Importance of a Company Being Transparent to the Public

Transparency is important if a company uses investor money. If a company does not trade publicly, it can still benefit from being open as to its finances and its operations.

Importance

• Profitable companies benefit from transparency of their financial operations. business colleagues preparing for business meeting image by Vladimir Melnik from Fotolia.com

  Transparency is mandatory for public companies. If a company acts on this, it gains investors' and public trust. According to the article "Corporate Transparency and Resource Allocation" by Jim Naughton, thanks to transparency, funds move to the companies that do well.

Disadvatages

• Transparency may not benefit a company that is not doing well. business image by david levasseur from Fotolia.com

  If a company is not doing well, it may prefer to not divulge this to the public or its own stockholders. However, this is illegal. Immediate transparency often impedes a company from recovering from a plunge, as investors may take their cash elsewhere. Also, a company that is transparent is expected to perform regularly, and may not have a long-term outlook on development. A company that is not public may try to keep its business secrets from the competition.

Security Exchange Commission

• The Security Exchange Commission regulates public companies' transparency. stock market analysis screenshot image by .shock from Fotolia.com

  Financial transparency is being imposed by the Security Exchange Commission (SEC), the federal regulatory arm of securities. Companies have to register their securities with the SEC, and the chief officers have to provide sworn statements as to their truthfulness.