toabandon their sense of monopoly over the governanceprocess in favor of participatory models that invite input atall stages of development. Such processes will appear instark contrast to the fast-paced, no-bullshit approach tocorporate decision-making. But the added effort up front toarrive at reasonably consensual decisions can save a greatdeal of frustration and friction down the line.

Most importantly, the new culture of corporate governancemust include a willingness to be held accountable whenfirms fail to meet commitments or live by their word.Sociologists point out that some system to monitor andsanction members' actions is a common feature in anysuccessful system or community. Monitoring andsanctioning is important not simply as a way of punishingrule-breakers, but also as a way of assuring people thatothers are doing their part to maintain the integrity of thecommunity.206 Willfully submitting to a system ofmonitoring and sanctioning demonstrates a commitment toaccountability.

At this stage, it is largely the fear of accountability holdingmany firms back from embracing a multi-stakeholderapproach. Inevitably, this is a vicious cycle. A lack ofperceived accountability undermines legitimacy, whileeroding legitimacy destroys the willingness of stakeholdersto view the firm as a trustworthy partner. At the very least,enabling stakeholders to scrutinize the governance processwith greater ease and convenience is a first step towardbuilding legitimacy through genuine transparency,participation, and accountability. Over time, these advanceswill enable firms to better navigate changes in society andthe economy as new perspectives and knowledge areintegrated into the development of corporate policy.

Building a networked organizational structure

If culture is about changing mindsets, building a networkedorganizational structure is about creating the necessaryspace to include new voices and organizations in theprocesses of governance. Forming broader and strongernetworks with a broad range of institutions in society willnot only enable companies to stay more attuned to emergingissues and social expectations, but also provide thecomplementary resources and competencies to addressthem. For instance, it would be naïve to think that firms arecurrently well-equipped to deal with the social andenvironmental challenges that await them. And it would beeven more foolish to suggest that firms should build thisinternal capacity for themselves.

The most fruitful advances will come from networkedstructures that pool the competencies and resources of abroader more representative group of stakeholders insociety. A few tactical options range from regular briefingson key governance issues, to seats on the board of directors,to stakeholder consultations with special sub-committees, topresentations and discussions at annual general meetings, tocollaborative working projects or policy networks. Sharingrisk and responsibility among stakeholders will createincentives to work collectively toward a shared vision andoutcome. Failures will inevitably occur, but all participantscan share the blame and consequences.

To perform effectively, emerging corporate governancenetworks will require both institutional and organizationalframeworks to manage the relationships among firms anddiverse stakeholder groups. An institutional framework willinclude a set of rules and responsibilities that governs thegovernance process (see discussion of transparency strategygovernance in section 8). An effective institutional



framework will help broaden participation, manage groupdynamics, create trust and commitment, and facilitateprogress on issues and challenges. An organizationalframework will determine issues of scale and scope.Determining the appropriate degree of centralization versusdecentralization for handling different governance issueswill be a core issue for corporations operating in a globalenvironment.

There is no precise formula for setting ground rules formulti-stakeholder governance. But to be sure, firms' abilityto maintain a monopoly on determining the rules is waning.The opportunity in extending franchise in corporategovernance is to orchestrate a collective process forestablishing acceptable norms and procedures thatresult in better governance, greater legitimacy, anda broader and much deeper well of social andknowledge capital.

Enabling a process of continuous policyinnovation

While there has never been a one-size-fits-allprocess for corporate governance, the currentprocess could be characterized as:

• Slow: new policies and change initiatives oftentake years to develop and operationalize;

• Static: policies are designed to be comprehensive andunchanging

• Linear: policy is created in a sequence of steps thatbegins with problem definition and ends withimplementation; and

• Broadcast: policy decisions are broadcast to thestakeholders after they are decided.

In a networked world, effective governance integratespolicy development and implementations into a seamlessand flexible process of continuous engagement,improvement, and innovation. Reaching out to new playersto draw in the knowledge and resources needed to fuel andinspire change means goingback to the iterative cycle ofsetting values that forms the heart of transparency strategy(discussed in section 8). Over time, this process transformsthe nature of corporate governance itself.

A firm starts by measuring and codifying its performance. Itcommunicates the results to provide external assurance tostakeholders and then listens to feedback it receives. Itassimilates and synthesizes the learnings from this

experience and then transfers them to the firm's businessweb. The business web develops the capacity to respondwith new innovations and patterns of behavior. Acontinuous process of communicating, listening, learning,and responding creates the internal and external feedbackloops that reinforce the values that underpin action. Whiletransparency strategy does not wholly replace conventionalstructures of corporate governance, it fundamentallytransforms them by distributing governance throughout theorganization and beyond. Firms will still require strongexecutive leadership. However, by creating more inclusiveand dynamic governance processes, responsibility andownership will be shared among a much broader group.

Figure 45. Multi-stakeholder governance



Transforming corporate governance

Table 4

Transformation

Creating a learning and engagement culture to support transparency and a values-based approach to enterprise

Shifting to networked model of communications and engagement to build relationships in each of the five dimensions of transparency

Managing a continuous process of communicating, listening, learning, and responding that embeds the right values and behaviors in the organization

Key Principles

· Transparent

· Accountable

· Participatory

· Decentralized

· Agile

· Adaptive

· Knowledge-based

· Responsive

· Cyclical

Culture

Structure

Process

NextGenerationReporting

System

communicating

listening

learning

responding

Measurement and codification

Externalassurance

Internal innovation

NextGenerationReporting

System

BusinessWeb

StakeholderWeb

Implications for Leaders

We are still in the very early days of a profoundtransformation. The promise is that more transparent andparticipatory forms of governance will enable corporationsto become more integrated with the societies in which theyoperate, better attuned to social and environmentalconcerns, and more broadly accountable to stakeholders.The key question is whether the emerging reality ofnetworked governance will strengthen or diminish firms'capacity to manage the ever-growing list of interconnectedchallenges and issues they face in this century.

The success of the new interactive models of multi-stakeholder engagement is not guaranteed. Admitting moreparticipants, designing broader forms of accountability,creating new organizational forms, and sharing risk andresponsibility: these will be challenging, and occasionallyagonizing, advances. Yet, the inevitability of transparencynetworks forcing firms to adopt new systems of governanceis unarguable. The issue for firms is their role in them: asactive participants, or unwilling bystanders.

