Random questions about culture

Spent last Thursday mostly thinking about culture: in the morning in a meeting at the FRC, talking about a research project and hearing about their “culture coalition” and later at an AQF event "Whose culture is it anyway?"

On the bus on the way home I met a friend and told her I had spent the day talking about culture. "How interesting! What sort? Theatre? Art? “ (My day had included some of that: in the  afternoon I went to the Alexander Calder exhibition at Tate Modern, highly recommended.) But her comment made me think about the connections between the meanings of the word.

If, like my friend, we automatically think of cultural activities as relating to the arts and humanities, rather than companies, what might corporate cultural activities be? Externally, many companies sponsor cultural activities such as major art exhibitions: is this a way of suggesting that these sponsoring organisations are "cultured" i.e. appreciative of culture and thus appealing to the like-minded? Does this link at all to internal activities supporting their corporate cultures? 

The OED definition of culture begins with its roots in the notion of growing things. This idea of culture being a process, something dynamic, was largely missing from the AQF discussion, during which I jotted down the descriptions that the speakers used. Culture was variously characterised as:good/bad; strong/weak; positive/negative; productive; poor. We were told that changing culture was a long process - which made me wonder how you would know when you’d achieved it.

The idea of culture as “how we do things round here” captures some of the idea of culture as active and implies some reference to an underlying framework of norms. Could "the culture of our company" mean how we perform or describe some underlying notion? Is culture about making values visible through action? 

UK corporate governance developed under the aegis of a group of people who can best be described as gentlemen. I talked to some of them when writing the history of the Cadbury Committee. Gentlemen whose behaviour was characterised by old-fashioned courtesy, gentlemen whose good manners and considerable charm overlay incisive minds and a very shrewd approach to business matters. Gentlemen who managed to combine a flair for business with an ideal of public service. Gentlemen of quiet influence, who conducted business in panelled boardrooms, the clubs of Carlton House Terrace and at City dinners. 

We used to refer to them as captains of industry. Their shared culture was quintessentially British and they led companies which were also quintessentially British - and, indeed, could be described as part of our national culture, like Cadbury. Their individual aura of trustworthiness lent trustworthiness to the companies they led. 

But global companies are now led by much more diverse groups who do not share a common culture in the same way. Establishing a common boardroom culture within increasingly diverse boards must be a great challenge. In a climate where "challenge" is seen as a solution to governance problems, how can a common culture be sustained?

Sir Adrian Cadbury

I was very sad to learn of the death of Sir Adrian Cadbury. He had a huge influence on my academic career, for which I shall always be grateful. I first met him when I was in the middle of my PhD study of audit committees. At that time, around 1996, there was very little academic literature on audit committees and what there was suggested that they weren’t very effective, so I wanted to know why the Cadbury Committee had placed such emphasis on their value. I discovered that Sir Adrian was speaking at a conference on internal audit in Birmingham so I went along and, after his very interesting talk, I posed my question. His response was a big smile and with a twinkle in his eye he replied “It was the only thing the Committee could agree on!” Of course, it wasn’t as simple as that and in the coffee break he explained much more about the background but that remark sparked in me a deeper interest in how the Committee had worked and a lengthy quest to find the minutes of its meetings.

After that, we corresponded occasionally: he was always ready to answer my questions and it was a delight to receive his beautiful handwritten letters. As academic research in corporate governance became more established, conferences took place. Adrian was a regular attender and speaker at one organised by Bernard Taylor at Henley Business School, an annual event which brought together academics and corporate governance practitioners from across the world.  One morning there I awoke very early and decided to go for a walk by the river where I encountered Adrian watching the early morning rowers with great interest: that was when I learned of his great rowing prowess, about which he was typically very modest.  He also chaired sessions at the annual conference hosted at Birmingham Business School, where he showed great enthusiasm for the academic work presented, particularly by young scholars from abroad. They all wanted to be photographed with him and he acceded charmingly to every request.

My search for the minutes continued. I eventually tracked down the original Committee secretary, a civil servant long retired, because Adrian remembered that he had been a keen ornithologist: a search of bird watching groups led me to him but sadly he had no idea of where the minutes might be.  As news of my quest spread, people were very helpful; possible locations mooted were an attic in Edinburgh (the home of one of the Committee members), a warehouse in Milton Keynes (where ICAEW papers are stored) and the archives of the former DTI but many diligent searches have as yet revealed no trace of the minutes of Committee meetings between 1992 and 1995.  At one point I actually accused Adrian of not having held any formal meetings at which the entire committee assembled: he thought this was very amusing and denied it but it became clear from his papers that much of the important work in developing the Report and Code went on outside any formal meetings.

