To open government partisans, the open society agenda may seem quite foreign; where to begin? Fortunately, laws and policies that compel corporate disclosure have emerged in various policy domains in recent decades. In other work, we have called these measures “targeted transparency” because they aim not just to provide general information, but rather to achieve specific public objectives such as better schools, high-quality hospitals, and safer consumer products.[129]
In 1997, for example, the Los Angeles County Board of Supervisors adopted an ordinance that requires restaurants to post highly visible letter grades (A, B, C) on their front windows that are based on the results of County Department of Health Services inspections. This transparency system makes it much easier for patrons to avoid restaurants with dirty kitchens or otherwise unsafe practices. There is substantial evidence that the system has worked. Revenues at “C” restaurants declined and those of “A” restaurants increased after the policy was implemented. Over the course of a few years, the number of “C” restaurants decreased and the number of “A” restaurants increased. Perhaps most importantly, fewer people are getting sick from food poisoning after the implementation of the report card system. Studies estimate that hospitalizations from foodborne illnesses have decreased from 20% to 13%.[130] This transparency innovation has spread to several other cities and two states.
At a larger scale, Congress passed a law in 1975 (and has updated it several times), called the Home Mortgage Disclosure Act (HMDA), that compels banks to disclose detailed information about their mortgage lending. HMDA requires banks and other lending institutions to amounts, geographic distribution, and other characteristics of their mortgage applications, including race, gender, and income of applicants. Advocacy groups such as National People’s Action and community-based organizations have used data produced by HMDA to show how many lenders discriminate and to help negotiate fairer lending practices with those institutions. Furthermore, banking regulators used the data both to establish the extent and patterns of discrimination as well as to conduct their enforcement efforts under laws such as the Community Reinvestment Act.[131]
These are just two examples of how methods of transparency have been applied to the actions and products of private sector organizations. Transparency has also been used—sometimes quite effectively and sometimes less so—to address problems such as automobile safety, nutrition and health, hospital safety, credit risk, environmental quality, and workplace health and safety.
Analyzing the effectiveness of transparency incentives is important because measures that succeed can reduce critical public risks and improve public services. Those that miss the mark can distort incentives in ways that waste resources and expose people to risks they do not fully comprehend. In addition, some transparency systems in areas of health care and for certain consumer products are gaining momentum as information and communication technologies increase the capacity of citizens and consumers to use them to make more informed choices—and to circle around corporate secrets and political obstacles to collaborate on their own transparency efforts. Technology is also transforming the capacity of entities that create public risks to pick up signals from consumers’ changed choices and respond by reducing those risks.
[129] Full Disclosure: The Perils and Promise of Transparency, Fung, Graham, and Weil, Cambridge University Press, 2007.
[130] Ibid, pp. 192–194.
[131] Ibid, pp. 203–205. HMDA and CRA have also been cited recently as one of the precipitating causes of the subprime mortgage meltdown. In our view, transparency surfaced wide-scale and pernicious discrimination in bank lending practices. How much it also contributed to the inappropriate use of subprime and other forms of complex mortgage instruments during the housing boom—versus other factors such as the securitization of mortgages and the agency problems arising within the housing finance sector that allowed brokers to approve borrowers with little capacity to meet the terms of their mortgages—requires separate treatment.