—Anthony Williams



ENDNOTES

1. Working Group. 1998. Report of the Working Group onTransparency and Accountability. Washington D.C.:International Monetary Fund.

2. See the Decision Mapping System project website at theUniversity of Washington.http://nalu.geog.washington.edu/dms/transparency_content.html

3. United Nations Expert Group. 1991. Study on Ways andMeans of Promoting Transparency in International Transfers ofConventional Arms. Report to the Secretary-General, UNDocument A/46/301. New York: United Nations.

4. Ann Florini. 1999. “Does the Invisible Hand of the Market Needa Transparent Glove? The Politics of Transparency.” Paperprepared for the Annual World Bank Conference onDevelopment Economics, Washington D.C., April 29-30, 1999.

5. See David Held, Anthony McGrew, David Goldblatt andJonathan Perraton. 1999. Global Transformations. Stanford:Stanford University Press, and Sassen, Saskia. 1998.Globalisation and Its Discontents: The New Mobility of Peopleand Money. New York: The New Press

6. Anthony Giddens. 2000. “The Globalizing of Modernity.” In, TheGlobal Transformations Reader. Eds. David Held and AnthonyMcGrew. Cambridge: Polity Press.

7. David Harvey. 1989. The Condition of Postmodernity: AnEnquiry into the Origins of Cultural Change. Oxford: BlackwellPublishers.

8. Manuel Castells. 1996. The Information Age: Economy, Societyand Culture, Volume I, The Network Society. Massachusetts:Blackwell Publishers.

9. Florini, 1999, ibid.

10. Ann Florini. 1998. “The End of Secrecy.” Foreign Policy, 112,pp. 50-63.

11. See Fortune 500. http://www.fortune.com

12. Sarah Anderson and John Cavanagh. 2000. Top 200: The Riseof Corporate Global Power. Washington D.C.: Institute forPolicy Studies. http://www.ips-dc.org/reports/top200text.htm

13. Niall Fergusen. “Power.” Foreign Policy. January/February2003, no. 134.

14. Richard Higgot and Simon Reich. 1999. From Globalisation toGlamorisation: The Rise of the NGO in International Relations.Washington D.C.: International Studies Association.

15. Daniel Bell. 1999. The Coming of Post-Industrial Society: AVenture in Social Forecasting. New York: Basic Books.

16. Manuel Castells. 1996. The Information Age: Economy, Societyand Culture, Volume I, The Network Society. Massachusetts:Blackwell Publishers. p. 470.

17. Ibid, p. 471.

18. Later we discuss the point that the driving forces oftransparency are not necessarily operating on similartimescales. Some of the forces described are having animmediate impact while others will take shape over the comingyears and make their mark on transparency toward the end ofthis decade.

19. For access to particular stats see the following reports:Environics' CSR Monitor http://www.environicsinternational.com/;Edelman's survey on European and US Opinion Leadershttp://www.edelman.com/people_and_perspectives/insights/index.asp;FT's World's Most Respected Companieshttp://specials.ft.com/wmr2001/FT3SFHBQ6VC.html; CooperativeBank's research on ethical consumption http://www.co-operativebank.co.uk/bigissue.html; Social InvestmentForum's research reports,http://www.socialinvest.org/areas/research/

20. Evidence for the rise in ethical consumerism is drawn from arange of work completed over the past five years. Our sourcesincluded: Roger Cowe and Simon Williams “Who Are theEthical Consumers?” The Cooperative Bank; Deborah Doane.“Taking Flight: The Rapid Growth of Ethical Consumerism”New Economics Foundation, October 2001; EthicalConsumerism - A Research Study Conducted for TheCooperative Bank, presented by Charlotte Hines and AshleyAmes, June 2000; Environics International, CorporateResponsibility Monitor 2001 and 2002.

21. A new website, Responsible Shopper, provides a goodexample of the power of the Internet to enable ethicalconsumers to easily compare products and companies. Theservice, provided by Co-op America, investigates andevaluates hundreds of companies on their social andenvironmental performance and provides simple tools to helpconsumers make more informed choices about the productsthey buy. http://www.responsibleshopper.com

22. Evidence that ethical investment is on the rise is welldocumented. The Social Investment Forum, for example,reported that total assets under management in portfoliosscreened for socially concerned investors climbed from $1.49trillion in 1999 to $2.03 trillion in 2001. The number of mutualfunds in the US using social investment criteria increased to230 in 2001, from 168 in 1999. Separate accounts (individualor institution investment portfolios) grew by 40% from 1999 to2001. Of the $2.03 trillion in managed accounts, $601 billion isin portfolios controlled by investors involved in shareholderadvocacy. SIF states that socially screened assets grew 1.5times faster than all U.S. managed portfolio assets since 1999,and that one out of every eight dollars under professionalmanagement is involved in socially responsible investing (SRI).A recent survey of UK investment managers by Deloitte &Touche, found that in the previous 12 months, more than 50percent of fund managers perceived an increase in interest inSRI from their pension fund and other institutional clients. Theyalso present evidence that assets in professionally managed,social-screened investment portfolios are growing faster thanassets in non-screened funds. While socially screened portfolioportfolios rose by 36% between 1999 and 2001, the totaluniverse of professionally managed assets in the US grew at22%, from $16.3 trillion in 1999 to $19.9 trillion in 2001. Forthese stats and many others see: Social Investment Forum,



“2001 Report on Socially Responsible Investing Trends in theUnited States.” See also: “Corporate Citizenship andSustainability Arrive: Are Capital Markets Addressing NewBusiness and Investment Risk Factors?” by Steven Godeke,senior research advisor for financial markets and corporatecitizenship to The Conference Board, July 2002.

23. Harvard professor Theda Skocpol, for one, has documentedthese transformations in civil society and worries that too manyvaluable aspects of the old membership-based civic traditionare not being reproduced or reinvented in the world of“memberless organizations.” Theda Skocpol, “AssociationsWithout Members,” (The American Prospect, July/August1999).