When he decided to give his papers to the Judge Business School in Cambridge,  he told me that he didn’t think any of the twelve boxes contained copies of the minutes but that I should look at the papers to see if there were any clues. When the papers were eventually archived, I was invited to examine them and speak about their importance at a symposium. (The papers have since been digitised and are all available online, a remarkable resource) At that point I recruited my colleague Judy Slinn, a business historian, to help me as she had lots of experience of working with archives. We realised very quickly that this amazing material could provide the basis for a book and Adrian was delighted at the prospect of the Committee’s work being properly documented. His support for the idea enabled us to raise some funding for the work, from ICAS and from the British Academy, and a publishing deal with OUP, the publishers of Adrian’s own book “Corporate Governance and Chairmanship”.

Thereafter he took a keen interest in the progress of the book and generously offered to write a foreword. He dropped the odd gentle hint that we should get on with it a bit more quickly as he was, as he put it, no spring chicken.

I’ve blogged about some of the frustrations of putting the book together. But there was much pleasure in the process too, especially the time spent in the Judge library reading Adrian’s annotations on many of the documents: our task would have been very much more difficult if his handwriting hadn’t been so clear! On one occasion he very kindly invited us to his home for coffee to chat about some of the issues: his memory of the Committee’s work was very clear and he was able to explain much of the context of the data we worked with.  

Although he always referred to the work of the Committee as a team effort , it became very clear to us that the success of the Committee’s work was in great part due to his people management skills and to the immense efforts he put in after the Report and Code were published, which ensured that the ideas became embedded in thinking about corporate governance. A significant problem for us was avoiding the writing of a hagiography but, while he modestly played down his personal contribution, we wanted to ensure that it was properly documented. We sent him the final draft in some trepidation but to our relief he seemed quite thrilled with it .

We were delighted that he was able to speak at the book launch in October 2013 and his remarks were very kind.  He was, as ever, charming and patient with everyone there who wanted to speak to him and asked him to sign copies of the book.

I had tentatively floated with him my idea that non-executive boards were now in great danger of distancing themselves too far from management and that maybe the boundary between governance and management should be more permeable, an idea which drew on the data Thom and I were collecting on the role of NEDs  in NHS boards. He firmly disagreed, but charmingly, of course.

The last time I heard from him was earlier this year when we shared our amusement that someone in the OUP marketing department  thought that, since Cadbury must mean chocolate, a Valentine’s Day marketing push for the book would be useful.

I shall miss his wise counsel, his keen intellect and the twinkle in his eye. It was great privilege to know him.

Am I an economist?

I have an undergraduate degree in economics from the University of Manchester. I was awarded it a long time ago, when the Phillips curve was something relatively new and the first edition of Richard Lipsey's first textbook had just appeared. After that, I became a chartered accountant, which is how I described myself until I became an academic. But perhaps I am also an economist...

My musings have been prompted by the extensive media discussion of what is being described as Corbynomics. I'm not especially interested in the substance of what is being discussed - even if Mr Corbyn were to achieve significant power, I'm sure he would discover as others have before him* that there are significant constraints to policy implementation, consigning his manifesto to oblivion.

But I am interested in how policy making happens: who do policy makers consult and how do they evaluate the advice they receive? In the areas I know best, there is sadly little use made by policy makers of independent and rigorous academic research, although ICAEW is striving to address this by basing its policy recommendations on a thought leadership programme which draws on academic research, and by establishing strong links with academics across the world through funding research studies and involvement in leading academic conferences.

So if his economic policy ideas are so newsworthy, I began to wonder who advises Mr Corbyn. That's not difficult to discover as his adviser Richard Murphy, has quite a high public profile (although he doesn't feature in this list of "top economists". To join this particular list, you can nominate yourself and the ranking is based on social media activity. With a bit of effort, I could probably get myself in there. Maybe I am an economist!)

Mr Murphy is described as an economist and has extensive experience as an advisor to a range of organisations. His campaigning stance on tax justice seems to make him a controversial figure and his frequent blog postings generate some interesting debate on the blog and on Twitter. As with many blogs, I found myself wanting to know more about the supporting arguments for opinions expressed; my personal rating system gives more credence to bloggers who cite peer-reviewed academic research - I have, after all, spent many years telling my students to follow up sources to assess the credibility and legitimacy of arguments.

Mr Murphy's posts don't seem to cite many academic sources, and neither do those of his publications accessible from his web site, which led to me wonder about his background and qualifications. I was very interested to learn that he has exactly the same qualifications that I do: an undergraduate degree in economics and accountancy, and an ICAEW qualification. I'm really beginning to think that I may be an economist!

