T R A N S PA R E N C Y

DISCLOSURE
A N D R E G U L AT I O N
AGENDA ❑ DEFINITION AND CONCEPTUAL
FRAMEWORK
❑ THEORICAL UNDERPINNINGS OF
TRANSPARENCY AND DISCLOSURE
❑ CORPORATE PYRAMIDAL STRUCTURES
❑ HOSTILE TAKEOVERS AND MARKET FOR
CORPORATE CONTROL
❑ FAILURES IN THE MARKET FOR
CORPORATE CONTROL
❑ ECONOMICS OF REGULATION
❑ ROLE OF FINANCIAL & REGULATORY
INSTITUTIONS
Definition and Conceptual Framework
 TRANSPARENCY, REFERS TO THE QUALITY
OF BEING EASILY SEEN THROUGH OR
UNDERSTOOD.

IN THE CONTEXT OF GOVERNANCE AND

BUSINESS, IT IMPLIES THE ACCESSIBILITY
AND COMPREHENSIBILITY OF
INFORMATION.

TRANSPARENT ENTITIES PROVIDE CLEAR

AND UNAMBIGUOUS DATA, ALLOWING
STAKEHOLDERS TO MAKE INFORMED
DECISIONS.

THIS EXTENDS TO FINANCIAL REPORTS,

TRANSPARENCY
ORGANIZATIONAL STRUCTURES, AND
DECISION-MAKING PROCESSES.
 • In the early stages of capitalism, there was a limited notion of transparency. Many
Early Mercantile Era (17th - 18th Century): businesses were small-scale and often family-owned. Transparency was primarily seen in
terms of fair trade practices and accountability to customers.

• With the industrial revolution, larger corporations emerged, often characterized by complex
Industrial Revolution and Emergence of
ownership structures and a separation between ownership and management. This led to an
Evolution of Transparency

Corporations (19th Century): increasing demand for transparency from shareholders and regulators.

• The late 19th and early 20th centuries saw the introduction of corporate laws and
Late 19th - Early 20th Century: Regulatory
regulations, particularly in the United States and Europe. These regulations aimed to
Responses: address issues of disclosure, accountability, and protection of investors' interests.

• After World War II, there was a global shift towards strengthening corporate governance
Post-World War II and Rise of Corporate
and accountability. Principles of transparency were embedded in corporate governance
Governance: codes, emphasizing the responsibility of boards of directors to shareholders.
• The 1970s and onwards saw increased shareholder activism and demands for greater
1970s - 1990s: Shareholder Activism and transparency. This led to the development of standardized financial reporting practices,
Reporting Standards: such as Generally Accepted Accounting Principles (GAAP) and International Financial
Reporting Standards (IFRS).
• High-profile corporate scandals (e.g., Enron, WorldCom) in the early 2000s prompted
Late 20th Century - Early 21st Century: significant regulatory reforms. The Sarbanes-Oxley Act of 2002 in the U.S. and similar
Corporate Scandals and Regulatory Reforms: measures globally aimed to enhance transparency, financial reporting, and corporate
governance.
• In recent decades, there has been a growing emphasis on non-financial reporting,
21st Century: Sustainability Reporting and particularly in the areas of environmental, social, and governance (ESG) factors. This reflects
ESG: a broader understanding of transparency that encompasses a company's impact on society
and the environment.
• The advent of the internet and digital technologies has revolutionized how companies
Digital Age and Technological Innovation: communicate with stakeholders. Corporate websites, social media, and digital reporting
platforms have become important tools for transparency and communication.
 DISCLOSURE IS THE ACT OF REVEALING
SPECIFIC INFORMATION TO STAKEHOLDERS.

THIS ENCOMPASSES A WIDE ARRAY OF DATA,

RANGING FROM FINANCIAL STATEMENTS TO
COMPLIANCE WITH ENVIRONMENTAL
REGULATIONS.

