Questions about board gender diversity

The Hampton Alexander report published yesterday provides some useful facts and figures but the general thrust is no different from any other similar report that we have read over the years.

I've posted this in a comment thread below an article in the FT today:

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Perhaps it's time to question some fundamental assumptions which underpin all these criticisms.

 What exactly is the problem that increasing board gender diversity is designed to address? Companies with all male boards don't seem to be failing all over the place and there is a distinct lack of *robust* evidence to show that diverse boards perform better (anecdotes are not data and correlation does not imply causation).

 Why should corporate boards be expected to reflect the diversity of the population as a whole?

 Evidence that diversity among groups and teams may improve performance is frequently cited. But how far can this be applied to corporate boards which are a rather specialised type of working group with specific accountability obligations operating within a defined regulatory framework?
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The Future of Corporate Reporting

So the FRC has finally pulled its collective finger out and launched a project to look at the future of financial reporting, something long overdue. The perceived problems with audit could usefully be addressed in this context, although the broad themes listed here make no mention of audit or indeed of the corporate governance framework within which corporate reporting exists. But it's a start.

I wonder if they'll bother to look at past work in this area - for example, the work done by the Scottish Institute in 1988, "Making Corporate Reports Valuable"  or the (confusingly titled) 1975 discussion paper "The Corporate Report".  The thinking embodied in these two publications is well worth revisiting.

Nor do the themes mention accountability which is central to the issue. Surely the first step in such a project must be to identify the groups to which companies are accountable. At the simplest level, these groups must be those providing the resources that a company needs to operate. The integrated reporting project has already had a good crack at defining the resources in terms of the six categories of capital but doesn't make the leap to establishing the information requirements of the resource providers. 

This is the crucial step. What do resource providers want to know? Our present reporting framework is based on the historic assumption that resources are provided by the limited group of creditors and shareholders, the latter being viewed as owners who had purchased shares in the company and thus had a direct financial interest and were a homogenous group with the same information needs. The development of the complex investment intermediary chain challenges this assumption and needs to be unravelled to demonstrate how accountability works within it. 

"The Corporate Report" broadened the scope of accountability to include other stakeholders but thereafter the accounting standardisation project took over and redirected attention, in my view unhelpfully because the notion of "decision usefulness" underpinning accounting standards was developed with no link to accountability.

Establishing the information requirements of resource providers is no easy task but the future of audit and assurance depends on it. Resource providers may have different views on how to assure themselves of the credibility of the information provided to them. This could lead to some really innovative thinking, not just about assurance provision but also about the regulation of reporting: who is it for and how should it be done?

So the fundamental questions for this project should be:

• who are companies accountable to?
• what information is needed to satisfy that accountability?
• how best can that information be provided and assured?
• how should the accountability process be regulated?

These are big questions. In framing them and seeking the answers, the FRC could usefully draw on the work of other groups looking at the fundamental purpose of the corporation - for example, this report published today by the British Academy, which makes proposals (based on rigorous research) to reposition the corporation in society. Such a repositioning has important consequences for corporate reporting and strong support from the accountancy profession for such an initiative could make significant change possible. Let's hope that the FRC is prepared for big thinking.

When the going gets tough...

.. women get it tougher. 

I am deeply saddened by today's news that Sacha Romanovitch is being booted out of GT. She has been a wonderful role model for young women in accountancy and has done important things at GT. It seems that her public profile suited GT partners when things were going well but the Patisserie Valerie scandal has apparently tipped the balance. I'd like to know who the PV audit partner is and what action will be taken against him or her.

Have you ever heard of Bill Michael, David Sproul, Kevin Ellis or Steve Varley? They are the leaders of the Big Four accountancy firms. They manage to keep a pretty low profile, don't they, in spite of the audit problems which swirl around their firms on a regular basis. And if their fellow partners have briefed against them anonymously, the press haven't thought it worth reporting.

I have always admired GT. My very first experience of the accountancy profession, many years ago, was a summer job with a firm in Sheffield which was taken over by Thornton Baker. The staff were all so eccentric that I don't think taking on a girl seemed at all odd to them, which meant that I had no idea that I would encounter any gender prejudice in the future...