So what gives authority to Mr Murphy's advice? His advice on accountancy and tax would presumably derive authority from his membership of a professional accountancy body but there is no equivalent for economists, other than, possibly, membership of the profession of academic economists. Interestingly, in his very full disclosure of his personal funding arrangements on his blog, Mr Murphy states that his funders "have agreed that an appropriate income benchmark for my work is that of a UK university professor." Hm. Some professors of economics and finance command pay considerably higher than the grants Mr Murphy receives. But the holder of a professorial post in a UK university is subject to an important constraint: his or her work is subject to peer review, which gives it legitimacy and authority. The system of peer review may have its flaws (this is a good discussion of these in the context of medical science) but it does expose ideas to analysis and critique by those who understand them. Mr Murphy does get called out sometimes by those who comment on his blog: today he posted an interesting article about pensions which included a very confusing statement about the status of bank deposits, implying that these are bank capital rather than liabilities to depositors, and, when challenged by a reader, agreed that this was misleading - although he hasn't apparently amended the original post. But this is not the same as the type of review to which an academic article would be subjected. But, then, Mr Murphy is not an academic. Which leaves me still wondering about how authoritative his economic advice might be.

Anyway, I look forward to reading his forthcoming book "The Joy of Tax". His publishers have cannily decided to capitalise on his current high profile and bring forward the publication date.

However, I'm still not entirely clear about what an economist is. Investigating the jobs advertised on www.econ-jobs.com suggests that for many of them I'd need a stronger quants background than that provided in my degree, although some say that the role involves the sort of information analysis and communication for which any solid accountancy qualification and experience would provide. so maybe I can conclude that I *could* be an economist, if I really wanted to...

*Most recently, for example, the Lib Dems: before the Coalition came into being, I attended a meeting at which Vince Cable set out a compelling and indeed inspiring case for the government to take the opportunity provided by the financial crisis for extensive infrastructure investment, a case which was never heard of again...

Accountancy firms wake up to widening access

I am delighted to see today that EY has followed PwC's lead and scrapped their UCAS points requirement for student applications.

Thirty years ago, when I started teaching accounting at Oxford Poly, students on our accounting degree course were typically admitted with relatively poor A level results. In those days, course managers dealt with admissions and had a great deal of latitude: we had time to interview applicants and make a judgement about how well they might cope with degree level study. And, as the majority of staff teaching accounting had professional accounting qualifications, we could also develop some idea about whether the students were suited to and likely to be successful in subsequent professional examinations. Quite often, poor A level results could be explained by situations beyond the student's control and we could take those into account.

Many of these students flourished during their studies and achieved excellent degrees but those who wanted to become chartered accountants faced great difficulty in securing training contracts

Around that time, someone noticed a correlation between good A level results and success in ICAEW examinations. Accountancy firms were having to deal with increasing numbers of applications for training contracts, so setting a minimum A level score was an attractive, and apparently logical, screening process. The result was that our graduating students didn't even get as far as the interview stage. We tried to help, advising them to draft covering letters which stressed the value added of their university experience and to include a photo. We drew on our personal contacts in firms, encouraging them to visit us and meet our students and persuading them to make a case for interviewing strong applicants. We steered our students to apply to smaller firms where partners were often more interested in assessing how well a student might fit in to the team and have the skills to contribute quickly in a practical way than in their out-of-date A level results. For some, we suggested that they might find it easier to train with a different professional body, although an ICAEW qualification was, usually, in their view, the best: this was especially the case with our international students.

Our students had often felt that they had been written off at 18 because of poor A level scores but they had blossomed in higher education and regained confidence: it was very sad to see them denied entry to their chosen career paths, with three years of significant achievement dismissed as irrelevant.

The advent of online application meant we were no longer able to use any of our support strategies. A further blow: subsequent analyses of ICAEW exam performance revealed a correlation between a degree in a non-accounting subject and success in ICAEW examinations.  Our students could still find training contracts with smaller firms but those who succeeded with the Big Four became rare.

I'm still in touch with quite a few of my former students: they all became qualified accountants and many of them have had very successful careers, both within the profession and outside it. Some have even offered to employ me. But I still lament the loss to the profession which resulted from enforcing that rule for so many years and I greatly welcome the widening of access. I'm also delighted that one of my former colleagues is researching in this area: her work should provide sound data for future policy decisions. 

Ethics

Saturday's "Lunch with the FT" column was about Pavel Durov, a young Russian tech entrepreneur. He described the development of his social networking site VKontakte:

-----
It was, he says a "libertarian's paradise" in the unregulated internet market that then existed in Russia. "You could do anything," he says. "Of course, there were stupid laws. You could get around them with the help of corruption, which is usually bad, but when the laws are really stupid and outdated and really limit innovation, it can be a good thing."
-----

Really?