24. Robert Keohane and Joseph Nye observe that the number ofinternational NGOs has quadrupled from about 6,000 to over26,000 in the 1990s alone. Robert O. Keohane and Joseph S.Nye Jr. “Globalization: What's New? What's Not? (And SoWhat?)” (Foreign Policy , Spring 2000). Lester Salamon ofJohn Hopkins University goes as far as to say that we are inthe midst of a global “associational revolution” that may proveto be as significant as the rise of the nation-state. LesterSalamon, “The Rise of the Nonprofit Sector,” (Foreign Affairs,July 1994). The Association for Progressive Communication, aglobal federation of 24 non-profit Internet service providers,serves over 50,000 NGOs in 133 countries. http://www.apc.org.The Carnegie Endowment for International Peace counts morethan 5,000 transnational NGOs (NGOs based in one countrythat regularly carry out activities in others) CarnegieEndowment for International Peace, Transparency and CivilSociety.http://www.ceip.org/programs/transparency/transparency%20main%20page.htm (February 24, 2000).

25. Robert O. Keohane and Joseph S. Nye Jr. “Globalization:What's New? What's Not? (And So What?)” (Foreign Policy ,Spring 2000). Lester Salamon of Johns Hopkins Universitygoes as far as to say that we are in the midst of a global“associational revolution” that may prove to be as significant asthe rise of the nation-state. Lester Salamon, “The Rise of theNonprofit Sector,” (Foreign Affairs, July 1994).

26. See the Union for International Associations' Harvard BusinessReview http://www.uia.org

27. At the first World Conference on Women in Mexico City in1975, 2,000 government delegates and 6,000 NGO delegatesattended. Five years later, 8,000 NGO delegates went to the1980 women's conference in Copenhagen. In Nairobi in 1990,there were 11,000. In 1995, Beijing hosted the Fourth WorldConference on Women; 40,000 NGO delegates attended,along with 6,000 governmental delegates. Over the course offour conferences in 20 years, the number of governmentdelegates to the international conferences had merely tripledwhile the number of NGOs had increased more than six-fold.See Riva Krut, “Globalization and Civil Society: NGO Influencein International Decision-Making,” (UNRISD, Discussion PaperNo. 83, April 1997)http://www.unrisd.org/engindex/publ/list/dp/dp83/toc.htm (April 10,2000)

28. NGOs are becoming most active in spaces where the state isreceding, or losing its capacity to intervene, but where aneffective system of global governance is still absent. In thepost-cold war world there has been a shift in focus fromsecurity matters, in which national allegiances are central, toso-called global issues, in which they are not. The emergenceof environmental issues that defy the capacity of individualstates to provide solutions, for example, has led civil society(particularly NGOs) to take the lead in trying to initiatecollective action at the international level. See Peter Spiro,“New Global Communities: Nongovernmental Organizations inInternational Decision-Making Institutions” (WashingtonQuarterly, Winter 1995)

29. It is also important to note however, that a growing number ofNGOs are savvy about business and bring a new attitude ofopenness toward working with corporate leaders. This newvanguard of advocacy groups articulates astute proposals forturning business ingenuity toward social and environmentalconcerns. They are skilful at finding allies and change agentsinside firms around the world. They attract teams of scientists,economists, lawyers, and other professionals to work for them.Their representatives now sit shoulder to shoulder with seniorgovernment and corporate executives in international policy-making venues, and even share the stage at Davos with thetitans of global enterprise.

30. Intense competition among NGOs in the relief sector, forexample, has pushed the sector toward a form of oligopoly thatthreatens to crowd out smaller players, especially local NGOsin developing countries. Some NGOs, such as the Red Cross,have tried to address these concerns by drafting codes ofconduct and “pledging to do no harm.”

31. We borrow this notion of the civil foundation from the work ofRoger Martin in the Virtue Matrix. We define the civilfoundation as the sum total of laws, rules, norms, socialexpectations, legal and political structures, etc., that definewhat is and isn't acceptable behavior in society. See RogerMartin, “The Virtue Matrix: Calculating the Return on CorporateResponsibility.” Harvard Business Review.

32. See David Held's chapter “The Development of the Nation-State,” in Democracy and the Global Order, Stanford UniversityPress, 1995.

33. United Nations press release, November 14, 2001.

34. Don Doering, et al. 2002. Tomorrow's Markets: Global Trendsand Their Implications for Business. Washington D.C.: WorldResource Institute.http://pathways.wri.org/presentations/tomorrows_markets.pdf

35. See, for example, the World Bank Group report: Entering the21st Century: World Development Report 1999/2000.

36. Alfred Aman. 1995. “A Global Persepctive on CurrentRegulatory Reforms: Rejection, Relocation or Reinvention?”Indiana Journal of Global Legal Studies, vol. 2, no. 2, pp. 429-64.

37. Virginia Haufler. 2001. A Public Role for the Private Sector:Industry Self-Regulation in a Global Economy. Washington:Carnegie Endowment for International Peace.



38. Transparency-based governance refers to the efforts of stateand non-state actors to promote disclosure of information andparticipatory decision-making as a means to compel actors(usually the powerful) to behave in accordance with rules orbroadly held norms.

39. An OECD fact-finding mission reported on 246 codes ofconduct, which represents only a sample of the total numbersof codes in existence. See the OECD report: CorporateResponsibility: Results of a Fact-finding Mission on PrivateInitiaitves, published February 2001. Available at:http://www.oecd.org/pdf/M00015000/M00015441.pdf. See also:Corporate Codes of Conduct: An Expanded Review of theirContents, published May 2001. Available at:http://www.oecd.org/pdf/M00015000/M00015433.pdf

40. See www.unglobalcompact.org

41. See http://www.globalreporting.org/GRIGuidelines/Reporters.htm

42. Daniel Bell, ibid.

43. David Held. 2000. “Regulating Globalisation.” In The GlobalTransformations Reader. Eds. David Held and AnthonyMcGrew. Cambridge: Polity Press.

