The Transparency Trap: Non‐Financial Disclosure and the Responsibility of Business to Respect Human Rights

• Date: 01 March 2019
• Published date: 01 March 2019
• Author: David Hess
• DOI: http://doi.org/10.1111/ablj.12134

American Business Law Journal

Volume 56, Issue 1, 5–53, Spring 2019

The Transparency Trap:

Non-Financial Disclosure

and the Responsibility of Business

to Respect Human Rights

David Hess*

This article examines the potential for transparency programs to improve cor-

porations’ human rights performance. The primary focus is on “general” trans-

parency programs such as the inclusion of human rights issues in sustainability

reports. Regulators increasingly rely on such programs, one of which is the EU

Directive on the Disclosure of Non-financial Information, which many com-

mentators view as a model for legislation in other countries and for a business

and human rights treaty. This article identifies several problems with this

approach. The human rights metrics used in current sustainability reporting

standards often lack validity or are based upon data that is most easily col-

lected, rather than most important. Moreover, the empirical evidence on sus-

tainability reporting shows continued problems of selective disclosure,

impression management, incomparable disclosures, and the use of disclosure as

an end in itself (as opposed to a process that leads to organizational change).

To move forward, regulators should shift focus to a model grounded in regula-

tory pluralism. Under this approach, regulators would combine a selection of

targeted transparency mechanisms to create a more complete regulatory system

that corrects for one disclosure mechanism’s weaknesses by including others that

have complementary strengths.

*Associate Professor of Business Law and Business Ethics, Ross School of Business at the Uni-

versity of Michigan. B.A., Grinnell College; J.D.,UniversityofIowa;M.A.,Ph.D.,TheWharton

School of the University of Pennsylvania. The author benefited from presenting this article and

receiving feedback from participants at the 2017 Business and Human Rights Scholars Confer-

ence, the 2018 Big Ten and Friends Business Law Research Seminar, and the 2018 symposium

of University of Connecticut’s Business and Human Rights Initiative.

©2019 The Author

American Business Law Journal ©2019 Academy of Legal Studies in Business

5

INTRODUCTION

The regulation of business through mandatory public disclosures is ubiqui-

tous. For instance, the primary tool of the Securities and Exchange Com-

mission (SEC) is disclosure, not substantive regulation of a company’s

governance.

1

Armed with information on the company, investors are

expected to protect themselves against fraud and mismanagement, which is

expected, in turn, to lead to improved corporate behavior.

2

Similarly, food

and beverage companies must place nutrition labels on the products they

sell.

3

The government requires this disclosure to allow consumers to

improve their well-being and encourage corporations to produce healthier

foods.

4

Other areas of business regulation by disclosure include vehicles’

risk of rollovers, exposure to chemicals in the workplace, and the release of

toxic chemicals into the environment.

5

These few examples demonstrate the wide range of uses for trans-

parency policies. Surprisingly, however, governments continue

to enact mandated disclosure regulation even though the effective-

ness of such policies is questionable. Professors Ben-Shahar and

Schneider—commenting on required disclosures for lenders, doctors,

police, and others—bluntly state that “‘[m]andated disclosure’ may be

1

Troy A. Paredes, Blinded by the Light: Information Overload and Its Consequences for Securities

Regulation,81W

ASH. U. L.Q. 417, 427 (2003).

2

Id. at 418.

3

Diana R. H. Winters, The Magical Thinking of Food Labeling: The NLEA as a Failed Statute,

89 TUL.L.REV. 815, 816–17 (2015).

4

Winters argues, however, that nutrition labels do not work. Id. at 819. As a simple illus-

tration of her point, Winters states the simple fact that “[h]ealth outcomes directly

related to nutrition have worsened dramatically since [the enactment of the Nutrition

Labeling and Education Act (NLEA)].” Id. at 818. Others argue that nutrition labels are

only moderately successful at achieving their goals. See Andrea Freeman, Transparency for

Food Consumers: Nutrition Labeling and Food Oppression,41A

M.J.L.&MED.315,318–19

(2015) (reviewing the evidence on nutrition labels and concluding that labeling “only

facilitates better choices for middle and high-income consumers, the Whole Foods

shoppers who already engage in healthy eating habits”); ARCHON FUNG ET AL., FULL

DISCLOSURE:THE PERILS AND PROMISE OF TRANSPARENCY 84–85 (2007) (reviewing the

empirical evidence and company responses and concluding that the program was “mod-

erately effective”).

5

FUNG ET AL., supra note 4, at 186–88, 194–96.

6 Vol. 56 / American Business Law Journal

the most common and least successful regulatory technique in Ameri-

can Law.”

6

Governments continue to rely heavily on transparency policies for sev-

eral reasons, despite these doubts. First, many policy makers hold the

basic assumption that information will lead to better decision making,

and therefore even more information must lead to even better decision

making.

7

This belief is reflected in commentators’ frequent use of Justice

Louis Brandeis’s quote, “Sunlight is said to be the best of disinfectants.”

8

Second, the costs of transparency are typically borne by the disclosers

and users of the information, not the government.

9

Third, disclosure

laws are typically appealing to all legislators regardless of where they

may fall on the political spectrum.

10

Fourth, passing a transparency pol-

icy gives legislatures a sense of satisfaction that they are taking action on

the identified problem.

11

Many view mandated disclosure as “a kind of

magical minimalism that delivers significant rewards at little cost.”

12

Moreover, political feasibility is not the only reason legislatures pass

transparency laws. Depending on the policy issue, traditional forms of

government regulation may not be suited to address a particular prob-

lem.

13

For especially complex problems, other stakeholders beyond the

6

OMRI BEN-SHAHAR &CARL E. SCHNEIDER,MORE THAN YOU WANTED TO KNOW:THE FAILURE OF

MANDATED DISCLOSURE 3 (2014).

7

Id. at 138–39. Ben-Shahar and Schneider argue that if a transparency policy fails, an initial

reaction by policy makers is likely to be that it failed because not enough information was

disclosed and further, or better timed, disclosure is needed. Id. at 140.

8

The author’s recent search of that quote in LexisAdvance returned more than 350 results

in the “secondary materials” category in just the last ten years. Searching for paraphrased

versions of the quote returned numerous additional citations.

9

BEN-SHAHAR &SCHNEIDER,supra note 6, at 139, 145–46. It is not uncommon for the alterna-

tives to disclosure to require significant government resources dedicated to an enforcement

agency, for example, and still have the risk of ineffectiveness. Id. at 145.

10

Id. at 139, 146–48. Likewise, in many situations, businesses would likely prefer to face

disclosure requirements rather than more intrusive regulation, and would have less opposi-

tion to such laws. Id. at 149.

11

Id. at 141.

12

Cynthia Estlund, Just the Facts: The Case for Workplace Transparency,63STAN.L.REV.

351, 354 (2011).

13

FUNG ET AL., supra note 4, at 14.

2019 / The Transparency Trap 7