Financial Transparency as Governance: A Comparative Legal Perspective on the EU and the U.S.

By Rabia Ecrin Özdaşan

Are financial transparency regulations in the European Union and the United States instruments of corporate governance, and which legal regime best strikes the balance between public accountability and economic efficiency?

In today's multifaceted global economy, financial transparency has become a building block of effective corporate governance, permitting stakeholders to attempt accountability and lead to sustainable economic development. The European Union and the United States, as two world economic powers, have developed separate regulatory schemes for improving corporate financial disclosure. While each scheme espouses transparency, the schemes embody different priorities and legal spectrums that pose serious questions as to which scheme better accommodates the competing demands of public accountability and efficiency in the marketplace.

The European Union (EU) has developed a systemic, multi-factored regulatory process to improve corporate financial transparency, specifically through the Corporate Sustainability Reporting Directive (CSRD). The CSRD applies to large companies with an initial effective date of 2024 and requires large companies to disclose standardized environmental, social, and governance (ESG) information with traditional financial data under the EU system.1 The EU approach to corporate governance focuses on a stakeholder model that acknowledges responsibility to more than shareholders, including employees, consumers, and the environment.2

Conversely, the U.S. approach to corporate governance focuses on investor protection, which is linked to market efficiency. The major regulatory body that governs corporate financial disclosure in the U.S. is the Securities and Exchange Commission (SEC). The Sarbanes-Oxley Act (SOX) of 2002 was enacted to protect citizens after several accounting scandals in the early 2000s.3 SOX contains strict rules about financial reporting. Most ESG disclosures in the U.S. are considered voluntary, but recent proposed SEC rules indicate that there may be a shift whereby ESG disclosures are becoming mandatory.4

While the EU is emphasizing a prescriptive, multi-stakeholder, regulatory philosophy, the U.S. is emphasizing a prescribed, market-driven, investor philosophy.5 Understanding these differences is important for determining which system is better suited to balance public accountability with economic efficiency in corporate governance.

The stark contrasts in regulatory philosophies of the EU and the U.S. becomes readily apparent when viewed through examples such as the prominent corporate scandals. In the United States, the scandal at Enron in 2001 exposed important flaws relating to both corporate financial disclosure, and internal controls, and were ultimately the triggering event to the passing of the Sarbanes-Oxley Act (SOX) in 2002.6 SOX introduced detailed reporting requirements and improvements to the independence of auditors to instill investor confidence and integrity in the markets. Similarly, the U.S. model's emphasis on investor protection and market efficiency is illustrated in the reactive, but robust regulatory approach taken following this scandal.

By contrast, the Wirecard scandal in the U.K. in 2020 demonstrated serious gaps in the financial oversight capabilities of the EU.7 The EU had mandated disclosure requirements, but the regulatory actions taken by multiple regulators including the police were lagging due to the vastness, delays and many other factors that allowed fraud to flourish for many years. This trouble highlighted issues confronting regulators in terms of enforcement and posed challenges for the EU in terms of achieving stakeholder accountability in a thorough and organized manner without compromising practical economic and social realities. In light of the systemic failure to detect fraud at Wirecard, the EU subsequently began to harmonize and accelerate changes to improve the quality of audits and enhance financial disclosures, reaffirming their prescriptive approach to regulation.

While the EU's multistakeholder regulatory system is amenable to broad accountability-oriented frameworks, thereby embodying progressive governance models, it may also require substantial compliance costs that potentially crush corporate insatiable appetite for agile progression and innovation.8 Contrarily, the U.S., with an emphasis on investor versus non-investors protection, values flexibility, fluid capital markets, but may further accommodate the interests of investors while neglecting non-investor stakeholders' environmental or social interests.9 The increased push for mandatory ESG disclosures in the U.S., which create an almost parallel reality between the United States and the EU, is also characterized by political and industry resistance that has potential to stymie the pace of reforms.

Financial transparency, an important strand of corporate governance, is indispensable for a governance model that weighs the importance between accountability and economic vitality. The EU and the U.S. regulatory systems are anchored in differing legal philosophies and governance models that each have their pros and cons. It is incumbent for both policymakers and corporate ECOS to reflect on the differing approaches to transparency that support both the social contract of trust in public institutions, as well as virulent markets. There is a need for research that continues to inform and strive for an international harmonization of standards for transparency that efficiently contributes to greater corporate accountability and sustainable economic growth.

Bibliography

Corporate Sustainability Reporting Directive, Directive (EU) 2022/2464, 2022 O.J. (L 305) 1.

European Commission, Sustainability Reporting, https://ec.europa.eu/info/business-economy-euro/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en (last visited May 29, 2025).

Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002).

SEC Proposed Rule on Climate Change Disclosures, 17 C.F.R. Part 229 (2022).

See generally Corporate Governance and Disclosure: EU vs. U.S. Approaches, 42 J. Corp. L. 345 (2023).

Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002).

European Parliament, Report on Wirecard Scandal and Regulatory Response (2021).

Marco Ventoruzzo & Giacomo Lener, Regulatory Divergence in Corporate Disclosure: EU vs. US, 42 J. Corp. L. 345 (2023).

SEC, ESG Disclosure Developments, https://www.sec.gov/esg (last visited May 29, 2025).