44. See in particular the following literature: Sassen, Saskia.Forthcoming. Denationalization: Economy and Polity in aGlobal Digital Age. Princeton University Press. Sassen, Saskia.1998. Globalisation and Its Discontents: The New Mobility ofPeople and Money. New York: The New Press. Held, David.1995. Democracy and the Global Order: From the ModernState to Cosmopolitan Governance. Cambridge: Polity Press.Rosenau, James N. 1999. “Relocated Authority in aReorganized Politics.” Paper prepared for the CarnegieEndowment for International Peace, Washington D.C., June21, 1999. Rosenau, James N. 2000. “Governance in aGlobalizing World.” In The Global Transformations Reader.Eds. David Held and Anthony McGrew. Cambridge: PolityPress.

45. Edward Alden. “US tries to halt rights suit against Exxon.”Financial Times. August 5, 2002.

46. John Ruggie and Richard Falk have done some of the mostextensive work in rethinking the UN system.

47. For a great discussion of NGO accountability see: Lisa Jordanand Peter van Tuijl, “Political Responsibility in NGO advocacy:Exploring emerging shapes of global democracy.” Novib. April1998.

48. A proposal for a global parliament is laid out in: Falk, Richardand Andrew Strauss. 2001. “Toward Global Parliament.”Foreign Affairs, vol. 80, no. 1.

49. For an overview, see: David Held and Anthony McGrew eds.2002. Governing Globalisation: Power, Authority and GlobalGovernance. Cambridge: Polity Press.

50. Such thinking is currently in vogue in many internationalinstitutions such as the UN and the World Bank. For the bestacademic overview of such a proposal see: Sabel, Charleswith Archon Fung and Dara O'Rourke. 1999. “Ratcheting Labor

Standards: Regulation for Continuous Improvement in theGlobal Workplace.” World Bank Group Social Protection UnitDiscussion Paper SP 0011. Washington D.C.: World BankGroup.

51. See, Thomas Blanton. 2002. “The World's Right to Know.”Foreign Policy , issue 131, pp. 50-58, and , Ann Florini. 1998.“The End of Secrecy.” Foreign Policy , 112, pp. 50-63.

52. On this point see: Simmons, P.J. 1998. “Learning to Live withNGOs.” Foreign Policy , Fall 1998; and Spiro, Peter. 1995.“New Global Communities: Nongovernmental Organizations inInternational Decision-Making Institutions.” WashingtonQuarterly, Winter 1995.

53. For such a perspective see: Merchant, Carolyn. 1992. RadicalEcology: The Search for a Livable World. New York. Routledgeor Sachs, Wolfgang, ed. 1993. Global Ecology: A New Arena ofPolitical Conflict. Halifax: Fernwood Publications. Korten,David. 1999. i

54. These forces include the deployment of new informationtechnologies and an international policy agenda of deregulationand liberalization.

55. For more on these themes see David Held, Anthony McGrew,David Goldblatt and Jonathan Perraton. 1999. GlobalTransformations. Stanford: Stanford University Press.

56. In 1999, the United Nations Conference on Trade andDevelopment (UNCTAD) reported that there were 60,000global corporations with 500,000 foreign subsidiaries, whichhad sales of $US11 trillion. A small number of thesecorporations dominate world markets for oil, minerals, food,and other agricultural products, while one hundred or so play aleading role in the globalization of manufacturing productionand services. UNCTAD. 1999. World Investment Report 1999:Foreign Direct Investment and the Challenge of Development.New York: United Nationshttp://www.unctad.org/en/pub/pubframe.htm (February 24, 2000)

57. See Peter Dicken. 2000. “A New Geo-Economy.” In The GlobalTransformations Reader. Eds. David Held and AnthonyMcGrew. Cambridge: Polity Press.

58. Sylvia Ostry. External Transparency: The Policy Process at theNational Level of the Two Level Game. Paper prepared for theWTO Advisory Group, April 2002.

59. Working Group. 1998. Report of the Working Group onTransparency and Accountability. Washington D.C.:International Monetary Fund.

60. For more discussion of intangibles see: Verna Allee. 2000.“The Value Evolution.” Journal of Intellectual Capital, vol. 1, no.1, pp. 17-32.http://www.vernaallee.com/library%20articles%20pages/The%20Value%20Evolution.pdf

61. For a thorough discussion of the new economics of the digitaleconomy see: Don Tapscott, David Ticoll and Alex Lowy. 2000.Digital Capital: Harnessing the Power of Business Webs.Boston: Harvard Business School Press.



62. For a great discussion of the internal communities of practicedimension see: John Seely Brown and Paul Duguid. 2000. TheSocial Life of Information. Boston: Harvard Business SchoolPress.

63. Paul Hawken, Amory Lovins and Hunter Lovins. 1999. NaturalCapitalism: Creating the Next Industrial Revolution. Boston:Back Bay Books.

64. Robert Costanza, et al. “The value of the world's ecosystemservices and natural capital.” Nature, vol. 387, May 15, 1997.

65. For more on this theme, see the economic research groupRedefining Progress http://www.redefiningprogress.org

66. The current cost of high-resolution satellite images isapproximately $1,000 to $4,000 for a single image with aresolution of 10 meters to 1 meter. Barring governmentintervention, this price can be expected to fall if the technologyimproves and the market for satellite imagery grows. SeeYahya A. Dehqanzada and Ann Florini. Secrets for Sale: HowCommercial Satellite Imagery Will Change the World.(Washington: Carnegie Endowment for International Peace,2000).

67. See http://www.simputer.org

68. Filipinos send 52 million text messages every day - more than10 daily for every mobile phone owner. See: Richard LloydParry, “In revolutions they used to say 'keep your powder dry.'Now they say 'keep your cell phone charged.'” TheIndependent, Jan 23, 2001.

69. Uli Schmetzer, “Cell Phones Spurred Filipinos,” ChicagoTribune, January 24, 2001.

70. See http://www.globalforestwatch.org and http://www.wri.org

71. See The California Institute of Telecommunications andInformation Technology (Cal-IT2) website http://www.calit2.net/

72. Despite the potential for interference, it is clear that peoplevalue immediacy, not just because it makes life more efficient,but because there is psychic value to be gained from beingplugged into the latest information, and exchanging informationwith others in real-time. For example, Digital 4Sight hastracked the impact of immediacy on consumer behavior.Swedish teenagers subscribe to services that send them SMSmessages whenever their favorite football team scores a goal.Filipino shoppers coordinate their progress through mega-mallsusing SMS.