When I first started teaching, it was difficult for poly graduates, even with first class degrees, to get training contracts, because those in charge of recruitment used A level results as a filter: poly students typically had poorer A level results, often for reasons beyond their control and unrelated to their intellectual ability. The partners at the local GT office were keen to employ our graduates and went out of their way to meet them and advise them on their applications.

And the GT annual corporate governance reports have been a great boon to both academics and practitioners. As academic adviser to the Turnbull review group which looked at reporting of internal control, I was asked to investigate the research process GT used to produce their report: I was very impressed by its rigour (they hadn't heard of inter-coder reliability but they knew how to deal with it...)

Sacha's leadership of the firm only increased my admiration for them. It's disappointing to find that GT is really no different from its competitors.

Bankers

I have just finished reading Philip Augar's excellent book "The Bank that Lived a Little: Barclays in the Age of the Very Free Market". I found myself completely gripped by it because, even though the outline of the events was familiar, his meticulous research and good writing made the story really come alive.

There is something fascinating about the rise of this literary genre which takes the lid off the world of finance, offering some insights into the thinking of the people involved in events that can blossom into full-blown scandals. I remember being very impressed by "Barbarians at the Gate" and "Liars' Poker" when they were published in 1989 and there has been a steady stream of such books since then, some turned into compelling films like "The Big Short" and "The Smartest Guys in the Room".

Augar's book seems to me to be a cut above the rest. The underpinning research is very impressive and he has made very good use of the extensive access he was afforded to people and papers. There is often a nuance to the books in this genre, as if the authors are saying not only "Here's the story and the facts I've discovered" but also inviting the reader to share their shock and concern about issues of accountability and the behaviour of the protagonists. Augar is very careful about positioning his analysis, which in my opinion makes this book as objective as good academic research aims to be. The reader can't help but conclude that there was a significant problem with Barclays' strategy and that the non-execs did a poor job of challenging those driving it but Augar manages to trace a path through his accumulation of factual information in such a way that the reader is led to this conclusion in small steps, rather than being presented with the full glare of the story viewed with hindsight.

The book clearly describes the dominance of a small elite group of middle-aged men over the banking industry. They are not driven by the size of their personal rewards: these serve to symbolise and reinforce their relative status. They are driven by competition. They know they are powerful but they seem to have little idea of how such power might be used to improve society. They view regulation as a constraint to be circumvented or even ignored.  Although they have much in common, they are not friends and have little compunction about leaking damaging information, undermining each other in the boardroom or sacking each other. They consider themselves exclusive on the basis of their qualifications and experience: only they can fully understand the complexities of financial institutions and the challenges of the economic environment. They are not very likeable.

There are women in this story. If the diversity discourse has any real traction, you'd expect them to make a difference to board behaviour. They don't, although at least one - Alison Carnwath - tried.

The numbers are astonishing. They are juggled about with little concern for the impact on those at the bottom of the pile - the bank's retail customers. Alongside the boardroom story, Augar traces the experience of one such customer, whose business fails in large part due to the mis-selling of a complicated financial product, illustrating the way that the traditional aspects of retail banking have been undermined and also emphasising the distance and apparent disconnect between the board and the organisation's frontline activities.

Lombard Street to Canary Wharf: my tentative theory that moving out of the old buildings of the City where office walls are often hung with portraits of past directors has had a negative impact on behaviour was somewhat undermined - Barclays took the portraits with them - but there are points in the story where the surroundings become symbolically important.

And the dinners. Deals are made and candidates are assessed over dinners. There's a book to be written about the role of dinners in corporate governance.

The relationship of the Barclays executives with their counterparts in the US is interesting. The goal of rivalling the Wall Street institutions underpins the development of the investment side of the bank but the implications of this for the organisation as a whole are not considered carefully by the board until it is too late. The clash of cultures between the US and the UK is also fundamental to the story. While wanting to harness the drive and abilities of US bankers, the board members from the UK fail to recognise problems of different communication styles. Traditional informal nods and winks of the City don't work as the regulators expect them to. The international network within which the senior bankers are enmeshed challenges the idea that culture can be effectively changed within individual companies. This group has its own culture, permeating all the banks between which they moved so easily. It would be interesting to consider the role of this type of epistemic community on organisational culture: the current emphasis in corporate governance thinking on managing culture does not appear to take such external influences into account.