The Great Governance Debate

A publication from the IoD today: thanks to @dinamedland for the headsup. Nice word cloud on the front cover.

But why "great"? Is there a lesser governance debate? Is there a debate at all? And what is the purpose of debates? Motions carried or defeated? Is this a sensible metaphor for corporate governance? I think that good governance happens in all the small conversations between the people involved. The Cadbury Code was all about stimulating those conversations, providing a language and a framework in which they could take place. It certainly wasn't about measurement of any sort. (Henry Mintzberg recently offered some cogent words about this.)

I did get beyond the front cover. I got as far as page 8 and realised I could do with a cup of tea and a cuddle with my cats while pondering my own inadequacies with regard to statistics and wondering whether it would be worth trying to address these at this stage of my life. It didn't take long to conclude that I could manage without knowing what "support vector machine regression" means. It certainly implies academic rigour, as does the Cass imprimatur, so I parked my anxieties and turned to the conclusions.

Ok, these are interim conclusions, but really?

"Different questions give different answers"? Really?

"Companies with higher governance scores have reputational advantage." You don't say!

"High-profile companies have reputational disadvantage

 Companies with lower scores in the predictive model (lowest tier) suffer from an average reputational disadvantage of -42. High-street banks have some of the strongest reputational disadvantages, ranging from -47 to -124."

Now that's quite interesting and might be worth exploring.

"Range of scores is relatively narrow.

We also note that the range of scores produced in the predictive model is relatively narrow. It may be that lower-scoring companies are already moving to develop and improve governance to deliver the levels seen by the higher-scoring companies."

That would also be worth investigating over time.

" Governance is a complex system. [Well, there's a surprise!]

The range of results from the instrumental factors in Section 6 above shows us that no single factor can determine how well a company delivers corporate governance. Companies that wish to improve their governance should address a wide variety of factors. Governance should be seen as the responsibility of the whole organisation."

I would certainly take issue with that final sentence. I blogged about the problems of blurring of boundaries between governance and management last August and I'll have more to say on that in a future post.

This may not seem very positive: I should probably read the report in more detail, to be fair. But it's my contribution to the debate, for now. Is anyone listening?

The truth about our norm core

Interesting article in today's FT by Tim Harford, pointing out that the classic studies of what has come to be called groupthink are too often quoted without mentioning the proportion of the subjects involved who did not follow the herd.

I'm still puzzled about the point at which consensus (considered good) becomes groupthink (considered bad). The evidence that board diversity will lead to less groupthink is very limited but this argument is frequently trotted out in support of board gender diversity.

And I'd like to see research on the relationship between consensus and diversity. In my research on audit committees, when I enquired about how contentious issues were resolved, board members told me repeatedly that dispute was minimal: many of their stories indicated that this was because consensus was achieved outside the board room through informal conversations. There have been many changes in the way boards work since I undertook that research but I doubt whether the importance of informal communication before and after meetings in achieving consensus has entirely diminished. How does that work for more diverse boards, I wonder?

Lots more interesting stuff to read:

A fascinating article by Paolo Quattrone on institutional logics: "Governing Social Orders, Unfolding Rationality, and Jesuit Accounting Practices: A Procedural Approach to Institutional Logics". A demanding read but worth getting to grips with.

Having read the sample chapter via Kindle, I was really keen to get hold of this and assumed that I would need to use the inter-library loan service, a ponderous process. The librarian who deals with ILL made my day when she told me that the Brookes library has it in ebook form!

I haven't read very far yet (and, because the author is a legal scholar, it has lengthy footnotes on every page so it's easy to lose track of citations, which I find very frustrating) but I like his initial analysis of the arguments which seems more comprehensive than anything else I've read. So far, there is almost no reference to non-US literature - I shall be ticking off citations against my lengthy bibliography on board gender diversity. I see that the empirical work was conducted in Norway: I hope he reflects on the difficulty of generalising from that special case.

Delighted with this, a freebie from OUP for reviewing a book proposal. It looks at accountability within everyday processes such as rubbish collection, traffic control and airport security, and how this relates to governance.

And a treat.










My other treat this week was listening to the wonderful Bob Monks speak at a CSFI roundtable event - always a pleasure to hear him speak, and I was able to give him a copy of the Cadbury book.

Chasing audit quality

The accountancy profession continues to struggle to demonstrate the value of audit to the wider world. Like the activities of boards of directors, audit is opaque: the title of Beattie, Fearnley and Brandt's prize-winning book on audit "Behind Closed Doors" was well chosen. If it is difficult to show what auditors actually do, it is even more difficult to assess the quality of what they do.