73. See http://www.scorecard.org

74. See http://www.indymedia.org

75. Bruce Little, “Rules have changed for WTO.” Globe and Mail,February 10, 2000.

76. Ann Florini. 2002. “The Challenge of Democracy: InformationTechnology as a Tool for Improving Global Governance.” Paperprepared for the Conference on “New Technologies andInternational Governance,” Nitze School of AdvancedInternational Studies, Johns Hopkins University, February 11-12, 2002.

77. Ann Florini. 1999. op cit.

78. See, for example, the work of Gilbert W. Fairholm. 1994.Leadership and the Culture of Trust. USA: Praeger Publishers;See also: Nichols, Ted. 1993. Secrets of EntrepreneurialLeadership. USA: Dearborn Financial Publishing.

79. See for example, Susan P. Shapiro. The Social Control ofImpersonal Trust. AJS. November 1987, 93(3): 623-58; RussellHardin. 2000. Trust and Trustworthiness. New York: RussellSage Foundation; and, Trudy Grovier. 1998. Dilemmas ofTrust. Canada: McGill-Queen's University Press.

80. Francis Fukuyama. 1995. Trust: The Social Virtues and theCreation of Prosperity. USA: Simon & Schuster

81. Robert D.Putnam. “Bowling Alone.” Journal of Democracy.1995(6): 65-78.

82. See http://www.environicsinternational.com

83. Ann Florini. 1999, op cit.

84. We also elaborate on extensively these points in theforthcoming ROI model for clients of the Leadership in theNetworked Economy research program.

85. For an extensive treatment of relationship capital see: DonTapscott, David Ticoll and Alex Lowy. 2000. Digital Capital:Harnessing the Power of Business Webs. Boston: HarvardBusiness School Press.

86. Dicken, Peter. 2000. “A New Geo-economy.” In The GlobalTransformations Reader. Eds. David Held and AnthonyMcGrew. Cambridge: Polity Press

87. ibid.

88. David Wheeler et al. 2001. “Measuring the Business Value ofStakeholder Relationships.” The Centre for Innovation inManagement, Simon Fraser University.

89. Wheeler, ibid.

90. For more on this theme see: Hai Huang, Claudia Keser,Jonathon Leland and Jason Shachat. “Trust, the Internet andthe Digital Divide.”http://domino.watson.ibm.com/library/cyberdig.nsf/papers/70EF5D97CB09AAFE85256BF700625D6C/$File/RC22511.pdf

91. Recorded live during a Digital 4Sight audio conference,Understanding the Transparency Phenomenon, May 31, 2002.

92. See the documentary “War on Workers” for testimony fromformer Wal-Mart managers. http://www.walmartwatch.com

93. In the next 15 years, America will experience a 15% decreasein those typically considered to be emerging leaders—people,ages 35 to 44. As 76 million baby boomers approachretirement, employers will be left with an estimated 51 milliongeneration Xers (those born between 1965 and 1977) to fill thevoid. “The Talent Edge”, Workspan, December 2001.



94. See http://www.cecglobal.org/publications/speeches/kuttner.htm

95. Ibid.

96. Sensitive figures on store sales, team sales, profit margins,even salaries, are available to every person in every location.In fact, the company shares information so widely that the SEChas designated all employees “insiders” for stock-tradingpurposes.

97. Historically, DeBeers has operated as a cartel operating behindthe scenes, controlling up to 80% of the world's rough diamondtrade. The company has done so through its own miningoperations, marketing diamonds for third parties, and moppingup supply on the open market in places like Antwerp. Theserough diamonds flow through the DeBeers supply chain,eventually landing in London where they are aggregated andsorted at DeBeers' charterhouse street facility, which at anygiven time may hold up to $1 billion worth of rough diamonds.These diamonds are then divided and sold in multimillion dollarlots to special customers that DeBeers calls “sightholders.”Ironically, these sightholders do not actually see thesediamonds beforehand. De Beers determines which diamondsgo into which lots, and even sets the prices. Customers arebuying “sight unseen” at fixed prices, a process DeBeersexecutives termed “feeding the ducks.”

98. These diamonds have funded prolonged conflicts in areassuch as Sierra Leone and Angola. The result has been terriblehuman rights violations in those countries. Violence, mutilation,and even kidnapping (as a means of military recruitment) havecontributed to the destruction of the social foundation andresulted in some of the poorest living conditions in the world.

99. Identity management is the set of technologies and servicesthat enables identity information to persist across differentelectronic services. Until now, most identity information hasremained scattered. Most websites for example, keep a uniqueindividual profile of their customers. When customers form arelationship with another website, they have to create anotherprofile from scratch. Different websites don't tend to “talk” toone another or share customer information. Identitymanagement services are an attempt to synch up all thisstranded customer information. The vision is that informationprofiles will follow the customer from one website or electronicservice to another.

100. Learning from its acquisition of Firefly in the mid 90's (whichlater evolved into Microsoft Passport), Microsoft cleverlypositioned Hailstorm as a privacy management system forconsumers

101. See “Microsoft Has Shelved Its Internet 'Persona' Service,”New York Times, April 11, 2002.http://www.nytimes.com/2002/04/11/technology/ebusiness/11NET.html

102. See Abby Tan, “Cell phones may be key to cleaner air inPhilippines” CSMonitor, July 19, 2002.http://www.csmonitor.com/2002/0719/p07s02-woap.html

103. See “The Age of Swarming”http://www.smh.com.au/articles/2002/08/16/1029114008692.html

104. Most people look for evidence of a rise in ethical proclivitiesamong consumers in public opinion polls and consumerresearch. Perhaps the most telling evidence that something ishappening, however, is in the growing number of ethicalbrands coming out in the marketplace. Loblaws and othermajor supermarket chains have introduced successful organicfood product lines. Toyota has launched a hybrid vehicle calledPirus. The Body Shop has a long-standing line of ethical bodyproducts. For more evidence on the rise of ethical consumerssee the social drivers of transparency in section 4.

105. The price declines highlight industry economics gone awry.While coffee production has surged by 3.6%, demand forcoffee lags well behind at just 1.5%. New sources ofproduction have outpaced demand causing a precipitous dropin prices. Even a cartel formed to solve the problem in 2000was short-lived. It folded in 2002, overwhelmed by newsources of supply in SE Asian countries where growers areanxious to capture a share of global coffee markets.

