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20 December 2014

Why is transparency important?

Transparency is a term frequently bandied about in the boardroom but is it really important for start-up businesses to embrace the concept from the outset? Business is all about trust – trust with investors, employees and clients/customers. Transparency is a key factor to building trust as, in a business context, it refers to financial activities being carried out openly, so that people can be confident that they are honest and correct.

For start-ups, the need to build trust is amplified. For example, a start-up company’s appetite for capital increases the more successful it gets; in order to fund its growth plans, relies on investors believing in its story and trusting its management team. This means that there needs to be total transparency in the workings and finances of a business. Investors must be provided with regular financial updates and have access to the company data they require to continue to make informed investment decisions. By running the business transparently, there is also the additional potential benefit that, by keeping investors informed about the business’ progress or needs, investors may be encouraged to invest additional sums.

For most businesses, particularly those in the start-up phase, people are the key assets and the need to attract and retain the very best human capital possible, is paramount. Therefore, a culture of transparency between the managers of a business and its employees is also an essential ingredient for success. People are loyal to employers who share their values, who set out the vision clearly and who are open in sharing what success looks like, the KPIs for the business and how well the business is performing.

Transparency in procurement is also a key area where profitability can be greatly increased. By ensuring that no one, other than the company, is benefiting from arrangements with consultants and suppliers, all employees will be aware that total visibility on all contracts is required.

For customers and clients, promoting awareness of a company’s commitment to best practice, transparency in the supply chain, views on equal pay etc are important factors when deciding whether or not to do business with an organization. Transparency means that an organisation can also demonstrate that it has thought through issues and that there are no ‘skeletons in the closet’ that might be exposed in the future which could impact on the reputations of those associated with that organisation.

The hack, in November 2014, of Sony Pictures Entertainment included a document containing the salary details of the company’s leadership team. The revelations that followed revealed a lack of transparency in both wages and a serious gender pay gap in the company – 17 of those exposed earned over $1 million per annum and only one of those executives was a woman.

Another group where transparency is a key factor driving behaviour is consumers. Brand loyalty is key for a consumer company to succeed and start-ups need to embrace it. There has never been more choice available to the consumer; they need and want to be informed about the company and its product/s. Using the food industry as an example, consumers expect to know exactly what ingredients go into their food, their provenance, whether they are organic etc. Innova Market Insights identified the top food trend for 2015 as ‘From Clean to Clear Label’, signalling more transparency in labelling, indicating that transparency is high up on the consumer’s agenda.

There are always some organisations that take it to extremes. Buffer, a social media company, embraced the concept of radical transparency. It provided all employees with information on every team member’s salary and the formula used to calculate the salary and equity. In case this could be considered in any way opaque, it added a further level of transparency by issuing every employee with a Jawbone UP wristband to log their sleep patterns and exercise levels.

The Buffer approach is almost certainly resistible for most, but there are practical ways that businesses can implement a company wide commitment to transparency.

- Explain the concept of transparency and the benefits it delivers.
– Be transparent about your company’s goals and update your team regularly on how you are performing against those targets to drive productivity.
– Leave no grey areas – specify where you require transparency.
– Communicate that the need for transparency applies to every person across the organization.

Respect comes from being honest and genuine. The overall benefit to all businesses operating in a transparent manner is that it helps build trust between all stakeholders that in turn will have a direct correlation with the success of the business.