Great Expectations

Recently I have been reflecting on expectations. This was initially prompted by the change in attitude to Aung San Suu Kyi, once highly praised as a beacon of resistance and now reviled and stripped of honours for not condemning the type of behaviour she resisted for so long.  No doubt her apparent power is in fact severely constrained but we expect consistent behaviour, especially from our heroes.  Nearer home, the fate of the Liberal Democrats also hinged on expectations: I suspect that their power in coalition was also severely constrained and unpleasant trade-offs had to be made but expectations were high and perceived inconsistencies eventually punished.

We expect certain standards of behaviour from professionals, to whom we may trust our wealth and our health. Professional bodies exist to uphold these standards but the norms of professional behaviour are rarely framed in the context of expectations.  As far as I know, the accounting profession is the only one which has explicitly addressed the problem of unmet expectations by identifying the expectation gap between public expectations of the audit process and what auditors can actually achieve.  Some of what professionals due is aspirational: your doctor may not be able to cure you. Neither can accounting – a pertinent discussion of this can be found in McSweeney (1997).

As people have become more aware of the huge influence of corporations on our daily lives, expectations about those running such organisations have increased and the panoply of corporate governance regulation and policy has developed to address those expectations. Prescription about board behaviour is now extensive, based on the assumption that we expect board members to direct and control their companies effectively.

But do we expect too much of boards? At the time of the Cadbury Code, independent NEDs were seen as key to meeting expectations of corporate governance best practice. One significant difficulty for NEDs is the tension between the detachment required to maintain independence and the deep knowledge of company activity required to exercise oversight. Since that time, boards have become smaller and predominantly independent.  NEDs no longer meet at the boardroom table with the senior executives who manage the functional areas of the business: their contact with these people is often mediated via the remaining executives on the board who are typically only the CEO and the CFO. I’m not aware of any studies of how the information flows around the board have changed given this evolution in board composition but intuitively one might expect the ability of NEDs  to exercise their oversight role to have been challenged by the emphasis on board independence.

Useful guidance for NEDs in how to approach their role from an ethical perspective is provided by Guy Jubb’s recent paper for the Institute of Business Ethics, originally drawn to my attention by this comment. As well as raising issues for NEDs to address, the paper places financial reporting in its central role in corporate governance, a point made by John Kay as noted in earlier posts on this blog. 

Academic literature questioning the existence of any link between board independence and board performance has been around for quite a while (see for example ) and there is a an equally large literature exploring the effectiveness of NED oversight (see, for example).

But the latest data from Grant Thorntons’ annual corporate governance survey suggests perhaps that boards themselves are sceptical about the value of the UK Corporate Governance code’s current NED prescription:

“The most widespread non-compliance relates to directors’ independence. Twenty-five companies declare non-compliance with provision B.1.2, which requires that at least half of a board is made up of independent non-executive directors. Non-compliance with provision A.3.1, requiring the chair to be independent on appointment, remains the second highest area of non-compliance with 19 companies.”

The accepted wisdom on board composition is now that they should be independent and diverse but the impact of these requirements has not been properly considered. Other expectations are also coming into play: for example, the pressure on boards to engage more closely with a wider range of stakeholders. I have yet to find robust evidence that this engagement will improve board decision-making. It will certainly take up board time, and further increase expectations of what they can achieve.

Maybe it’s time to review the expectations that are being placed on these small groups of part-time directors?

McSweeney, B(1997) The unbearable ambiguity of accounting.  Accounting, Organizations and Society. 22(7) pp 691-712