The Barclays board ticked all the corporate governance boxes but made bad decisions. This is an excellent example to challenge the misguided belief that code compliance can prevent boards from making mistakes, and demonstrates the need to distinguish carefully between defective governance structures and processes and poor business decisions. The non execs were not shrinking violets: they were people of stature and competence in the worlds they came from. Why were they unable to exercise effectively the oversight function expected of them? This story supports my strong suspicion that the NED role is often impossible to fulfil in the way that our current corporate governance framework assumes.

The story is not over yet. Charges of fraud around the raising of the funds from Qatar that kept Barclays independent of government funding during the financial crisis have yet to be resolved. Criminal proceedings against four former senior employees will not start until next year. Augar's commentary on the unfolding story will be well-informed: I look forward to it.

Holiday reading

Even retired professors get holidays but while cruising along the Rhine my choice of reading was on the lighter side and, since I came home, the recent very hot weather has made it difficult to concentrate on anything that deserves significant intellectual effort, like Philip Augar's "The Bank that Lived a Little" or Jesse Norman's "Adam Smith: What he Thought and Why it Matters", both of which are waiting on my desk.

But I had reserved Richard Brooks' "Bean Counters: The Triumph of the Accountants and How they Broke Capitalism" from the local library so when it arrived I thought I should at least open it. Not that I imagine there will be such a queue of other eager readers that I won't be able to renew it but you never know in Oxford.

I confess that having read an extract somewhere I was expecting this book to irritate me, so the act of reserving it and paying £1.20 to do so was possibly masochistic. I began by looking at the index: how could a book about accountants not include any reference to my hero Sir David Tweedie? And then I looked at the acknowledgements and sighed a little that the names listed were all from the critical wing of both academia and the profession, such as it is. Puffs on the back cover from Margaret Hodge, Frank Field and John McDonnell and the fact that Brooks writes for Private Eye all made it pretty clear what I could expect in its pages.

But I was surprised to discover that the book is somewhat better than I expected. The first section on the history of the profession is reasonably well researched, although there is more about the history of the US profession than the UK but I suppose that's necessary to set the picture for the ascendancy of the global firms.

The opportunity to take a slightly more balanced view of the probity of the profession is occasionally missed: with reference to Robert Maxwell's scathing description by the Board of Trade inspectors as "a person who cannot be relied upon to exercise proper stewardship of a publicly quoted company" Brooks does not inform the reader that one of those inspectors was Sir Ronald Leach, senior partner of Peat Marwick Mitchell and that the firm refused to have anything to do with Maxwell thereafter.

Neither is there any discussion of the establishment of UK accounting standards and the sincere attempts by the profession to address the measurement and valuation issues inherent in the reports being audited (which is where Sir David would come in.)

The second section gallops through more recent scandals, pointing out the high rewards and lack of accountability that have privileged accountants over those who have lost money and jobs. Oddly, there is almost no mention of the boards of the client companies discussed: all responsibility is placed at the doors of their auditors with no reference to corporate governance failings.

The final part in which Brooks interviews Big Four partners in an attempt to hold them to account could have been really interesting if approached more objectively - perhaps with the help of disinterested academic support enabling more nuanced probing, giving some deeper insights into the thinking of leading accountants about their role. And the conclusions about what might be done are far from startling.

For me, the real kernel of the questions Brooks should have been asking lies in footnote 12 of chapter 2: "for whom does a company account?" Our reporting framework, in which audit is so central, is based on a set of assumptions about this question which were developed in another era and are inappropriate for current circumstances. If the profession really wants to retain its audit role, it should be leading thinking about this question, in order to shape the place of audit in the future.

Reviewing the FRC

The invitation to contribute to the Kingman review of the FRC published today mentions in passing that the FRC was established after Ron Dearing’s 1988 report “The Making of Accounting Standards”. I can’t find my copy but I remember the cover – glossy red with an overall design based on the word “red” in fancy lettering. I was told by an ICAEW employee at the time that this design was requested by Dearing as it was not only the colour of the cover but also his initials. 

Not long after, ICAEW published a further report with a red cover. This was written by Professor David Solomons. I still have my copy. It is a much more sober publication printed in a very small font and it contains a detailed and scholarly analysis of the conceptual and theoretical aspects of accounting standards.

