A radical approach to #corpgov?

John Kay’s submission to the BEIS inquiry made the very important point that businesses are financed differently from the way that they were when our legislative and regulatory regime was first constructed. We are locked into a nineteenth century framework of accountability that bears little resemblance to twenty first century business reality.

In the past the accountancy profession has led the way in radical thinking. The profession has struggled for many years with the idea that financial reports are not useful.  “The Corporate Report” was published by ICAEW in 1975, before the accounting standard setting behemoth had submerged corporate reporting and developed into a huge constraint on any form of constructive rethinking.

The new forms of report proposed by this discussion paper were largely ignored, apart from the value added statement, although the statement of future prospects and the statement of corporate objectives have been revisited, with little acknowledgement of their history, in the integrated accounting project. The list of users and the description of their information needs has become received wisdom, repeated in financial accounting textbooks and firmly set in stone.

Thirteen years later ICAS published the discussion paper “Making Corporate Reports Valuable”.

This is much more radical in its approach, starting with a clean sheet and  thinking through accountability issues and how to address them. (It is notable that chapter 2 provides a corporate governance perspective: Scottish accountants had been reflecting on corporate governance for some time and were central to the establishment of the Cadbury Committee.)

MCRV reframed the list of users and directly addressed problematic areas of reporting. A detailed analysis of information needs led to precise suggestions for different reporting forms. This paper was followed in 1990 by a specimen set of accounts for a fictitious company, Melody plc, showing how the ideas could be applied in practice and in 1993 by a further feasibility study.

The two discussion papers bear rereading. While they were very much of their time, prompted by specific concerns such as the problem of accounting at a time of high levels of inflation, they represent a depth of thinking about reporting and accountability that has not been seen during the past twenty five years since the publication of the Cadbury Code. Corporate governance, financial reporting and audit are inextricably linked (yet surprisingly few corporate accounting textbooks – even those written by accountants – fully address this) as they form the framework within which accountability is expressed and achieved.  It would be encouraging to see the accountancy bodies once again grappling with these issues from a radical perspective, rather than offering further ideas for tinkering at the edges.

But the only recent instance of radical thinking on corporate governance that I have found is in this paper by a US legal scholar which argues that boards of directors are no longer essential.

It’s worth a read.

This week the FRC has announced a fundamental review of the UK Corporate Governance Code.

It remains to be seen how fundamental it will really be, in terms of addressing how corporate governance arrangements relate to modern business models and different funding patterns. And whether it will go back to first principles and pose unasked questions – for example, the unintended consequences of mandating board composition, which have not been widely discussed. Since Cadbury, board independence has been viewed as desirable but US evidence questioning this existed even before Cadbury*. Many large companies now have a hybrid form of two tier board: the board and the executive group do not sit around the table together and the link between the two is principally in the hands of the CEO. Which is ironic, given that corporate governance arrangements were largely intended to curb the power of the CEO.

Another useful set of questions might be: how do governance mechanisms operate within the public sector, where accountability structures are very different? Have boards of central government departments and of NHS Trusts simply replicated arrangements from within the private sector or have such arrangements been adapted? Is there anything that the private sector can learn from this?

The discussion paper published this week by ICSA is an interesting attempt to extend the debate, arguing that restoration of trust in business is not only the responsibility of listed companies and they cannot be expected to shoulder alone the task of achieving broad public policy objectives.  ICSA promises further papers and a radical approach. My breath is bated...

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* Baysinger, B.D and  and Butler, H.N (1985) Corporate Governance and the Board of Directors: Performance Effects of Changes in Board Composition Journal of Law, Economics, & Organization, Vol. 1, No. 1 pp. 101-124;  see also Bhagat, S and Bernard Black, B (1999) The Uncertain Relationship Between Board Composition and Firm Performance The Business Lawyer Vol. 54, No. 3 pp. 921-963