My recent reading has pointed up two rather different approaches to this problem, a difference which underlines the worrying gap between academic research and practice. Academics investigating the relationships which might affect audit quality use proxies for audit quality such as abnormal accruals. There is a sizeable literature dating back to de Angelo's widely cited paper published in 1981. This is a useful overview from 2004.

A practitioner reviewing some proposed research in this area recently observed: "..it has always been slightly unclear to me how you can establish an appropriate proxy for something that has itself not been clearly defined, and for which no agreed methodology of assessment has been developed."

The FRC seems to ignore all this and takes a pragmatic approach, well illustrated in the recent practice aid for audit committees, developed thus:

"The FRC organised five roundtables where an approach to assessing the effectiveness of the external audit was field tested, with a focus on audit quality and the financial statement process. The roundtables included key market participants relating to companies with a UK Premium listing – including audit committee members, investors, financial management and auditors, who gave feedback on the proposed approach, and shared some of their own experiences and expectations."

This would not pass the tests of rigorous empirical research (but is there any such thing? Paul Williams examines it here) but it has generated an analysis of the potential components of audit quality which recognises the subjectivity and judgement involved in its assessment but still offers a practical way forward.

Accounting academics are subject to all sorts of institutional constraints which militate against producing studies which could be of practical help to practitioners: they often complain that access to people is difficult, making ethnographic approaches, which could provide insights into behaviour, too problematic to undertake. But the fundamental questions which interest each group are the same. It would be in everyone's interests to bridge the gap.

The PRA on board responsibilities

The Prudential Regulation Authority is consulting on this. The paper sets out a very clear articulation of board responsibilities which would apply to any company, not just those regulated by the PRA. The paper provides a couple of neat summaries of the effective board from the PRA perspective:

"An effective board is one which understands the business, establishes a clear strategy, articulates a clear risk appetite to support that strategy, oversees an effective risk control framework, and collectively has the skills, the experience and the confidence to hold executive management rigorously to account for delivering that strategy and managing within that risk appetite."

"The desired outcome from a regulatory standpoint is an effective board, which is one that:
• establishes a sustainable business model and a clear strategy consistent with that model;
• articulates and oversees a clear and measurable statement of risk appetite against which major business options are actively assessed; and
• meets its regulatory obligations, is open with the regulators and sets a culture that supports prudent management."

The focus on risk, while obviously most relevant in financial services, might also help other companies to consider business decisions more carefully: from the perspective of negative outcomes, it is not always easy to distinguish between bad corporate governance and bad business decisions.

But the system still relies heavily on NEDs. I wonder if there is any recent research on the effect of NEDs on the boards of financial services companies over the last decade.

And I'm still struggling to understand what "culture" means.

Brief thoughts on abstracts

In a Twitter conversation yesterday @fcablog observed that the abstract of this Piketty paper did not properly represent the contents. This post to the excellent LSE blog about the importance of social media presence to academics prompted his further comment on the need for better abstracts.

Writing abstracts is difficult and the challenge is not always recognised, partly, I think, because of the way academic papers are developed. These days many conference organisers demand the submission of full papers rather than just abstracts but when I first started attending conferences all that was needed was an abstract. My most frequent co-author had a happy knack of constructing very interesting abstracts from some rather vague research ideas with which we had been tinkering: we would send the result off to a conference (chosen largely on the basis of being held in a place we quite fancied visiting) and when the abstract was accepted we would then be faced at a later stage with actually writing the paper. We could change the abstract, of course, but our paper would have been allocated to a presentation stream on the basis of what we'd originally said so there were limitations.

Amazingly, this process worked rather well and we ended up with some sound publications which have stood us in good stead over the years of our careers. 

I thought I'd take a look back at the development of the abstract for our most widely cited paper. This paper was one output of a research project financed by the Institute of Chartered Accountants in Scotland which also resulted in this report. 

This is the original abstract sent to the first conference at which we presented our ideas. The title was "From Frog to Prince: the Metamorphosis of Internal Audit".

"Over the last decade, the term ‘audit’ has become widely used in spheres of accountability beyond the purely financial (Power 1997), while accountancy firms have begun to re-brand audit services under the banner of ‘assurance’. This change has been paralleled by a shift in external audit focus from detailed compliance and financial system analysis to a broader strategic emphasis on business risk (Lemon, Tatum et al. 2000). Corporate governance policy recommendations have highlighted the importance of internal control and raised the profile of the internal audit function. In a similar shift to that observed within external audit, the role of internal audit now emphasises risk management (Selim and McNamee 1999), notably in the assumption of a close link between internal control and risk management underpinning the recent Turnbull guidance (Turnbull Committee 1999). In practice, the extent of this shift may be limited (Griffiths 1999). This paper explores the evidence that suggests that these changes are taking place, using interviews with leading internal audit practitioners, set against the background of changing sociological perspectives on risk."

