Lawrence Summers' review in the FT of Brandon Garrett's book "Too Big to Jail" caught my eye this weekend. Summers makes the important observation that the work of legal scholars is often "prescriptive but without a strong empirical foundation". This has been true of much of the literature I've read by US authors, less so of those from the UK, but it is changing. I remember being delighted to find a paper by US legal scholars on board gender diversity which was based on interviews with those involved, very unusual within that stream of literature.
I have yet to read the book but Summers uses the Arthur Andersen/ Enron example to illustrate the inadequacies of punishment of corporate fraud. The impact on those employed by AA and completely unconnected with the Enron relationship was huge and unfair (see here, here and here ) and punishment of the individuals whose dereliction could be proved might have paralleled that suffered by the Enron executives but I am not sure that this is a good example and oddly Summers does not mention that the firm's conviction was later overturned.
Summers suggests that a different structural approach to accountability might improve policy in this area. He uses the dreaded term "nexus of contracts" which, to me, conjures up agency theory and all that is wrong with that approach but, language aside, he may have a good idea. I have been impressed by the paper by Kelli Alces which proposes that boards of directors are no longer fit for purpose. It is surely time for a substantial review of the fundamentals of corporate accountability and our consequential legislative arrangements.
The comments on Summers' review largely focus on whether he should be given a platform in the FT at all, given his controversial past. More importantly, in my view, it should be recognised that he writes from a US perspective. He acknowledges this, somewhat tangentially, in the penultimate paragraph but we should always remember that the US legislative and regulatory structure is predicated on very different historical and economic assumptions to that of the UK, and policy making in approaches to corporate crime should reflect this.
Sunday 23 November 2014
Thursday 20 November 2014
Jelly beans and qualitative research
I do like Tim Harford's work and I especially like this.
Much research into corporate governance has been heavily influenced by finance researchers, juggling the many variables that might link corporate governance characteristics to corporate performance, without finding any convincing relationships.
But, since most corporate governance policy steadfastly ignores independent research findings, maybe this doesn't matter.
Encouragement for qualitative research approaches could make a difference. It's very challenging to do. Access to those involved in corporate governance can be difficult to secure and collecting data through interviewing is fraught with pitfalls. Funding applications may be judged by people with little experience of qualitative methods. Condensing a plethora of rich insights into a standard sized journal article is not easy. But this type of approach can usefully highlight the huge variety of practice and experience hidden behind the boardroom door and perhaps cause policy makers to think a little more deeply about the potential consequences of regulation.
The jelly bean researchers could have asked why people eat jelly beans in the first place...
Much research into corporate governance has been heavily influenced by finance researchers, juggling the many variables that might link corporate governance characteristics to corporate performance, without finding any convincing relationships.
But, since most corporate governance policy steadfastly ignores independent research findings, maybe this doesn't matter.
Encouragement for qualitative research approaches could make a difference. It's very challenging to do. Access to those involved in corporate governance can be difficult to secure and collecting data through interviewing is fraught with pitfalls. Funding applications may be judged by people with little experience of qualitative methods. Condensing a plethora of rich insights into a standard sized journal article is not easy. But this type of approach can usefully highlight the huge variety of practice and experience hidden behind the boardroom door and perhaps cause policy makers to think a little more deeply about the potential consequences of regulation.
The jelly bean researchers could have asked why people eat jelly beans in the first place...
Friday 14 November 2014
No more codes, please!
ICAEW have published the fifth of their discussion papers on corporate governance, calling for the establishment of an overarching "framework code", to embrace the group-specific codes that have sprung up in recent years. The paper raises several questions.
1. What is the proposed "framework code" for?
It is not clear exactly what problem the "framework code" is designed to address and the idea adds further confusion by blurring the boundaries of corporate governance to include "everyone involved in corporate governance". The Takeover Code which is cited in the paper works well because it is directed at managing a very specific area of activity where the potential problems are clearly understood. The well-established Panel structure permits comprehensive representation of clearly defined groups of stakeholders.
2. Where would such a "framework code" sit?
The paper suggests that it would encompass a very wide range of stakeholders. Basic principles need to sit within a structure of agreed ownership: the FRC currently "owns" the UK Corporate Governance Code but it would be difficult to justify the same organisation taking responsibility for a "parent" code which would sit above this.
3. What does "framework" mean?
The OECD Principles are also cited in the paper: how would a "framework code" differ from these? The use of the word "framework" resonates worryingly with the conceptual framework for financial reporting, a never-ending project which can hardly be described as a success. (See here, here, here and here for some thoughts on this.)