106. The federation was created in the 1950's as an internationaltrade association. Over time, the federation began to endorsewhat is called “fair trade”, the sale of sustainable products thatoffer producers a “fair” percentage of the retail price. Theobject is to provide producers with sustainable living wages.Fair trade products range from commodities like coffee, tocrafts and other handmade goods.

107. This is approximately 1% of Starbucks' supply.

108. “How to Fix Corporate Governance.” Business Week, May 6,2002.http://www.businessweek.com/magazine/content/02_18/b3781701.htm

109. Qorvis Communications. “Investor Communications: A NewYear's Resolution.” January 2002.

110. Facilitation payments refer to nominal amounts of money usedto “grease the wheels” of bureaucracy.

111. In 1999, all 34 OECD members and five non-member countriessigned the Convention on Combating Bribery of Foreign PublicOfficials, which sent a message to the global community thatcorruption in international business would not be tolerated.Specifically, the convention requires signatories to makebribery a crime. Similar anti-corruption initiatives have emergedfrom other international organizations, such as the Council ofEurope, the Organization of American States, the EuropeanUnion, and the United Nations.

112. For example, The Economist estimated that payments made toIndonesian bureaucrats totalled one-fifth of a company'soperating costs, while bribes in Uganda decreases the bottomline by approximately 8%. A Harvard economist calculated thatincreasing Singapore's level of bribery to that of Mexico's is theequivalent of imposing a tax on foreign investment of roughly24%. See: “The worm that never dies,” The Economist, March2, 2002; “A global war against bribery,” The Economist,January 14, 1999; and Shang-Jin Wei, “How Taxing isCorruption on International Investors?” Paper presented atInternational Anti-Corruption Conference (IACC), Prague,Czech Republic, October 7-11, 2001.



113. Mark Wade, Shell International, Interview with Digital 4Sight,April 29, 2002.

114. The exact numbers of dead and injured are debated. We haveprovided the lower end of the estimates.

115. Speech by Unilever Chairman, Niall Fitzgerald, Wednesday,May 8, 2002.http://www.unilever.com/news/speeches/EnglishSpeeches_4284.asp

116. Conversation with Susanne Stormer on December 11, 2002.

117. See http://www.xanga.com/home.asp?user=mamaduck

118. David Bacon. “It's the Real Thing: Murders at Coke.” TheNation. November 21, 2001.

119. Susan Ferriss. “Murder in Colombia Lands Coca-Cola in CourtBattle” Atlanta Journal and Constitution, June 6, 2002.http://www.accessatlanta.com/ajc/business/coke/0602/06colombia.html

120. At the peak of the sweatshop issue in 1993, Nike's share pricefell over 50% from a peak of $23 to $10. Since 1994, the shareprice has recovered.

121. Whether the town hall or a national assembly ofrepresentatives, government was understood to be theappropriate loci for democratic discourse and deliberation,while the free press offered a critical and independent mediumfor holding governments accountable.

122. This is not to say that governments do not play a role incultivating democratic debate and discourse. We do suggestthat governments have been somewhat displaced by the riseof civil society as a galvanizing force to discontent in society.

123. Our study included 28 different companies, of which wefocused on five in depth. These 28 cases include: BalfourBeatty, British Airways, British Telecom, Cable & Wireless, thechocolate industry and slavery, Citigroup, Clarica, CooperativeBank, Coca-Cola, De Beers/Conflict Diamonds, Exxon-Mobil,Fair Trade (coffee), Genetic information and the Association ofBritish Insurers, Home Depot, Microsoft/Hailstorm, Monsanto,Nexen, Inc., Novo Nordisk, Pacifica Radio, Scorecard.org,Sony, Shell, Unilever, Union Carbide, Wal-Mart, Whole FoodsMarket, World Bank, and the World Trade Organization.

124. See http://www.globalwitness.org/campaigns/diamonds/index.html

125. Statement From World Diamond Council, October 10, 2002.http://www.worlddiamondcouncil.com/index.html

126. Ibid.

127. See http://www.conflictdiamonds.com/pages/Interface/reportframe.html

128. By RAN's estimates they mobilized a network of 30,000members and 150 grassroots Rainforest Action Groups(RAGS) across the world, including indigenous groups, humanrights and environmental organizations, small businesses andlocal politicians, and high-profile celebrities that bolstered theircause.

129. Persistent pressure from local business/citizen coalitionshelped RAN convince municipal councils in small cities such asMadison, WI, and Longmont, CO to delay approval for newstore construction in their communities until Home Depotdeveloped a response to the old growth-free campaign. OnAugust 19, 1999, the Atlanta Journal Constitution, from HomeDepot's home state of Georgia, reported that “The RainforestAction Network . . . took part of the credit for denying a newlocation for Cobb County-based Home Depot in Racine, WI.The network has been spotlighting the behemoth do-it-yourselfhome improvement retailer because of its wood products,many of which the network says come from old-growth forestsin British Columbia and around the world.” See Steve Visser,“Wood controversy,” (Atlanta Journal Constitution, August 19,1999).

130. See Home Depot's web page on environmental practices:http://www.homedepot.com/prel80/HDUS/EN_US/diy_main/pg_diy.jsp?CNTTYPE=NAVIGATION&CNTKEY=compinfo%2fenvironment%2findex.jsp&BV_SessionID=@@@@1293943589.1043301492@@@@&BV_EngineID=ccdiadchgehelldcgelceffdfgidgml.0

131. See RAN's press release on January 3, 2003, RainforestAction Network Statement on Home Depot's Wood PurchasingPolicy. http://www.ran.org/news/newsitem.php?id=609&area=home

132. The extended view is produced by changing the softwareparameters for inclusion in the network map. A lower thresholdallows us to see more of the groups that are linked intoMonsanto's transparency network, although by virtue of beingfurther removed, these sites are likely to be less influential andless connected to others in the core network.