EFFECTIVE DISCLOSURE PRACTICES ARE NOT

MERELY A LEGAL OBLIGATION BUT SERVE AS A
MEANS OF BUILDING TRUST AND
ACCOUNTABILITY. THEY PROVIDE A
COMPREHENSIVE VIEW OF AN ORGANIZATION'S
DISCLOSURE OPERATIONS.
Evolution of disclosure

Early Forms of Disclosure (Ancient • Early forms of disclosure were rooted in ancient legal systems, where parties were expected to reveal
relevant information in legal proceedings for fairness and justice. This concept was further developed in
to Medieval Times): medieval Europe.

• The need for transparency and disclosure became evident with the growth of complex financial markets.
Emergence of Modern Securities This led to the establishment of securities regulations like the U.S. Securities Act of 1933 and the
Regulation (Early 20th Century): Securities Exchange Act of 1934, which aimed to protect investors by ensuring that they had access to
accurate and reliable information about securities.

Financial Reporting Standards and • The mid-20th century saw the establishment of accounting standards like Generally Accepted
Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). These standards
Accounting Practices (Mid-20th played a crucial role in standardizing financial reporting practices and ensuring transparency in corporate
Century): financial disclosures.

Non-Financial Disclosure and • In the latter half of the 20th century and into the 21st century, there was a growing emphasis on non-
Sustainability Reporting (Late 20th financial disclosure, particularly related to environmental, social, and governance (ESG) factors. This
expanded the concept of disclosure beyond purely financial information.
Century - Early 21st Century):
 REGULATION REFERS TO THE ESTABLISHMENT
AND ENFORCEMENT OF RULES AND STANDARDS
WITHIN AN INDUSTRY OR SECTOR.

REGULATION IS A PART OF INSTITUTION &

INVOLVES THE OVERSIGHT AND CONTROL
MECHANISMS THAT GOVERN TRANSPARENCY
AND DISCLOSURE PRACTICES.