I can't find the notes of our earliest conversation that will have led to this but I'm fairly sure that those citations are a manifestation of my lack of confidence in the broad assertions of my co-author! Including citations in an abstract is rarely helpful: they take up the limited space and the full references don't often accompany the abstract which makes it difficult for a reader to follow them up.

This is the abstract from the first full conference paper draft: 

"The publication of the Turnbull report in the UK represented a radical redefinition of the nature of internal control and internal audit as features of corporate governance in the UK.  It is surprising that the redefinition has been largely unremarked.  In this paper we chart the implied change in the role of internal audit, evaluate evidence that such a change has actually occurred and identify the pivotal role of the concept of risk in the change which is occurring.  Competition for organisational turf and influence is identified as a driving force; ownership of risk management is seen as an occupational vacuum which internal auditors are seeking to occupy as a means to acquiring influence on corporate strategy formation.  At the same time compliance with systems and verification of internal control are in danger of becoming neglected.  Internal auditors are seeking to professionalise their occupation and to compete with external auditors and non-executive directors in providing strategic advice.  Meanwhile, who is minding the shop? "

I like that second sentence: well, *we* were surprised. We did eventually come up with evidence to support some of these claims.

This is the abstract from the final published paper which is entitled "Risk management. The reinvention of internal control and the changing role of internal audit". Sadly the frog metaphor had to go (although we kept it in a footnote), the language is more academic and the whole tone is far more serious.

"The publication of the Turnbull guidance represented a radical redefinition of the nature of internal control as a feature of corporate governance in the UK, explicitly aligning internal control with risk management. This paper explores this change, using sociological perspectives on risk and its conceptualisation to frame the debate about internal control and risk management within the UK corporate governance arena - the most recent manifestation of an ongoing competition for the control of economic and social resources. The paper demonstrates that developments in corporate governance reporting requirements offer opportunities for the appropriation of risk and its management by groups wishing to advance their own interests. This is illustrated by a review of recent changes in internal audit."

It's worth noting that the journal in which this was published now demands structured abstracts.

Looking back at the abstracts I'm not at all sure that they would satisfy @fcablog. But it has made me think more carefully about the role of the abstract and what readers require. I confess that when I've reviewed papers for journals I haven't always paid a great deal of attention to the abstract, other than to check that they are in line with the paper contents. It might be quite interesting to write a paper about writing abstracts...

A US perspective on women on boards

Wonderful stuff in the New York Times: The Effect of Women on Corporate Boards. Professor Krawiec is spot on! And good to see the Catalyst view criticised.

Happy to admit when I'm wrong but...

On Saturday this article irritated me, as you might expect, so I shot off a letter to the Guardian noting in particular that the reference to Jimmy Choo was inaccurate, according to their web site.

Today I've had a message from the Readers' Editor's department, pointing out that Judith Sprieser left the board of Jimmy Choo with immediate effect earlier this month. Well, my bad.  The Stock Exchange announcement cites"personal reasons unrelated to the company".

This raises a question about naming and shaming boards which do not appear to be suitably diverse in their composition, in terms of the impact of timing and movement of directors. Presumably the Jimmy Choo board will be expected to appoint another woman. Suppose they had reached the magic number of three women on the board and one left: would they be expected to replace her with another woman? Extend this supposition to encompass representation of other groups: is the assumption that for every group there will be an appropriate number which should always be maintained? Won't it be a tad difficult for boards to ensure the right balance of competence and experience within these limitations?

Just askin'...

Women on boards redux

I'm following this morning's self-congratulatory tweets from Cranfield where the latest figures on women on boards are being revealed.

One tweet shows the extract from the report which lists the FTSE250 companies without female board members. Jimmy Choo? Now that's interesting. I see from their web site that do have some fancy shoes for men but surely their main customers are women? But, but... they do have a female NED, Judith Sprieser, so why are they on the list? Wonder if my tweet will get any response.

Lord Davies has apparently opined that "boards are getting fixed". Did they need fixing? Where's the evidence for that? Will I ever get tired of asking?

The Economist

Once upon a time, one could rely on the Economist. Its content could have been viewed as true thought leadership (I've been thinking about that today: see here.)

But these days its comment on corporate governance often just makes me sigh. Take this. 

First, the picky points.

1. Arthur Andersen was not a company, didn't have shareholders so couldn't practice shareholder-value maximisation. As a professional services firm, it may have advised its clients to do so but that's a little different.