133. See http://www.earthsummit.biz/awards/lifetime.html

134. Skip Spitzer. “In Biotech We Trust?” Pesticide Action Network,http://panna.igc.org/resources/documents/inBiotechWeTrust.pdf

135. David Teather, “US trade war threat as Europe bars GM crops”The Guardian, Friday January 10, 2003.http://www.guardian.co.uk/international/story/0,3604,872088,00.html

136. Paul Brown, “Trade war fear as public resists GM food,” TheGuardian, May 7, 2002.http://www.guardian.co.uk/gmdebate/Story/0,2763,711074,00.html

137. See http://news.ft.com/home/uk. See also, David Teather,“Troubled Monsanto scales down GM hopes in Europe,” TheGuardian, Aug 20, 2002.

138. The company is most recognized for the Marine StewardshipCouncil, created in partnership with the World Wildlife Fund(see section 5).

139. See http://www.sustainability-index.com/djsi_world/pdf/CB/CBR_Unilever_NV_CVA_03.pdf

140. See Trust Us - The Second Annual Survey of CorporateSustainability Reporting.http://www.sustainability.com/publications/engaging/trust-us-50.asp

141. See Jonathon Porritt's commentary on Unilever's sustainableagriculture practices.http://www.unilever.com/environmentsociety/sustainabilityinitiatives/agriculture/external_comment.asp



142. The IUCN is a broad, 980 member coalition of governmentagencies and NGOs that assist societies to becomeecologically sustainable. Seehttp://www.iucn.org/info_and_news/press/gbfpr.pdf

143. “Unilever chief's anti-bribes line.” BBC News, August 21, 2001.http://news.bbc.co.uk/1/hi/business/1501124.stm

144. “Lever Ex-workers go on Hunger Strike to CondemnCompany.” Greenpeace, April 22, 2001.http://zope.greenpeace.org/z/gpindia/storydetails?storyid=41

145. Nityanand Jayaraman. “Inconsistencies Galore,” CorporateWatch, October 4, 2001.http://www.corpwatch.org/campaigns/PCD.jsp?articleid=625

146. See Fortune 500. http://www.fortune.com

147. See, http://specials.ft.com/wmr2001/FT3M3WW95VC.html

148. Bill Saporito. “Can Wal-Mart Get Any Bigger?” Time, January13, 2003.

149. Bill Saporito, ibid.

150. “Wal-Mart Kicked Off Fortune's List of 100 Best Companies toWork For,” UFCW.http://www.ufcw.org/worker/internal.cfm?subsection_id=143&internal_id=853

151. Under the plan, a protocol from the US government providesfor the development of credible, global, industry-widestandards to identify and certify cocoa grown without childlabour. Research by the ILO will help define the scope of theproblem. NGOs like Free the Slaves and the Child LaborCoalition will lend their expertise to eliminating slavery on WestAfrican farms and help establish a system of independentmonitoring and reporting. The chocolate industry will leveragethe credibility and legitimacy conferred by non-industrypartners to reassure the world that their products are nottainted by child slavery.

152. Kurt Eichenwald. “Biotechnology Food: From the Lab to aDebacle.” The New York Times, January 25, 2001.

153. Charles Sabel, Archon Fung and Dara O'Rourke. 1999.“Ratcheting Labor Standards: Regulation for ContinuousImprovement in the Global Workplace.” World Bank GroupSocial Protection Unit Discussion Paper SP 0011. WashingtonD.C.: World Bank Group.

154. See http://www.igc.org and http://www.apc.org

155. See http://www.unglobalcompact.com

156, See “Bt Cotton: Seeds of Discontent” CorpWatch India.http://www.corpwatchindia.org

157. “Pact to end 'chocolate slavery.'” BBC News, May 2, 2002.http://news.bbc.co.uk/2/hi/africa/1963617.stm

158. See the old growth lumber campaign page on RAN's web site:http://www.ran.org

159. This lecture was given at Digital 4Sight's meeting of membersof the Leadership in the Networked Economy researchprogram in Palo Alto California on December 17, 2002.

160. For more on Lessig's ideas about new technologies and theconstraints they impose on society see his book: LawrenceLessig. 2001. The Future of Ideas: The Fate of the Commonsin a Connected World. New York: Random House. See also:http://lessig.org/

161. Manuel Castells. 1997. The Power of Identity. Oxford:Blackwell Publishers.

162. Castells., ibid.

163. Harold Innis. 1950. Empire and Communication. Toronto:University of Toronto Press.

164. It should be noted that the network society exhibitscontradictory trends. At the same time that power seems to bedecentralizing to individuals and organizations that can nowmore effective shape public discourse, power is also beingfurther concentrated by the growing gap between rich andpoor, between the employed and unemployed, between thosewith access to a clean and environment and those withoutaccess, etc. Meanwhile other forms of networks like financialmarkets and corporate conglomerations also yield considerablepower by virtue of the amount of economic resources theycontrol.

165. Harold Innis, ibid.

166. Christopher R. Kedzie. 1997. Communication and Democracy:Coincident Revolutions and the Emergent Dictator's Dilemma.Washington D.C.: RAND Corporation.

167. For an archive of such communiqués seehttp://www.ezln.org/documentos/

168. For a complete study on what RAND called the Zapaista socialnetwars, see David Ronfeldt, John Arguilla, Graham Fuller andMelissa Fuller. 1998. The Zapatista Social Netwar in Mexico.Santa Monica CA: RAND.

169. Locals and supporters also claim that carcinogens and otherpoisons continue to leach into underground drinking water, andthe Bhopal death toll continues to mount. See “Dow shows itstrue colors: $22 billion corporation sues its penniless victims.”Bhopal.net, a news, information and action site for the Bhopalcommunity and its network of supporters.http://www.bhopal.net/welcome2.htm

170. The Yes Men gained some notoriety years back by postingsatirical sites about the World Trade Organization (WTO) andthe General Agreement on Tariffs and Trade (GATT). Seehttp://www.rtmark.com for details

171. The press release can be found athttp://www.dowethics.com/r/about/corp/bhopal.htm

172. Joyce Slaton. “Bhopal Bloopers: How Dow and Burson-Marsteller made a big stink even stinkier.” San FranciscoChronicle, Thursday January 9, 2003.



173. Joyce Slaton, op cit.

174. Ann Florini speaking during a Digital 4Sight audio conference,Understanding the Transparency Phenomenon, May 31, 2002.

