The Sunlight Solution

Full Disclosure: The Perils and Promise of Transparency by Archon Fung, Mary Graham, and David Weil ( Cambridge University Press, 282 pages)

Public policy has its fashions -- styles of government that come and go -- but now and then there are genuine and durable strategic advances in how we attack public problems. In recent years, Congress and state and local governments have responded to a wide variety of concerns by adopting the same promising idea: Require businesses and public agencies to disclose information about their performance so that consumers can make smarter choices about what they buy, and citizen groups and the press can identify and publicize organizational failures and push for improvements.

In their new book, Full Disclosure, Archon Fung, Mary Graham, and David Weil call these measures "targeted transparency policies," and according to their count, the federal government alone adopted 133 of them from 1996 to 2005. Alarm about SUV rollovers, for example, led Congress to establish a rating system for automobile rollover risks. Environmental worries led to mandatory disclosure of drinking-water contaminants by water authorities. Educational concerns generated requirements for measures of school performance. In response to the Enron scandal, Congress tightened the rules for financial reporting by corporations.

The rash of targeted transparency policies has some aspects of fashion. But, though not all the measures have worked out, there are lessons that point to a genuine advance in our strategy of government.

Louis Brandeis famously said that sunlight was "the best of disinfectants." Targeted transparency policies aim to focus that light on key aspects of business and government so as to make both of them more responsive to the public. Though often resisted by corporate and bureaucratic interests, such measures have cross-ideological appeal. Unlike government-imposed regulatory standards, transparency policies leave individuals free to make their own choices. Many of the policies can be justified as helping markets to work more effectively, while others generate social pressure for change and improve democratic accountability. In some cases, the mere anticipation of bad publicity or lost revenue may be enough to get corporations and government agencies to remedy the problems.

Yet such measures can also be a substitute for effective action. The information disclosed to the public may be murky, misleading, or inaccessible. Consumers may be unswayed by data, perhaps because they feel they have no real alternatives. Or the institutions may simply not respond in the way that policy-makers expected.

Drawing on 18 case studies -- including disclosure rules for corporate finance, campaign finance, mortgage lending, workplace hazards, toxic releases, plant closings, nutritional labeling, school performance, restaurant hygiene, and terrorism-threat levels -- Full Disclosure provides a wide-ranging and systematic analysis of targeted transparency in the United States (with some additional discussion of global mechanisms, such as international disease surveillance).

The book makes two key contributions: It clarifies the factors that determine whether policies are effective and it suggests that transparency measures are now entering a new phase when they can be even more useful to the public than in the past.

The most effective targeted transparency policies produce accurate information that gets integrated into the decision-making routines of consumers, investors, and citizens. For example, because Congress required that the ratings for rollover risks be conspicuously printed on new-car stickers, buyers saw the information at the point when it could sway their decisions -- and the auto industry responded by improving vehicle stability. After Los Angeles began grading restaurants for hygiene on an A-B-C scale and posting the grades conspicuously, the restaurants with poor ratings lost business -- and hospitalizations for food contamination in the city declined.

Not all successful policies have their effects because of individual responses in the marketplace. For example, disclosure of mortgage-lending practices has helped community groups to demand that banks serve minority neighborhoods that they have historically avoided.

Yet many transparency policies haven't worked well at all. The water-quality reports are too complex for consumers to understand; the color-coded terrorism alerts don't have clear implications for citizens. Disclosures of plant closings come too late to affect corporate decisions, and the workers usually can't do anything about them.

Some policies are examples of what the authors call "gerrymandered transparency" as a result of special exceptions written into the laws by Congress (for example, small-business exemptions from requirements to report toxic releases). Indeed, because the transparency systems typically have serious limitations when first enacted, they are likely to succeed only if the political support for them is strong enough to sustain and strengthen them as they develop.

For transparency to work, according to Full Disclosure, several conditions need to be met. Those conditions include "a bridgeable information gap [contributing] substantially to risks or public service failures"; the potential for establishing generally agreed-on measures of performance; and "information users [with] the will, capacity, and cognitive tools to improve their choices."

What makes the whole subject of great interest is the possibility that transparency policies can now be made more effective and useful than ever before.

Transparency is not a new idea. The effort to open up government itself goes back to the steps taken in the 17th and 18th centuries to publish laws, ban secret trials, and create public galleries for viewing legislative sessions. Laws requiring corporations to disclose critical information came largely in the 20th century. The Pure Food and Drug Act of 1906 and the Security and Exchange Acts of the 1930s were key landmarks.

But it is in recent decades that transparency has come into own as a tool of public policy. Fung and his co-authors identify three waves of reform. The first-generation transparency policies of the 1960s and '70s -- right-to-know laws, such as the Freedom of Information Act -- gave the public access to previously restricted data and documents. Targeted transparency policies enacted in the '80s and after went a step further by requiring business and government to disclose standardized forms of information relevant to organizational performance.

More recently, a third generation of efforts has emerged that the authors call "technology-enabled collaborative transparency." Instead of passively receiving information, consumers and the public can now actively create it by pooling their own data and experience. And in contrast to the relatively inflexible and slow systems created under targeted transparency laws, the new approach uses computers and the Internet to provide real-time information that individuals can customize for their own use.

Some steps along these lines are already being taken, but we are just at the beginning of this new phase of innovation. To deal with local environmental concerns, for example, people in a community can use handheld devices to test tap-water purity and share the data "via user-friendly graphics like those of weather forecasts." Consumers may also be able to get information delivered to them more easily at the point of purchase. "Consumers seeking safe toys or healthy foods could zap a product's bar code with their cell phones to see an instant map of risks and benefits and a comparison to similar products," Fung and his co-authors note.

Whether or not these possibilities are realized depends, as always, on overcoming the corporate and bureaucratic interests that resist accountability. As the case studies show, some promising transparency measures were sabotaged from the outset. Even those who hope to use transparency to minimize top-down government regulation need to get politics to work well enough to lend consumers and citizens the power of sunlight.

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