The Dearing report addressed the structure of accounting standard setting: Solomons addressed the content of the standards themselves. Both are fundamental to the issue of trust in corporate reporting and I think they need to be addressed at the same time. How can we judge whether the FRC is fit for purpose in its role as guardian of  corporate reporting and corporate governance, without considering whether both corporate reporting and corporate governance are fit for purpose?

Is there a better way to fail?

In some instances of corporate scandal or failure, it seems clear who is to blame. Greed and incompetence are simple to attribute and, when punishment does not follow, outrage does. The outrage is usually addressed by promises of systemic change.

The pendulum signifying deficient behaviour swings between three poles. If the board of directors is at fault, we are told that we need improved corporate governance - more independent and diverse boards. If the auditors are at fault, we are told that we need to break up the big 4 to make the audit market more competitive. If the shareholders are at fault, it seems that we need to make them take more active interest in their investee companies and behave as owners rather than traders.

None of this makes a great deal of difference. Part of the problem is due to the process of corporate accountability. The reporting framework was devised in the nineteenth century and has not adapted sufficiently to changes in business activity, business structure, information requirements and communication channels.

There is also a problem of expectation. The literature on audit long ago identified the expectation gap between what people think auditors should do and what they are actually required to do. (I remember being taught that the auditor is "a watchdog, not a bloodhound" which may seem like a useful metaphor.. but don't they both bark?)

But there is also a very wide expectation gap between what the general public believe that companies should do and what they actually do. No corporate accountability system can work without some clear idea of what companies are for and what can be expected of them. This discussion is happening in various places:  for example, The Future of the Corporation, The Purpose of the Corporation, Tomorrow's Company Whether the insights from these different groups can be brought together and synthesised in any useful way remains to be seen but such thinking is needed to underpin policy and regulatory decisions which, at present, work on an ad hoc basis, selecting what appear to be the most pressing issues and tinkering with the system to try to address them.

Companies fail for all sorts of reasons. Risk is inherent in business and can't be managed out of existence. Honest and competent boards and management may make bad business decisions. Covering up may lead to incompetent and dishonest behaviour but no system can prevent that. The new focus on corporate culture assumes that a "good" culture will inhibit such behaviour but evidence of this seems very sparse.

We need to accept that companies will fail, even those that tick all the boxes. More boxes to tick won't change this. As well as identifying causes, perhaps we should be looking more closely at how the failure process is managed and how those caught in the fallout can be better protected.

Transparency?

This recent publication by Larcker and Tayan caught my eye: "Netflix Approach to Governance: Genuine Transparency with the Board".  It's a short descriptive account of the "highly unique practices" (can "unique be qualified?) of the Netflix board. 

I'm a fan of Netflix (love "The Crown") but I'm not convinced that what is described represents "genuine transparency", whatever that means.  We are told:

"The Netflix approach incorporates two highly unique practices: (1) board members periodically attend (in an observing capacity only) monthly and quarterly senior management meetings, and (2) board communications are structured as approximately 30-page online memos in narrative form that not only include links to supporting analysis but also allow open access to all data and information on the company’s internal shared systems, including the ability to ask clarifying questions of the subject authors. This quarterly memo is written by and shared with the top 90 executives as well as the board."

I do think that distance from management is a problem for boards, now that executive directors and NEDs don't sit around the boardroom table together. But attending management meetings? Reed Hastings, the CEO, says:

 “I don’t want the management meeting to be any different because they’re there.” 

Really? Has he heard of the Hawthorn effect? I can't believe that management won't behave differently if observed by the board. I also find it difficult to believe that board members could keep their mouths shut if they think that mistakes are being made. Transparency? The cynic in me whispers that meetings can be stage managed to avoid difficult issues and important discussions can take place outside management meetings. Just like board meetings, in fact...

The board memo could be a good idea. Maybe this is transparency. The ability to drill down and ask direct questions could be very valuable. But how much time would this take out of a director's day? Would they bother?  We are not told how long the Netflix board has been operating in this way, although it implies that the practices were in place at the time of the Qwikster debacle which was in 2011. So the directors interviewed could have been asked about the actual use they make of this facility and how much of their time they devote to it.

"Hastings cautions that directors granted this level of access to management discussion and documentation need to exercise self restraint about influencing decisions outside the boardroom." You bet!