REGULATORY FRAMEWORKS ARE PUT IN PLACE

TO ENSURE THAT ORGANIZATIONS ADHERE TO
PREDEFINED NORMS, THEREBY MAINTAINING
FAIRNESS, INTEGRITY, AND STABILITY IN THE
REGULATION
BUSINESS ENVIRONMENT.
Theoretical Underpinnings of
Disclosure & Transparency
There are several academic theories that
address transparency and disclosure in
various capacities. The notable ones are:
a. Agency Theory Stakeholder Theory
b. Stakeholder Theory
c. Drucker’s Management philosophy and
his notion on Disclosure & Transparency
d. Information Asymmetry Theory
e. Resource Dependency Theory
Conceptual framework of Agency Theory
• 1. Agency Theory and Disclosure:
• Mitigating Agency Problems:
• Jensen's agency theory focuses on the relationship between
principals (shareholders) and agents (managers) in a corporation.
He argues that there may be conflicts of interest between these
parties. Disclosure plays a crucial role in mitigating agency
problems by providing shareholders with information about
managerial decisions and performance, reducing information
asymmetry.
• Alignment of Interests:
• Jensen contends that clear and timely disclosure helps align the
interests of managers with those of shareholders. When managers
provide accurate and relevant information, it reduces the potential
for opportunistic behavior and ensures that both parties share
common goals.
Conceptual framework of Agency Theory
• 2. Incentives, Contracts, and Transparency:
• Incentive Alignment:
• Jensen emphasizes that well-designed compensation contracts can align the
interests of managers and shareholders. Transparency in disclosing the
details of these contracts, including performance metrics and targets, is
essential for ensuring that incentives are properly aligned.
• Information in Contracting:
• Jensen's work underscores the importance of information in contracting.
Transparent disclosure enables parties to negotiate and structure contracts
effectively. It allows for the inclusion of performance-based clauses that hold
managers accountable for their actions.
Conceptual framework of Agency Theory
• 3. Market Efficiency and Transparency:
• Efficient Capital Markets:
• Jensen's research also contributed to the understanding of efficient capital markets.
He argued that in well-functioning markets, information is rapidly incorporated into
stock prices. Therefore, timely and accurate disclosure is crucial for market efficiency
and for ensuring that stock prices reflect all available information.
• Market Discipline and Transparency:
• Jensen believed that market discipline, driven by well-informed investors, is a
powerful mechanism for corporate governance. Transparent disclosure empowers
investors to make informed decisions and exert market discipline by buying or selling
shares based on their assessment of a company's performance.
Conceptual framework of Agency Theory
• 4. Governance Mechanisms and Transparency:
• Role of Transparency in Corporate Governance:
• Jensen's work laid the foundation for understanding the role of transparency
in corporate governance. He argued that transparency is a critical governance
mechanism that enables effective monitoring of managerial actions and
ensures that managers act in the best interests of shareholders.
• Disclosure and Shareholder Activism:
• Jensen's research indirectly supports the idea that transparent disclosure is
crucial for shareholder activism. It provides shareholders with the
information they need to assess a company's performance and take action
when they believe that management is not acting in their best interests.
Stakeholder
Theory,
Transparency,
and Disclosure
Evolution of Stakeholder theory
1. Early Roots (1920s - 1950s):
1. The concept of stakeholders can be traced back to the early 20th century. Early discussions focused on how businesses should consider the
interests of various groups, including employees, customers, and communities.
2. In the 1930s and 1940s, management scholars like Chester Barnard and Mary Parker Follett highlighted the importance of considering the
needs of all stakeholders in organizational decision-making.
2. 1960s - 1970s: Rise of Modern Stakeholder Theory:
1. The term "stakeholder" gained prominence in the late 1960s and early 1970s. The Stanford Research Institute (SRI) is often credited with
popularizing the term in a business context.
2. R. Edward Freeman is considered a pioneer in modern Stakeholder Theory. In his seminal book "Strategic Management: A Stakeholder
Approach" (1984), he formalized the theory and argued that organizations should consider the interests of all stakeholders, not just
shareholders.
3. 1980s - 1990s: Academic Development and Expansion:
1. Throughout the 1980s and 1990s, Stakeholder Theory gained traction in academic circles. Scholars like Donaldson and Preston expanded on
Freeman's work, providing additional insights and perspectives.
2. John Elkington introduced the concept of the "Triple Bottom Line" in the 1990s, emphasizing that businesses should be accountable for their
economic, social, and environmental impacts.
4. 2000s - 2010s: Integration with Corporate Social Responsibility (CSR):
1. Stakeholder Theory became closely intertwined with the field of Corporate Social Responsibility (CSR). Many organizations started to adopt
stakeholder-oriented approaches as part of their CSR initiatives.
2. The Global Reporting Initiative (GRI) introduced comprehensive sustainability reporting guidelines, further emphasizing the importance of
transparency and stakeholder engagement.
Stakeholder Theory and transparency and
disclosure
Transparency:
• Transparency is the bedrock upon which the edifice of Stakeholder Theory
is constructed. It embodies the principle of openness and accessibility of
information. Transparent organizations eschew secrecy, ensuring that their
operations, decision-making processes, and performance metrics are clear
and comprehensible to all stakeholders.
• Through transparency, organizations send a powerful message - that they
are committed to conducting business with integrity, and that they
acknowledge the impact their actions have on the broader community.
Transparent operations build confidence, engender trust, and ultimately
fortify the bonds between organizations and their stakeholders.
Stakeholder Theory and transparency and
disclosure
• Disclosure:
• Disclosure is the actionable manifestation of transparency. It is the
deliberate act of providing specific, pertinent information to stakeholders.
This information may encompass financial statements, sustainability
reports, governance practices, and more. Effective disclosure is
characterized by accuracy, completeness, and timeliness.
• By disclosing critical information, organizations empower stakeholders to
make informed decisions. Employees gain a clearer understanding of their
company's objectives, customers develop confidence in the products or
services they engage with, and investors can accurately assess risks and
opportunities. Disclosure is not a mere legal obligation; it is a moral
imperative, affirming the organization's commitment to open
communication.
The original stakeholder model (Freeman, 1984)
Peter Drucker on disclosure and transparency
1. Information as a Resource: Drucker believed that information is a vital resource for any organization. He argued that it should be
treated as a valuable asset, just like capital, human resources, or physical assets. Therefore, it is crucial for organizations to gather,
analyze, and disseminate information effectively.
2. The Need for Transparency: Drucker emphasized that transparency is essential for building trust within an organization and with
external stakeholders, including customers, investors, and the public. He argued that open communication and transparency create an
environment of honesty and accountability.
3. Balancing Privacy and Transparency: While Drucker advocated for transparency, he also acknowledged the need to balance it with
the protection of sensitive information. He believed that there should be a judicious approach to disclosure, ensuring that critical
business information is shared appropriately while safeguarding confidential data.
4. Accountability and Responsibility: Drucker maintained that leaders and managers have a responsibility to provide accurate and
timely information to all relevant parties. He believed that this accountability fosters a culture of integrity and ethical conduct within
an organization.
5. Stakeholder Engagement: Drucker emphasized the importance of understanding and meeting the needs of various stakeholders. He
argued that transparency helps in building strong relationships with stakeholders by keeping them informed about the organization's
goals, performance, and challenges.
6. Disclosure in Governance: Drucker's views on disclosure were particularly pertinent in the context of corporate governance. He
advocated for transparent reporting and disclosures in financial statements, as well as in broader organizational performance metrics.
He believed that this transparency helps in preventing fraud, ensuring compliance, and maintaining investor confidence.
7. Learning from Feedback: Drucker believed that transparency encourages feedback and constructive criticism. By openly sharing
information, organizations can learn from their mistakes, make necessary improvements, and adapt to changing circumstances more
effectively.
8. Long-Term Sustainability: Drucker viewed transparency as a critical factor in achieving long-term organizational sustainability. He
argued that organizations that are transparent and open in their operations are more likely to build enduring relationships with
stakeholders and adapt successfully to evolving market conditions.
Corporate Pyramidal
Structures:

• A corporate pyramidal structure is an

organizational arrangement
characterized by a hierarchical
ownership pattern, where a parent
company controls one or more
subsidiary firms. This creates a multi-
layered ownership hierarchy, with the
parent company at the top, exerting
control over the subsidiaries below. This
structure is often employed in large,
diversified conglomerates.
 Early 20th Century

The concept of corporate pyramidal structures gained

prominence in the early 20th century, particularly in the
United States. This period saw the rise of industrial
conglomerates like the Rockefellers' Standard Oil and J.P.
Morgan's United States Steel Corporation.

Formation of Holding Companies: During this era,

industrialists and financiers formed holding companies to
consolidate control over multiple operating companies.
The holding company, typically situated at the apex of the
pyramid, held majority ownership stakes in various
subsidiaries operating in diverse industries.
Post WW2 Expansion:
Regulation and Antitrust
Concerns
• In the post-World War II period, there was a resurgence of interest in corporate
pyramidal structures. This was partly driven by the need for more sophisticated and
flexible organizational forms to manage large and diversified business operations.

• The rapid expansion of corporate pyramidal structures raised

concerns about monopolistic practices and anti-competitive
behavior. This led to the passage of antitrust legislation,
including the Sherman Antitrust Act of 1890, which sought to
curb the power of large conglomerates
Global Spread, Controversies
and Governance Concerns
• Corporate pyramidal structures became a global
phenomenon, with companies in Europe and Asia adopting
similar organizational models. For example, in Japan, the
Keiretsu system emerged, characterized by a network of
affiliated companies with cross-shareholdings. Over time,
corporate pyramidal structures became associated with
governance issues, particularly regarding transparency,
accountability, and conflicts of interest. Shareholders in
subsidiary companies sometimes had limited influence over
decisions made at the top of the pyramid.
Conceptual framework of Corporate
Pyramidal Structures
• Parent Company
• Subsidiary Companies
• Ownership and Control Relationships
• Diversification of Business Interests
• Risk Management
• Complexity and Information Asymmetry
• Potential for Conflicts of Interest
• Financial Reporting and Transparency
Oliver Williamson & Ronald Coase on
Corporate Pyramidal Structures
• Minimization of Transaction Costs
• Reduction of Uncertainty and Opportunism
• Asset Specificity and Adaptability & Governance Mechanisms
• Boundary of the Firm
• Economies of Scale and Scope
Market for Corporate Control
Markets discipline producers by rewarding them with profits when they
create value for consumers and punishing them with losses when they fail to
create enough value for consumers. The disciplinarians are the consumers.
The market for corporate control is no different in principle. It disciplines the
managers of corporations with publicly traded stock to act in the best
interests of shareholders. Here the disciplinarians are shareholders.

