We’ve talked a few times about the issue of character and transparency in financial reporting…
Against that backdrop, I was intrigued by the website of the online clothing retailer Everlane. Here’s how it sums itself up in the “About” section:
- At Everlane, we want the right choice to be as easy as putting on a great T-shirt. That’s why we partner with the best, ethical factories around the world. Source only the finest materials. And share those stories with you—down to the true cost of every product we make. It’s a new way of doing things. We call it Radical Transparency
Here’s an example of how Everlane shares the “true cost” of a randomly chosen product – a men’s cashmere crew sweater that it sells for $100:
I’m not sure how many other companies do anything like this – reading about Everlane, I saw references to just a few more instances. On the one hand, the disclosure seems to acknowledge the company’s complicity in some prevailing inequities – for instance, that only $13 of a $100 sweater ends up in the pockets of the workers. At the same time, it plainly indicates that the ratio would be much worse for any other retailer. One can readily see how this would appeal to ethically aware shoppers, as noted in a CBS news story:
- Professor Lori Massaro of New York’s Fashion Institute of Technology says these upstarts use transparency to convince customers they’re getting a better deal than traditional retailers offer — even if that’s not always true.
- “I don’t want to use the word gimmick, but their biggest marketing tool is their transparent pricing,” Massaro said. “They make it very easy for the consumer to understand.”
You might also detect a penchant for gimmickry in the fact that according to Wikipedia, the company’s mobile application “features the current weather updates in order to provide suggestions for what to wear alongside the weather descriptions.” Anyway, here’s how the Everlane CEO talks about it:
- “We stand behind factory transparency and back up the story of each piece of clothing with real data,” said Michael Preysman, CEO and founder of Everlane. “People are more aware how clothes are made today because of social media, and, as a result, they know what the dark side is,” he added. “The more information we can provide about our process, the more clear it is to the customer why the decision they’re making is better for the planet.”
But of course there’s a possible problem – what’s the source of any of these numbers? Among other things – the amounts shown for items such as materials must surely employ some kind of estimation process, but what is it? Do the amounts include allocation of overhead? How do they take foreign exchange into account? How often are the calculations updated to reflect fluctuations? What about the data on what would be charged by other retailers – is that based on some kind of averaging? How does such a comparison take into account variations in quality, in the value of a brand name from one retailer to the next and so forth? Obviously, the questions could go on. I don’t see an answer to any of them on the website though.
This might be taken as the worst kind of carping – when a company is so far out ahead of its peers in certain respects, why should it be criticized for not going further? And yet that’s the inevitability of virtue, that once you ascend to a higher platform, the winds gather to blow you down off it. Another way of putting it is to raise the axiom I quoted before, that once you can fake sincerity, you’ve got it made. Since Everlane is laying claim to the sincerity, it can’t hope to entirely sidestep concerns about potential fakery, at least at the margins.
As we know, IFRS and US GAAP are designed for purposes of summarized corporate reporting, not to facilitate digging down as Everlane is doing. But at the same time, it seems such product-level disclosure might carry maximum credibility when an interested reader is able to understand its relationship to an entity’s overall financial statements, both in terms of the quality of systems and controls within which it’s produced, and regarding the policies applied in its preparation. As the CEO says, the more information that can be provided, the better it is for everyone. The challenge then is two-fold. For progressive companies like Everlane that shine a light on detailed aspects of their operations: how to expand the scope of that reporting so that users can appreciate its context and limitations. And for all the other companies: how most effectively to lead readers deeper into the numbers, both to anticipate and address changes in consumer concerns, and perhaps (why not?) to generate a useful marketing boost along the way…
The opinions expressed are solely those of the author