Disclosure of Beneficial Ownership After the Panama Papers

Joseph McCahery is Professor in the Department of Business Law at Tilburg University. This post is based on a foreword authored by Professor McCahery for a recent International Finance Corporation report. Related research from the Program on Corporate Governance includes The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here).

The disclosure of the “Panama Papers” [1] focused public interest on how elaborate corporate structures and offshore tax havens can be used by politicians, celebrities and other elites to obscure their assets, including concealing their beneficial ownership of companies.

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. In particular, investor confidence in financial markets is regarded as contingent on the accurate disclosure of the ultimate beneficial owner (either 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, however, the Panama Papers have heightened concerns that the current regulatory regime is inadequate and led to calls for stricter rules and regulations of this kind in order to further promote transparency.

A new report for the World Bank, Disclosure of Beneficial Ownership after the Panama Papers, questions this regulatory approach by first introducing the findings of an empirical study that examines how disclosure rules operate in practice across various jurisdictions.

The key takeaway of this empirical review is that, even in those jurisdictions that have a robust disclosure regime, the majority of firms engage in “grudging” or “boilerplate” compliance in which ownership structures are not revealed in an accessible way. Moreover, the impact of these ownership and control structures on the governance and corporate strategy of a company is often obscured.

The Report suggests that for anyone wishing to conceal their beneficial ownership there are ample legal means to do so. But—even more significantly—the survey suggests that the majority of firms are failing to engage in meaningful disclosure and existing disclosure and the reporting rules are not having the intended effect.

Learning The (Right) Lessons of the Panama Papers

The Report concludes that the demand for more and stricter disclosure rules is not necessarily the right lesson to be taken from the Panama Papers. In a globally connected society in which open communication represents the “new normal,” concealing information becomes increasingly difficult. In part, this is the result of digitalization, modern communication technologies and social media that makes the instant reproduction and rapid global dissemination of information easier than ever before. In an age of social media and computer-mediated networked technologies, it is no longer feasible to expect to keep negative information secret, at least in the medium or long term.

In addition to this technological change, there has also been an important cultural shift in attitudes towards information disclosure. All stakeholders within and outside firms—i.e. investors, executives, managers, employees, professional service providers, business partners, consumers and the general public—now expect and demand more open and honest communication practices.

The recent proliferation of corporate scandals, as well as the Panama Papers, need to be understood as signals of a new social order in which the non-disclosure of negative information is no longer tolerated (recall the Prime Minister of Iceland was forced to resign over a failure to disclose his interest in his family’s offshore account). As such, a lack of transparency in their communication strategies has become a source of enormous risk for companies (as well as for individuals who have a reputation to lose).

Moreover, more open communication strategies have become a source of opportunity for companies that can leverage such openness to their advantage. This cultural shift in the meaning of information management and communication strategy is the real lesson to be taken from the Panama Papers and unpacking the implications of this technological and social transformation is the key challenge in formulating any regulatory response to scandals of this kind.

The Way Forward?

Rather than taking the Panama Papers as an indication of the need for more or stricter disclosure rules, the Report advocate an alternative approach. Most significantly, 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 unintended effect of promoting evasiveness. Disclosure is perceived as an obligation to be fulfilled and not as an opportunity to add value to a firm.

Moreover, rather than focusing on introducing more stringent and mandatory disclosure and reporting rules, we advocate a different approach based on the current communication strategy and practice of a minority of firms in our sample.

Interestingly, a small number of firms engage in what we characterize as “open communication” in which information on control structures and its effect on governance and strategy are presented in an open, 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 more interesting and relevant for potential (talented) employees, as well as investors.

How Can Regulators Persuade Firms to Embrace Open Communication?

As “open communication” becomes more widely acknowledged, we believe this will happen anyway. The better governed firms already realize that they have to adjust their behavior and embrace open and personalized communication strategies. Companies will choose to adopt “open communication” because they recognize the financial and strategic benefits of such openness. Adopting internal and external processes of open communication and radical transparency will bring its own rewards.

Insofar as policy makers and regulators do have a role to play, it should be conceptualized as supporting, encouraging and persuading firms to recognize the rewards that come from the transparency regarding beneficial ownership and its impact on corporate strategy and governance. This would involve, at least in part, a re-framing of the debate from “mandatory disclosure” to “open communication” and focusing on “nudging” firms to acknowledge the business case for a more open and personalized approach to disclosure and communication.

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.”

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The complete report is available for download here.


1 Offshore tax havens can be, and frequently are, used for legitimate purposes. Also, the “Panama Papers” mention intermediate entities in very many jurisdictions other than Panama. (go back)

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