The market for corporate control is seen as an essential component of an

efficient capital market. It acts as a disciplinary mechanism, holding
underperforming firms and their management accountable. The threat of a
takeover incentivizes managers to maximize shareholder value.
1.Takeovers and Mergers: One of the primary activities within this
market involves mergers and acquisitions (M&A). This can take the
form of friendly negotiations or hostile takeovers, where an acquiring
firm bypasses the target's management to gain control.
2.Shareholder Value Maximization: This market is closely tied to the
principle of shareholder wealth maximization. Acquirers often seek to
improve the value of the target firm by restructuring, implementing
new strategies, or capitalizing on synergies.
Importance of the market for corporate
control
Economics of the public corporation. Public companies can be more
efficient at deploying capital than can privately companies, for
several reasons.
1. Public corporations permit accumulations of a large amount of
capital without government involvement.
2. The existence of the public corporation permits the separation of
two different economic functions: INVESTMENT and management.
3. The public corporation permits more efficient risk taking in the
economy
Agency Cost
The costs that result from separating the investing and
management functions are called “agency costs” because the
managers and directors of public companies are the agents of the
investor-shareholders. Because these agents are deploying the
shareholders’ money rather than their own when they manage the
corporation, they can benefit themselves by acting in their own
interests rather than in the interests of the shareholders.

• Problem of Rational Ignorance & Free Rider Problem

Failures in the Market for Corporate Control
Most of the existing internal control mechanisms that are used to ensure
that managers act in the best interest of the shareholders, that is that they
manage their company efficiently and maximize its value, are not effective.
Apart from the stock market, there is no objective standard of managerial
efficiency.

“Most control devices lack the necessary information to judge whether a

manager is doing his job in the best manner possible.” -Shleifer and Vishny
(1988, p. 10)
,

Friendly Takeover vs Hostile Takeover

The market for corporate control need not always involve hostile
takeovers, although their possibility is critical to a properly
functioning market. Firms in financial distress and firms whose
managers’ interests are closely aligned with shareholders’
interests often will welcome friendly acquisitions. These
acquisitions generally take the form of mergers in which the board
of directors of one company agrees and recommends that its
shareholders vote in favor of exchanging their shares to an
acquirer, either for cash or for stock in the acquirer.

“The market for corporate control: The scientific evidence” by Michael

Jansen & Richard Ruback
Hostile Takeovers
A hostile takeover is a scenario in which one company (the acquiring
company) attempts to acquire another company (the target company)
against the wishes of the target company's management and board of
directors. This is often achieved by directly approaching the shareholders of
the target company with a tender offer or through other aggressive means.
Motivations for Hostile Takeovers:
• Perceived Undervaluation
• Synergies
• Market Expansion
• Strategic Advantage
Do hostile takeovers create new wealth ? Or do they
simply move wealth from Group A to Group B;
enriching some at the expense of others?
Based on her argument on
• Wealth Redistribution
• Efficiency and Value Creation
• Defense Tactics
• Free cashflow effect
• Market Response and Shareholder Value
• Anti Takeover amendments
Role of Financial Institution
❑Financial Institutions are the bedrock of modern Economics
❑Intermediaries of Capital and Information
❑ Capital Allocation: Financial institutions act as intermediaries between savers
and borrowers, allocating capital to where it is most needed. This function is
essential for economic growth and development.

❑ Information Dissemination: Financial institutions play a crucial role in

disseminating information about investment opportunities, risks, and market
conditions. They provide the data necessary for informed decision-making.
Financial Institutions as Regulatory Subjects
• Compliance and Oversight: Financial institutions themselves are
subject to a web of regulatory measures. These regulations are
designed to ensure stability, solvency, and fair practices within the
financial sector.
Prudential Regulation: Prudential regulations, such as capital adequacy
requirements, are imposed on financial institutions to safeguard
against systemic risks and protect the interests of depositors and
investors.
Financial Institutions as Agents of Regulation

