Disclosure of Beneficial Ownership after the Panama Papers

The recent publication of the ‘Panama Papers’ has focused public attention on how elaborate corporate structures and offshore tax havens can be used by politicians, celebrities and other elites to conceal their beneficial ownership of companies, and obscure their assets. Conventional thinking suggests that trust in corporations and markets depend, in large part, on the existence of an accurate disclosure regime that provides transparency in the beneficial ownership and control structures of companies. Moreover, investor confidence in financial markets is dependent on the accurate and correct disclosure of the ultimate beneficial owner (who could be an individual, group of individuals or the state) of publicly listed companies. Most jurisdictions have therefore introduced rules mandating beneficial owners to disclose and report the accumulation of a substantial ownership of shares. Unsurprisingly, the Panama Papers have heightened concerns that the current regime is inadequate, and led to calls for more and stricter rules and regulations of this kind in order to promote transparency.

In a new paper, ‘Disclosure of Beneficial Ownership after the Panama Papers’, we set out to question this regulatory approach by introducing the findings of an empirical study that examines how disclosure rules actually operate in practice across various jurisdictions. The key takeaway of this empirical study is that – even in those jurisdictions that have a robust disclosure regime – the majority of firms engage in ‘grudging’ compliance in which control and ownership structures are not revealed in an accessible way, and – perhaps more importantly – the impact of these ownership and control structures on the corporate strategy and governance of a company is obscured. The paper suggests that for anyone wishing to conceal their beneficial ownership there are ample legal means to do so. But – even more significantly – the empirical study suggests that the majority of firms are failing to engage in meaningful disclosure, and that existing disclosure and reporting rules are not having the hoped-for effects.

Rather than taking the Panama Papers as an indication of the need for more and stricter disclosure and reporting rules, we advocate an alternative approach. We need to start by acknowledging that many companies are currently experiencing ‘disclosure fatigue’, in which the constant demand for ‘more’ and ‘better’ transparency and reporting is having the unwelcome and unintended effect of promoting indifference and evasiveness. Disclosure is widely perceived as an obligation to be fulfilled and not as an opportunity to add value to a firm.

Instead, we advocate a different approach based on the current communication practices of a minority of firms in our sample. Interestingly, this small number of firms engages in what we characterize as ‘open communication’ through which information on control structures and its effect on governance and strategy are presented in an accessible, engaging and highly personalized manner. Such firms seem to recognize the commercial and other strategic benefits to be gained from open communication.

If done properly, a whole ecosystem can emerge around the communication strategy of a firm. Consider the excitement that has been built up around Warren Buffet’s and Jeff Bezos’ annual letters to the shareholders of Berkshire Hathaway and Amazon respectively. As such, information should be seen as a resource that can be exploited – via ‘open communication’ – to the commercial advantage of a company. The hype that can be built up around the ‘event’ of disclosure can be an effective means to feed excitement and interest in the firm. This can make the company interesting and relevant for potential (and talented) employees, as well as investors.

Although we need some disclosure and reporting rules, we should not fetishize such rules. Insofar as policy makers and regulators do have a role to play, it should be conceptualized as encouraging and persuading firms to recognize the rewards that come from the open communication of beneficial ownership and its impact on corporate governance. This would involve re-framing the debate from ‘mandatory disclosure’ to ‘open communication’ and focus on strategies for ‘nudging’ firms to acknowledge the business case for a more open and personalized approach to communication. This paper acknowledges that this nudging approach is particularly relevant for firms in emerging markets. Crucially, it involves regulators and business practitioners developing a dialogue around identifying practical strategies and practices by which firms can understand and reap the multiple benefits of open communication.

Erik P. M. Vermeulen is a Professor of Business and Financial Law at Tilburg Law School, and Mark Fenwick is an Associate Professor at the Faculty of Law of Kyushu University.