Our financial system is beset by a whole host of chronic illnesses, chief among them: gluttony, amorality, and opacity. Band-aids won’t mend it; the patient requires immediate surgery. Unfortunately, we can’t apply the scalpel until we X-ray these ailing financial institutions and deeply understand the source of their sickness. In other words, we must apply one of corporate responsibility’s core principles: radical transparency.
Today’s New York Times reports that New York’s attorney general, Andrew Cuomo, has vowed to publicly identify the executives who received large bonuses at Merrill Lynch and AIG, even as their companies were bleeding billions. This is a welcome first step, but it doesn’t go far enough. What’s needed is wide-scale, all-encompassing transparency, which Daniel Roth proposes in a recent Wired piece.
Here’s the core problem: Many of the business world’s behemoths are not only too big to fail, they’re also too big to regulate. Roth reports that the a 2002 Senate study “found that the SEC had managed to fully review just 16 percent of the nearly 15,000 annual reports that companies submitted in the previous fiscal year; the recently disgraced Enron hadn’t been reviewed in a decade.”
A comparatively small group of overseers can’t possibly keep pace with our sprawling financial system. The solution, Roth argues, is to use the Internet to X-ray financial firms’ activities and thereby enable an army of individual investors to “act as citizen regulators.” The result, he concludes, “would be a wave of decentralized innovation that can keep pace with Wall Street and allow the market to regulate itself — naturally punishing companies and investments that don’t measure up — more efficiently than the regulators ever could.”
Yes, most multinational companies’ balance sheets are wickedly complex. But they are not beyond the understanding of motivated investors, especially if new regulations forced information to be disclosed in much easier to analyze formats. Just as Google has placed billions of documents at our fingertips, the SEC should order public companies to release all of their financial dealings in downloadable spreadsheets. The road to financial recovery will require a revolution in radical transparency. It’s time to free the data.