175. British Telecom's Better World sitehttp://www.btplc.com/Betterworld/,Shell's Tell Shell discussionfeature http://www.euapps.shell.com/TellShell/, and Novo Nordisk'ssustainability reporting site http://www.novonordisk.com/sustainability/default.asp, are examples of some of the moresophisticated uses of the Internet we have found. See alsoDigital 4Sight's report, Next Generation Reporting.

176. David Ronfeldt, John Arguilla, Graham Fuller and MelissaFuller, 1998, op cit.

177. Increasingly, the same could be said of NGOs and governmentagencies and officials. All participants, both the object of thetransparency network and the network itself need to establishcredibility and legitimacy to be able to engage effectively inpublic debates. The credibility of Greenpeace, for example, hasbeen eroded by critics who have pointed out the organization'stendency to exaggerate or misuse scientific evidence in wagingtheir campaigns.

178. Joseph Luft. 1970, 2nd Ed. Group processes; an introductionto group dynamics. Palo Alto, CA: National Press Books.

179. Adapted from Joseph Erickson, “The Johari Window: A GraphicModel Of Awareness In Interpersonal Relations” published onhttp://www.augsburg.edu/education/edc210/johari.html

180. The Group of 10 included groups such as Sierra Club, theNational Audubon Society, the National Wildlife Confederation,World Wildlife Fund, Natural Resources Defense Council, andEnvironmental Defense.

181. The professionalization or institutionalization ofenvironmentalism was a result of two trends: Growing concernabout the environment among the general public—whichprovided a huge pool of funders and hence, a revenue base forestablished environmental organizations. An increasingwillingness on the part of governments to become involved inenvironmental protection—which opened up a direct channelfor influencing public policy. Its worth noting that despite thecreation of established and “professional” environmentalgroups, grassroots and community-based environmentalorganizations continued to grow in number and play animportant role in environmental politics, but they were lessvisible and influential at the national and international level.

182. Quoted in Christopher Avery. 2000. Business and HumanRights in a Time of Change. London: Amnesty International

183. A large body of cultural theory has addressed this question.See for example, Stuart Hall. 1991. “The Local and the Global:Globalization and Ethnicity,” and “Old and New Identities, Oldand New Ethnicities.” In Culture, Globalization and the WorldSystem. Ed. Anthony King. Minneapolis: U of Minnesota Press.

184. Manuel Castells. 1997. The Power of Identity. Oxford:Blackwell Publishers.

185. Castells, ibid.

186. Noreena Hertz. 2002. The Silent Takeover: Global Capitalismand the Death of Democracy. London: Arrow Books.

187. Hertz, ibid.

188. Digital 4Sight audio conference with Susanne Stormer, May 31,2002.

189. For a more extensive case study on Novo Nordisk, see Digital4Sight's report Next Generation Reporting.

190. The fluidity of values and the contingent nature of our notionsof responsible behavior pose a challenge to efforts to codifyand institutionalize transparency-based governancemechanisms. Can companies and their stakeholders achieve areasonable level of stability and predictability in standards thatgovern behavior, while building enough flexibility andresponsiveness into the systems that govern corporatebehavior to account for the constant state of change insociety? What types of governance mechanisms support thistype of capacity? Are codes of conduct and certificationschemes sufficiently flexible and responsive to social norms?These questions will only be answered over time as newinstitutional responses to transparency continue to evolve

191. See BT's 1998 report, Changing Values and subsequent reporton the Better World site. http://www.btplc.com/Betterworld/

192. The FSC accepts no funding from industry and has developeda set of core principles guiding on-the-ground timbermanagement and harvesting operations, including restrictionson pesticide use and requirements for biodiversity protectionand erosion control. Firms seeking FSC approval mustundergo an audit by one of a few accredited “certifiers.”Arguing that the FSC guidelines are onerous and unwieldy, thetimber industries in the United States, Canada, and Europehave designed their own templates for appropriate forestrypractices like the Sustainable Forestry Initiative (SFI) program,established by the industry's American Forest and PaperAssociation in 1994. For more details see, Gary Gereffi,Ronnie Garcia-Johnson, and Erika Sasser. 2001. “The NGO-Industrial Complex.” Foreign Policy , 125, pp. 56-65.

193. Paul Hawken. “McDonalds and corporate social responsibility?”Ethical Corporation, May 5, 2002.http://www.ethicalcorp.com/content.asp?ContentID=85

194. For an example, see the report on BP's consultation on itsactivities in China,http://www.bp.com/location_rep/china/others_say/index.asp

195. Hubert St Onge, Clarica Insurance, Interview with Digital4Sight, April 9, 2002

196. Mark Wade, Shell International, Interview with Digital 4Sight,May 22, 2002

197. For example, all Nexen Oil employees are required toparticipate in an integrity-training workshop, while those inhigh-risk areas attend a separate workshop focused onimproper payments. In addition to internal communicationchannels and employee training, Shell distributes amanagement primer that provides guidance and case studiesas part of its anti-corruption training program. Last year, Shell



reported thirteen cases of bribery, and nine employeedismissals, while canceling 100 contracts with suppliers andremoving eight contractors from supplier lists.

198. The Fifty Years is Enough Campaign was formed by a coalitionof environmental and developmental NGOs In 1994. It had theexplicit purpose of challenging the Bank's policies, secrecy,and lack of accountability. See http://www.50years.org

199. Steve Denning, former Program Manager for knowledgemanagement at the World Bank, interview with Digital 4Sight,April 8, 2002.

200. Ibid

201. Gary Gereffi, Ronnie Garcia-Johnson, and Erika Sasser. 2001.“The NGO-Industrial Complex.” Foreign Policy , 125, pp. 56-65.

202. Noreena Hertz, op cit.

203. Diane Summers, “Charities accused of exaggerating advertclaims,” Financial Times, October 4, 1995.

204. Susanne Stormer speaking during a Digital 4Sight audioconference, Understanding the TransparencyPhenomenon, May 31, 2002.

205. Ann Florini, 1999, op cit.

206. Elinor Ostrom. 1990. Governing the Commons: The Evolutionof Institutions for Collective Action. Cambridge: CambridgeUniversity Press.



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