• Enforcement and Oversight

Financial institutions often act as enforcers of regulatory measures.
They play a key role in monitoring compliance and reporting any
irregularities to regulatory authorities.
• Market Surveillance
Through market surveillance, financial institutions contribute to the
detection of market abuses, such as insider trading or market
manipulation, which are detrimental to transparency and fairness
Role of Regulatory Institutions
• Enforcing Transparency and Disclosure Standards
• A. Disclosure Requirements: Regulatory institutions set mandatory
standards for businesses to disclose relevant information. This
includes financial reports, operational data, and governance
structures.
• B. Preventing Asymmetric Information: By ensuring that companies
provide accurate and complete information to the public, regulatory
institutions level the playing field, preventing situations of
information asymmetry which can lead to market distortions.
Impact on Economic Activities
• A. Market Confidence and Stability
• Stringent disclosure standards bolster investor confidence. This, in
turn, promotes stability in financial markets and stimulates
investment.
• B. Risk Mitigation
• Regulatory oversight helps identify and mitigate risks. This includes
risks associated with fraud, market manipulation, and inadequate
corporate governance practices.
• IV. Regulatory Institutions and Primitive Accumulation
• A. Defining Primitive Accumulation
• Primitive accumulation refers to the initial process of amassing
capital, often characterized by exploitative practices. Regulatory
institutions play a critical role in shaping how this process unfolds.
• B. Preventing Unethical Practices
• Regulatory institutions set the boundaries for economic activities,
preventing unscrupulous practices that could lead to unjust
accumulation of wealth or the exploitation of vulnerable groups.
Rent-Seeking, Crony Capitalism, and
Primitive Accumulation
• A. Rent-Seeking
• Rent-seeking refers to the pursuit of wealth through the manipulation or capture
of economic rents, often through non-productive means. These rents are the
excess returns earned above what is necessary to keep a resource in its current
use.
• B. Crony Capitalism
• Crony capitalism occurs when businesses and individuals collude with
government officials to secure favorable treatment, often in the form of
subsidies, contracts, or regulatory advantages. It undermines fair competition and
can lead to a distortion of economic outcomes.
• C. Primitive Accumulation
• Primitive accumulation is a historical process where wealth is initially
accumulated through practices like land enclosures, expropriation, or exploitation
of labor, often with coercive or exploitative means.
Rent-Seeking: Impact on Regulation and
Economic Activities
• A. Regulation and Rent-Seeking
• Rent-seekers often target regulatory processes to gain advantages.
They may lobby for favorable policies, seek loopholes, or engage in
regulatory capture to secure economic rents.
• B. Example: Patent Trolling
• In the technology sector, some entities engage in patent trolling,
where they acquire patents not for the purpose of innovation, but to
extract rents from other firms through litigation.
Crony Capitalism: Implications for
Regulation and Economic Activities
• A. Regulatory Capture
• Crony capitalism can lead to regulatory capture, where industries or
businesses exert undue influence over regulatory agencies, skewing
policies in their favor.
• B. Revolving Door Phenomenon: The revolving door between
government and industry can facilitate crony capitalism.
Former/current government officials or politicians may take positions
in industries they once regulated, blurring the lines between public
service and private interests.
Primitive Accumulation: Historical Context
and Modern Relevance
• A. Historical Context
• Primitive accumulation historically involved the expropriation of land
and resources, often with coercive means, as seen during the
enclosures in England.
• B. Modern Relevance
• In contemporary times, primitive accumulation can manifest in
practices like land grabs in developing countries, where powerful
entities acquire land from vulnerable communities.
Interplay of Concepts: Rent-Seeking, Crony
Capitalism, and Primitive Accumulation
• Overlap and Interconnection
• These concepts are not isolated; they can overlap and reinforce one
another. For example, crony capitalism may facilitate rent-seeking
behavior.
• B. Impact on Economic Inequality
• The interplay of these concepts can exacerbate economic inequality
by favoring a select few at the expense of broader societal interests.
Conclusion
the intricate relationship between transparency, disclosure, regulation,
and economic dynamics is not a theoretical construct; it's the
heartbeat of our economic ecosystem. Embracing these principles in
our actions will not only lead to more prosperous businesses but to a
more resilient and equitable economic landscape for all.