Proposals for change can only be successful if they are based on a careful assessment of the current situation and a good understanding of how this has developed, to ensure that such proposals address real problems and recognise the potential consequences of change. Although the Cadbury Code focused very specifically on the financial aspects of corporate governance and on the role of the board of directors, it was very much of its time and the world has moved on. The consequences of its implementation have not been properly assessed, either from the perspective of regulatory impact or from that of corporate boards themselves. From a regulatory perspective, the UK Corporate Governance Code is now unwieldy because every review has added further detail about implementation, rather than reconsidering the assumptions which underpin the principles. Within companies, the emphasis on independence and the role of NEDs has led de facto to a two tier board system which has yet to be acknowledged from a regulatory perspective. Does the unitary board which brings together NEDs and executive directors still exist in any major plc? How does a main board peopled by NEDs interact with an executive board or executive committee?
There is an urgent need to reassess the current corporate landscape and the assumptions on which the underlying principles of UK corporate governance arrangements have been built. Our legislative framework evolved under very different economic and social conditions. Is this legislation still fit for purpose? The proliferation of codes suggests that it is not.
As well as a fundamental overhaul of legislation at national level, there is scope for change at organisational level. Some interesting ideas have been offered by academics. A US legal scholar has argued that the board of directors could be scrapped in favour of quite different corporate governance arrangements which better reflect the interests of those involved. The analysis put forward by Colin Mayer in his excellent book "Firm Commitment" makes a good starting point for some radical thinking.
The ICAEW papers on corporate governance may be effective if they prompt a wider debate but that debate needs to be grounded in a clear identification of the scope and boundaries of the problems faced, a rigorous assessment of the capacity of current legislative and regulatory arrangements to deal with those problems and a careful consideration of the potential for unintended consequences.
1. What is the proposed "framework code" for?
It is not clear exactly what problem the "framework code" is designed to address and the idea adds further confusion by blurring the boundaries of corporate governance to include "everyone involved in corporate governance". The Takeover Code which is cited in the paper works well because it is directed at managing a very specific area of activity where the potential problems are clearly understood. The well-established Panel structure permits comprehensive representation of clearly defined groups of stakeholders.
2. Where would such a "framework code" sit?
The paper suggests that it would encompass a very wide range of stakeholders. Basic principles need to sit within a structure of agreed ownership: the FRC currently "owns" the UK Corporate Governance Code but it would be difficult to justify the same organisation taking responsibility for a "parent" code which would sit above this.
3. What does "framework" mean?
The OECD Principles are also cited in the paper: how would a "framework code" differ from these? The use of the word "framework" resonates worryingly with the conceptual framework for financial reporting, a never-ending project which can hardly be described as a success. (See here, here, here and here for some thoughts on this.)
Proposals for change can only be successful if they are based on a careful assessment of the current situation and a good understanding of how this has developed, to ensure that such proposals address real problems and recognise the potential consequences of change. Although the Cadbury Code focused very specifically on the financial aspects of corporate governance and on the role of the board of directors, it was very much of its time and the world has moved on. The consequences of its implementation have not been properly assessed, either from the perspective of regulatory impact or from that of corporate boards themselves. From a regulatory perspective, the UK Corporate Governance Code is now unwieldy because every review has added further detail about implementation, rather than reconsidering the assumptions which underpin the principles. Within companies, the emphasis on independence and the role of NEDs has led de facto to a two tier board system which has yet to be acknowledged from a regulatory perspective. Does the unitary board which brings together NEDs and executive directors still exist in any major plc? How does a main board peopled by NEDs interact with an executive board or executive committee?
There is an urgent need to reassess the current corporate landscape and the assumptions on which the underlying principles of UK corporate governance arrangements have been built. Our legislative framework evolved under very different economic and social conditions. Is this legislation still fit for purpose? The proliferation of codes suggests that it is not.
As well as a fundamental overhaul of legislation at national level, there is scope for change at organisational level. Some interesting ideas have been offered by academics. A US legal scholar has argued that the board of directors could be scrapped in favour of quite different corporate governance arrangements which better reflect the interests of those involved. The analysis put forward by Colin Mayer in his excellent book "Firm Commitment" makes a good starting point for some radical thinking.
The ICAEW papers on corporate governance may be effective if they prompt a wider debate but that debate needs to be grounded in a clear identification of the scope and boundaries of the problems faced, a rigorous assessment of the capacity of current legislative and regulatory arrangements to deal with those problems and a careful consideration of the potential for unintended consequences.
Thursday 13 November 2014
Thinking, but not very originally
On Tuesday evening I went to the Hardman lecture at ICAEW. I wangled an invitation to this prestigious event because I wanted to hear Jolyon Maugham (see my post on 30 September). I was not disappointed: he speaks as well as he writes and his talk was full of excellent metaphors (I do enjoy a good metaphor, as well as having a professional interest in them: see also here) Having followed his blog, I understood much of what he said, even the initialisms. And it was those that set me thinking.
