The need for transparency so investors can know what they own is an idea that has withstood the test of time.

It was first championed by Justice Louis Brandeis in his series of articles appearing under Other People’s Money.  It was subsequently picked up in an article by William Z. Ripley, a Harvard Economics professor, that appeared in the Atlantic Magazine’s September 1926 issue.

The article, Stop, Look, Listen! The Shareholders’ Right to Adequate Information, makes a number of points that are as relevant today as they were when they first appeared in print.

Professor Ripley begins with the problem of current disclosure practices.

And then there are the reports like Tristram Shandy, all obfuscated and darkened over with fuliginous matter.’ To the uninitiated, as we shall soon see in detail, they may tell too much that is not so, or too little of what they ought to tell. Of them the Wall Street Journal has this to say:

Many do more to deaden than to arouse the stockholders’ interest. ‘Whether by accident or design, such reports are drawn so as to withhold from the stockholder what he most desires to know. When he is told that ‘the increase in mortgages and ground rents payable represents a mortgage given in connection with purchase of additional property,’ he says to himself that an intelligent bootblack could have guessed as much. When he reads that ‘the decrease in miscellaneous accounts payable is due to withdrawals by affiliated companies to reduce their indebtedness for construction and other purposes,’ he refrains from calling the report a mess of tripe only for fear of insulting an industrious and self-respecting farmyard animal. [emphasis added]

His solution:

Stockholders are entitled to adequate information, and the state and the general public have a right to the same privilege.

Professor Ripley then defines “adequate information”.  He does so and at the same time lays to rest the Opacity Protection Team’s false claim that too much disclosure is bad.

Nor is it true that the primary purpose of publicity, the sharing of full information with owners, is to enable these shareholders to obtrude themselves obsequiously upon their own managements. But such information, if rendered, will at all events serve as fair warning in case of impending danger. And this danger will be revealed, not because each shareholder, male or female, old or young, will even bother to remove the wrapping from the annual report in the post, but because specialists, analysts, bankers, and others will promptly disseminate the information, translating it into terms that will be intelligible to all. [emphasis added]

Even in the mid-1920s, it was understood investors could and would rely on experts.  There has never been a requirement investors must do and can only rely on their own due diligence and assessment of an investment’s risk.

Professor Ripley sets the marker for what is disclosed at what the experts would like to see and not what some untrained individual sitting at their kitchen table might be able to analyze.

What is the benefit of expert level disclosure?

Our great exchanges—and no little investor should ever own securities for which there is not such a great open public market at all times can perform their proper function of making true prices, consonant with valuation, only when there is such disclosure. This, then, is the ultimate defense of publicity. It is not as an adjunct to democratization through exercise of voting power, but as a contribution to the making of a true market price. This is a point but half appreciated at its real worth. Consider the plight of the uninformed shareholder, compelled for some reason or another to let go of his investment during the sealed-up period. Is this not the ultimate basis of the right of every partner in an enterprise to such disclosure as shall assure him against an artificial or even a rigged price? Rigged market prices, based upon inside information, are perhaps one of the most vicious features of the present situation. Relief from this menace may be had only through insistence upon complete revelation in contradistinction to that which has been so aptly described by Hastings Lyon, speaking of the prevalent practice among public utilities, as ‘limitless obfuscation.’ [emphasis added]

Shorter: when investors have access to the information they need to know what they own, market prices reflect the true value of the investment and markets are not rigged.

Professor Ripley showed an awareness of what I call the Opacity Protection Team.  He understood security issuers prefer to operate in secrecy.

Much has indeed been accomplished. But one runs head-on against a serious obstacle. To a considerable degree within each industry it is a case of all or nothing. The laggard corporation, persistent in secretiveness, lays a heavy penalty upon its progressive rivals all down the line.

Finally, Professor Ripley looks at why it is hard for investors to force issuers to provide transparency so investors can know what they own.

Why should not the stockholders themselves, if necessary, bring about a reform in this business of publicity? Do they rest inert and mute because of their helplessness? There seem to be only two things which they can do. One is to boycott the sealed-up corporations. The other would be to take the bit in mouth and force the issue in open meeting. As for the boycott, mysterious corporations which have turned out to be bonanzas have always served as decoys for the public. The uninitiated are always ready enough to try a fling. But, even among the more wary, the personality and reputation of managers often afford sufficient guaranty, at all events to take a gambling chance, the more alluring because of the very mystery. [emphasis added]

His observation about investors is very important and fits right into the Information Matrix.

Information Matrix

	Does Seller Know What They Are Selling?
Does Buyer Know What They are Buying?		Yes	No
	Yes	Perfect Information	Antique Dealer Problem
	No	Lemon Problem	Blind Betting

Professor Ripley confirms investors are willing to buy the investments in the Blind Betting quadrant.  This was true in the 1920s and it is still true today.

This willingness to engage in blind betting completely undermines the investors’ ability to force issuers to provide transparency.  The reason is the issuers don’t need all the investors to buy every investment.  Wall Street can sell their opaque securities to those investors who are willing to engage in blind betting.

Despite the fact investors have the most to gain from transparency, the investors willingness to engage in blind betting means they can never force it to be provided.  From Wall Street’s perspective, this is great.  Wall Street prefers to sell high margin, opaque products that are valued based on a story Wall Street tells.

Of course, what Wall Street prefers is not necessarily what is best for Main Street.  The FDR Administration recognized this and redesigned the financial system to make it the government’s responsibility to force issuers to provide transparency.

This worked well for several decades until Wall Street captured the process by which the investment disclosure requirements are set.  Once Wall Street did this, it was freed up to once again sell investments in the Blind Betting quadrant.

The Transparency Label Initiative takes a different approach on investment disclosure.  The Initiative recognizes investors will engage in blind betting.  The Initiative also recognizes Wall Street’s control of the process by which investment disclosure is set makes it extremely difficult for investors to know when they are blindly betting.  This is particularly true when an investment provides the government mandated disclosures.

What the Initiative’s labels do is allow investors to know when they are engaged in blind betting.  Knowing when they are engaged in blind betting is very important to investors.

Why?

The Initiative’s labels turn opacity into an asset class.  Like any other asset class, investors can decide what is the appropriate allocation. Investors can decide how much, if any, of their portfolio they want to engage in blind betting with.