2. Colin Mayer has not yet, as far as I'm aware, been knighted, although he has written a very good book.

But what I would most take issue with is this statement in the penultimate paragraph of the article:

"..most companies are engaged in a constant process of negotiation between managers and investors over their strategy and time horizons."

Do investors have such close engagement with managers? Where's the evidence for this? The Cadbury Committee envisaged that the Code of Best Practice would improve corporate governance by stimulating such engagement between investors and boards  but even that hasn't worked as well as they might have hoped. 

I think this is sloppy journalism.

Now in print...

My piece in the March issue of economia. Will any one read it, I wonder?

If women are the solution, what is the problem?

This piece is due to appear in the March issue of economia but I'm posting it here now to amplify recent Twitter posts on this topic.

(The recent publication from BIS "Inspirational Women in Business" doesn't really meet my call for women's stories. To me, they sound much like the sort of career stories men would tell.)

If women are the solution, what is the problem?

The debate about gender diversity on corporate boards is mostly about how to get more women on boards: there is very little discussion about why the number should be increased. But boards without female members have successfully run many companies for many years and company failure is rarely, if ever, ascribed to board gender balance. What problem is this intervention designed to address?

The argument for increasing the number of female directors is generally framed as “the business case”. According to “Women on Boards”, the 2011 review led by Lord Davies, the business case has four dimensions:

Improving performance

Accessing the widest talent pool

Being more responsive to the market

Achieving better corporate governance

While these are all important corporate objectives, it is not clear how increasing the number of women on boards should be such a central strategy in achieving them.

There is some evidence of an association between gender balanced boards and corporate performance.  However, as with most research seeking to connect board composition with company performance, the complexity of the potential relationships between measurable characteristics means that, although associations between different factors can be demonstrated, the direction of causation is far more challenging to identify.  Do increased numbers of women on boards lead to better performance or do better performing companies appoint more women to their boards?  

“Accessing the widest talent pool” is also a persuasive idea but should surely be an aspiration at all levels of an organisation. The Davies Review offers no evidence that such access improves boards in particular.

“Being more responsive to the market” assumes that companies with a predominantly female customer base will be more successful if the board reflects this. We would expect board members to have a comprehensive understanding of the company’s commercial environment but there is no evidence to show that the composition of the board should ideally be linked to customer demographics.

“Achieving better corporate governance” should be an aspiration for all boards but there is no evidence that gender balanced boards are better equipped to do this: there is, as yet, no demonstrable link between board composition and improved oversight.

Following the original Davies Review, BIS has published annual reports assessing progress in meeting its recommendations. The business case has not been revisited, although in the 2014 report it is summarised again with a little more detail:

Improve performance at Board and business levels through input and challenge from a range of perspectives;

Access and attract talent from the widest pool available;

Be more responsive to market by aligning with a diverse customer base, many of whom are women; and

Achieve better corporate governance, increase innovation and avoid the risks of ‘group think’.

No evidence is cited to support the assumptions that “challenge from a range of perspectives” improves performance or that appointing more women to boards can increase innovation or avoid groupthink. The continuing stream of published research on board gender diversity around the world is studiously ignored: the report lists “Research published in 2013/14 “ but does not include a single article from an academic journal. Somewhat surprisingly, these annual reports do not refer to the two studies conducted by the Credit Suisse Research Institute which have prompted significant media commentary. Their 2012 report ‘Gender diversity and corporate performance’, while not a peer-reviewed academic study, provides a very good overview of the academic literature in the area. Its authors are careful to emphasise that correlation does not prove causation. In 2014 they published a further report on women in senior management. Again, the researchers draw on a wide range of recently published research and again they begin the report with a warning about the limitations of the research:

While our statistical findings suggest that diversity does coincide with better corporate financial perfor­mance and higher stockmarket valuations, we acknowledge that we are not able to answer the cau­sality question and this is an important caveat to the observations below in the report. Do better companies hire more women, do women choose to work for more successful companies, or do women them­selves help improve companies’ performance? The most likely answer is a combination of the three.

The 2010 European Commission report “Gender balance in business leadership”

forms part of a review of gender equality across member states, looking particularly at gender balance in decision making at high levels of government as well as business. It discusses the economic and business cases for gender balance on boards: the economic case is argued on the basis that economic growth demands the use of all available resources, making it essential to secure increased employment of qualified women in the workplace at all levels, while the business case rests on arguments similar to those listed in the Davies Review. The report refers to a very small selection of academic studies, noting that these studies do not prove causality, but this caveat does not appear in the subsequent report published in 2012 “Women in economic decision-making in the EU” which formed the basis of a proposed Directive on improving board gender balance in listed companies (approved by the European Parliament in November 2013 but yet to become law).