Initialisms act as shibboleths in terms of identifying groups and deterring outsiders. On this occasion, I was definitely an outsider. It is unusual these days for me to be in a large gathering of people where I only know one or two. I once horrified a rather shy acquaintance by saying that my idea of heaven was a roomful of people I'd never met before - all those wonderfully interesting possibilities! I get less excited about the prospect these days as my hearing is not as good as it used to be and conversations are more difficult, especially in this splendid room where many ICAEW receptions take place and where the acoustics make it necessary to stand very close to ones interlocutors.
But I was intrigued by the tribe I had fallen among and talked to a lot of people. For all of them, tax figured largely in their lives, but in different ways. There were tax practitioners of various sorts - accountants, consultants, barristers - and there were civil servants and policy makers. And there were a few academics. In conversation with my neighbour at dinner we noted a lack of diversity of both race and gender, although I thought that there were more women present than at similar events I have attended.
And on the bus home I realised that I had observed another form of homogeneity, beyond the pale faces and suits and ties: almost everyone I had spoken to had studied at Oxford or Cambridge. I hadn't asked any specific questions about their educational background but I had asked how they had ended up in their tax related jobs, and their accounts of their careers had begun with graduation.
So the movers and shakers in the tax world are an elite group and a rather good example of an epistemic community, a notion I have been thinking about for some time in the context of internal auditors and risk management. I made a mental note to return to that thought and went back to the book I was reading.
Today I turned to Jolyon's blog - another very interesting piece, about the influence of the Big Four on tax policy - and there in the comments I found that Martin Hearson had beaten me to it, and articulated the epistemic community idea far better than I could have done. This is not the first occasion that I have had a thought and found that someone at LSE had beaten me to it but it's usually been Mike Power who I've been trailing after :)
The book I was reading was "The Circle" by Dave Eggers, a dystopian vision in which a company with similarities to Google is effectively taking over the world. The characters were rather wooden and the plot unsurprising but the scenario described was quite compelling and it was a good read for the bus journey from Oxford to London and back again. (But the pedant in me was roused on reaching the penultimate page, when the word "prone" was used to describe the position of someone in a coma in a hospital bed. I rather think such a person would be lying on their back...)
Eggers doesn't mention any tax issues but in the world he envisages, -where everyone is constantly under surveillance by everyone else, knowledge has to be shared and privacy is a crime - there could be no tax avoidance. A lot of people would be out of work..
Initialisms act as shibboleths in terms of identifying groups and deterring outsiders. On this occasion, I was definitely an outsider. It is unusual these days for me to be in a large gathering of people where I only know one or two. I once horrified a rather shy acquaintance by saying that my idea of heaven was a roomful of people I'd never met before - all those wonderfully interesting possibilities! I get less excited about the prospect these days as my hearing is not as good as it used to be and conversations are more difficult, especially in this splendid room where many ICAEW receptions take place and where the acoustics make it necessary to stand very close to ones interlocutors.
But I was intrigued by the tribe I had fallen among and talked to a lot of people. For all of them, tax figured largely in their lives, but in different ways. There were tax practitioners of various sorts - accountants, consultants, barristers - and there were civil servants and policy makers. And there were a few academics. In conversation with my neighbour at dinner we noted a lack of diversity of both race and gender, although I thought that there were more women present than at similar events I have attended.
And on the bus home I realised that I had observed another form of homogeneity, beyond the pale faces and suits and ties: almost everyone I had spoken to had studied at Oxford or Cambridge. I hadn't asked any specific questions about their educational background but I had asked how they had ended up in their tax related jobs, and their accounts of their careers had begun with graduation.
So the movers and shakers in the tax world are an elite group and a rather good example of an epistemic community, a notion I have been thinking about for some time in the context of internal auditors and risk management. I made a mental note to return to that thought and went back to the book I was reading.
Today I turned to Jolyon's blog - another very interesting piece, about the influence of the Big Four on tax policy - and there in the comments I found that Martin Hearson had beaten me to it, and articulated the epistemic community idea far better than I could have done. This is not the first occasion that I have had a thought and found that someone at LSE had beaten me to it but it's usually been Mike Power who I've been trailing after :)
The book I was reading was "The Circle" by Dave Eggers, a dystopian vision in which a company with similarities to Google is effectively taking over the world. The characters were rather wooden and the plot unsurprising but the scenario described was quite compelling and it was a good read for the bus journey from Oxford to London and back again. (But the pedant in me was roused on reaching the penultimate page, when the word "prone" was used to describe the position of someone in a coma in a hospital bed. I rather think such a person would be lying on their back...)
Eggers doesn't mention any tax issues but in the world he envisages, -where everyone is constantly under surveillance by everyone else, knowledge has to be shared and privacy is a crime - there could be no tax avoidance. A lot of people would be out of work..
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