Left in the dark: Why transparency isn’t always best for institutionalizing corporate responsibility

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Transparency is usually seen as integral to corporate responsibility best practice. It allows closer scrutiny of those firms claiming CR credentials. But, if we want optimal outcomes in terms of industry wide adoption of CR practices, it may pay to tolerate a little hypocrisy at times – rather than highlighting the difference between what a firm says about CR and what it actually does.

6 min read

Patrick HaackPatrick Haack is a professor specialized in the Management of Risk, Reputation and Legitimacy. His research seeks to open the “black box” of institutional processes.

Corporate Responsibility (CR) has become an increasingly important issue for companies. In many industries, adherence to a range of social and environmental principles and practices is seen as essential. Yet, implementing and embedding CR is not easy. It takes time and resources. It is tempting to take shortcuts; to “greenwash” the organization with a thin veneer of CR respectability, while failing to adopt CR practices in a substantive way.

To avoid complacent organizations hiding beneath this veneer, and to encourage, even force, organizations to institutionalize CR, proponents of CR demand greater transparency. They argue that allowing closer scrutiny exposes behavior that is incongruent with espoused CR principles and persuades organizations to “walk the talk”. Highlighting disparities between policy and practice attracts criticism, and prompts organizations into greater accountability and improved CR performance to bolster legitimacy and avoid reputation damage. When organizations conceal their CR activities, it is difficult to evaluate their CR credentials and bring them to account.

There is some evidence, however, that a lack of transparency – or a degree of opacity – can be beneficial for the adoption of a particular organizational practice. It can increase organizational learning and improve trust and motivation. The suggestion is that freedom from scrutiny provides space for experimentation as decision makers come to terms with new CR practices, and consider how to implement those practices. Over time this freedom can lead to greater institutionalization of CR practices.

The challenge is reconciling these two perspectives. This is the issue that academics Patrick Haack, University of Lausanne Dirk Martignoni, University of Lugano, and Dennis Schoeneborn, Copenhagen Business School, investigate in their paper Corporate Responsibility as Myth and Ceremony: Bad, but not for Good.

The relationship between evaluation and adoption

Haack and his fellow authors adopt a new, dynamic perspective, examining the adoption of CR practices and their visibility to the external world, over time. The evaluation regime, the degree to which implementation of CR practices are visible to outsiders may change, because of regulatory measures or market conditions, for example. The authors use mathematical modeling to examine the outcomes from different patterns of CR adoption. In particular, they look at two evaluation regimes – transparency and opacity – and three levels of adoption – non-adoption, ceremonial (i.e. superficial) adoption, and or substantive (i.e. meaningful) adoption.

Of the four different sequences of evaluation, the authors pay particular attention to the situation where there is little visibility at first (opacity) followed by greater visibility (transparent), and the conditions under which this sequence maximizes the prospects of substantive adoption.

Their findings challenge orthodox perceptions of the best way to get organization and industries to substantively adopt CR practices. A conventional view is that a coercive approach is most effective, with an external regulatory framework allied to appropriate sanctions. While others believe the pressure of external scrutiny, along with the risk of reputational damage, and unfavorable benchmarking against market competitors, is enough to prompt action.

With both approaches, however, there is usually a call for transparency at the earliest opportunity, as a catalyst to fast and effective integration of CR principles into an organization’s structures and processes. Without such scrutiny it is thought, the initial separation between policy and practice may persist unexamined and unchallenged, hindering long term prospects of substantive adoption.

The research offers a surprising alternative. It suggests that, far from being a hindrance, a lack of transparency is an important element en route to maximizing the substantive adoption of CR practices. Given certain commonly encountered conditions, an initial period of opacity followed by a switch to a more transparent regime is the best option for maximizing adoption of CR practices. Furthermore, demanding early transparency, coupled with a tougher approach to accountability, can be counterproductive, slowing or stalling a move to CR practices.

One condition is a low likelihood that the organization will switch quickly and directly from non-adoption to substantive adoption. This is certainly true for many firms, especially large firms – multinationals, for example – where substantive adoption is costly and time-intensive. The other condition is that there is a high likelihood of an organization continuing with CR policy implementation once those polices are adopted as practices; evidence suggests that once adopted it is difficult for organizations to backtrack.

Timing transparency

Thus greenwashing need not be considered entirely in a negative light. A lack of visibility, initially, allows sufficient numbers of organizations in an industry to formulate CR policies. As the numbers of firms increase that espouse CR credentials, yet are not subject to scrutiny, external observers find it harder to differentiate between those organizations that have translated CR policy into practice and those that have not. Consequently, the compliant companies, in an effort to distinguish themselves from non-adopters, seek to establish measures that enforce industry wide transparency. In turn the switch to a more transparent environment encourages an industry-wide “ratcheting up effect” in CR performance.

In the long run, a lack of visibility on CR adoption, followed by greater transparency, leads to more substantive adoption of CR practices overall, than an approach where firms are transparent from the outset. This counter-intuitive finding has a number of important implications.

For a start, it suggests that it might benefit CR activists to be circumspect in their criticism of organizations, about greenwashing for example, in the early stages of developing CR polices, especially where substantive adoption rates are low across the industry, in that particular domain. Naming and shaming and demanding greater transparency may be counterproductive, in the long term.

Equally, for organizations that wish to take a lead on CR practices, there are challenges around the degree to which they should highlight the CR failures of competitors and the timing of any call for greater transparency. Indeed, there may be some conflict between the course of action that is best for competitive advantage, and that which is best for global sustainability in the long term.

And these ideas have implications beyond CR too. They suggest that the adoption of promising practices and desirable behaviors might best be achieved not by a binary self-regulatory or regulatory approach, but by a combination of both. That the opacity-transparency approach may be the best route to maximizing substantive adoption of desired practices – even when many organizations have little intention of adopting the policies in any meaningful way.

Read the original paper:

The paper has won the 2015 Best Paper Award of the Social Issues in Management Division of the Academy of Management. While the paper is currently under review, a shorter version can be accessed here: http://proceedings.aom.org/content/2015/1/11508.short

Haack, P. & Schoeneborn D. (2015). Exploring the Institutionalization of Corporate Responsibility: A Formal Modeling Approach. Academy of Management Proceedings, doi: 10.5465/AMBPP.2015.141

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