If the business case for pursuing board gender diversity is weak and based on unsupported assertions, are there other stronger supporting arguments?

The 2010 European Commission report sets the requirements for increasing board gender diversity very clearly within a broader social justice and equality context. In the UK this seems to have been ignored. Perhaps it has been taken for granted. Perhaps those pursuing the board diversity agenda believe that those who have to be persuaded of its value – male board members – would respond more positively to a business case, rather than social justice arguments. Such arguments have been explored extensively by political scientists, since gender balanced representation has been a political issue for far longer than in the context of corporate boards.  Corporate law enshrines the view that boards represent shareholders but the board diversity debate has not been framed in that context.

Since the problem which board gender diversity is designed to address remains unclear, the effectiveness of pursuing this solution will be difficult to assess.

Success can be measured at a superficial level by counting the number of women appointed but this is cannot be the whole story. The Davies Review annual reports have not attempted to assess success against the business case dimensions. Maybe the increased numbers are still too small to have a positive effect: the frequently quoted mantra “One is a token, two is a presence, three is a voice” may still be an aspiration in many boardrooms.  But there is some evidence of outcomes.

The 2014 Credit Suisse Research Institute report on women in senior management noted an important change from their earlier observations:

Companies displaying greater board gender diver­sity display excess stock market returns adjusted for sector bias. Companies with more than one woman on the board have returned a compound 3.7% a year over those that have none since 2005. The excess return has moderated since our initial report. Over the last two and a half years, the excess return is a compound 2.0% a year.

The researchers offer no explanation for this, but it demonstrates that results of increasing board gender diversity may not be as clear cut as expected.  In Norway, the country which is often cited as a leader in advancing gender diverse boards because of its early introduction of quotas, researchers have demonstrated an association between the introduction of quotas and a loss of shareholder value in Norwegian companies. This has been cited by opponents of quotas as support for their position, but again causality cannot be confirmed: it is possible that this may be a short-term effect attributable to a sudden increase in the appointment of less experienced board members.

Evidence from previous interventions mandating board composition suggests that such a policy may not be effective. In the UK, the initial pressure to influence board composition came in 1992 in the Cadbury Committee’s proposal that boards should appoint specified numbers of independent non-executive directors to strengthen the monitoring function, particularly in regard to financial reporting. There was little evidence available at the time to show that such appointments made a difference.  Indeed, research in the US, where boards were already predominantly non-executive, had concluded that mandating specific aspects of board composition was ineffective, due to wide variations between companies and industries.

Although there was some early resistance to the idea that boards should be required to appoint independent non-executive directors, over the last two decades it has become widely accepted. The 2013 Grant Thornton corporate governance survey of UK companies reports that 96% of FTSE 100 companies comply with the UK Corporate Governance Code requirement for at least half the board, excluding the chair, to be independent non-executive directors. However, across the FTSE 350, the most common area of non-compliance with the Code relates to the number of independent non-executive directors on the board. Non-compliance is more prevalent among smaller companies which suggests that smaller companies, with smaller boards, may have problems in complying with any form of mandated board composition.

The effects of this significant change in board composition are not easy to judge but research that clearly demonstrates positive outcomes from increased board independence is sparse. Indeed, there is some evidence of negative effects: banks with more independent boards performed more poorly than others in the recent financial crisis.

We still have little insight into what goes on behind the boardroom door. The board gender diversity debate rests on the implicit assumption that male and female board members behave differently. The criteria for independent board appointments cannot guarantee independence of mind and behaviour in directors: is it likely that gender can be a reliable predictor of the desirable behavioural characteristics sought for effective boards?

There is a steady stream of published research studies on board gender diversity: a Google Scholar search pulls up more than 150 publications in the last year. It is not unusual for policy makers to pick and choose the evidence that supports pre-determined plans but there is a danger of unintended consequences when policy enters the realm of conventional wisdom and underlying assumptions are no longer questioned. The debate about gender diversity has raised awareness of issues which boards should certainly consider but imposing demands for boards to demonstrate diversity in their composition, with no real understanding of how this influences board dynamics, may prove ultimately to be counter-productive.

And what of the women now being appointed to boards? We need to hear their stories. The 2014 Davies Review annual report contains some quotes from board members on their experience of strategies for improving gender diversity - all but one from men.

Laura F Spira

Laura F. Spira is Emeritus Professor of Corporate Governance at Oxford Brookes University and Academic Adviser to ICAEW. Her book “The Cadbury Committee: a History” was published in 2013 by Oxford University Press.