At a broader level, these practices raise an issue about the boundaries of corporate governance. The challenge is to provide board members with information that enables them to fulfil their oversight duties but not so much that they are tempted to become de facto management.  Or at least that is the received wisdom: the discussions I have had with NHS NEDs suggest that the boundary could be permeable under some circumstances.

We need to know much more about information flows around the board. It's quite possible that other companies use similar - or even more innovative - methods. Some rigorous research into this would be very valuable.

It's conference time again...

Back from two interesting days at the annual conference of the British Accounting and Finance Association. This year those of us who had received awards from BAFA in past years were invited back specifically to provide feedback to early career researchers. One of the privileges of an academic career is the opportunity to help those who are just starting out so I was delighted to be asked although my heart did sink slightly when I read the papers in the session which I had been assigned to chair with Mike Page. They were all about audit but all quantitative and only one author had any practical experience of auditing and that wasn't really apparent in his work.

The presentations were excellent - all kept to time and were very accomplished, especially when considering that English was not the first language of those presenting. Mike was able to give them some feedback on their stats and we both agreed that they needed to tell more of a story to give their work greater context.  If you've spent several years immersed in the fine detail of doctoral work it's quite a shift to step back and look at the big picture. But I did think that some of the research questions addressed, particularly those considering relationships between people, were not best tackled by the use of archival data.

In a very lively and thought provoking plenary address, last year's Distinguished Academic, Professor Jeffrey Unerman discussed the implications of the Brexit and Trump campaigns for accounting and finance academics. In the course of his presentation, he urged the audience to consider carefully the choice of research tools to investigate their research questions. I was certainly struck by the dominance of quantitative approaches in the papers at the conference but it is not difficult to see why this is happening as the opportunities for getting qualitative studies published in top ranking journals is limited and it is much easier and less time-consuming to find archival data to crunch than to gain access to appropriate interviewees or documentary sources.

At the other extreme, a paper, which attempted to stretch the understanding of what accounting is, considered war cemeteries as a means of accounting for the cost of war. Bizarrely, I found myself among a group of non-British academics who, while explaining how moving they found these places, also seemed to be developing a critique of the British government's management of the aftermath of World War 1. As a Brit whose great-uncle's wartime death is commemorated on the Chatby memorial I felt that I should have some comment to make but couldn't quite frame it appropriately.

Many of the papers scattered throughout the conference programme included corporate governance in their titles. This led me to joke that such attention probably signifies that corporate governance is dead. It appears that I am not the only one thinking this: Bob Garratt has written an interesting piece with this title for the RSA website. I agree with Bob that the focus of accountability should spread beyond boards but I don't think his remedy goes far enough to address the mismatch between the legal and regulatory structure which frames corporate reporting and the wider demands for accountability now being placed on business. When integrated reporting was first mooted, I thought this might be a big step towards solving this problem but it has been slow to make an impact. But several people attending the conference told me that they were looking at IR in their work so maybe academics can progress this in some way.

A paper by Niamh Brennan and Phil Shrives developed their continuing study of compliance with the UK Corporate Governance Code, looking at serious serial non-compliers. I think this is a very useful documentation of the impact of the Code but it is again important to step back and look at the big picture, in this case the way that approaches to the Code have evolved from its inception. But I would say that, wouldn't I? And I did suggest that they should read my book...

The paper that worried me most attempted to link the presence of female executive directors on boards with levels of executive remuneration in the UK. I found the fundamental assumption, that female directors could influence the level of accounting conservatism and thus the earnings on which executive compensation is based, quite unconvincing. Having focused only on female executives. they seemed to have ignored two important facts: a) the increased number of female directors since the Davies report are predominantly non-executives and b) it's NEDs who form remcos and make decisions about executive remuneration. But the really worrying aspect lay in their list of future research possibilities where they suggested exploring the impact on executive pay of other aspects of board diversity such as ethnicity, disability and sexual orientation. In one of those daft after-dinner conversations one has at conferences I had suggested that every company board should include a dog: this paper seemed to be moving perilously close to that idea...

For me, the most stimulating paper of the conference was presented by Lisa Jack who, working with Julia Mundy, is looking at the relationship between investment analysts and companies from a perspective of fairness and relational justice, using the theories of John Rawls. Unpicking such relationships is no easy task, with all the challenges of access to those involved, but this seems to me a very important attempt to throw light on the opaque workings of the investment intermediary chain. I shall watch the unfolding of this work with considerable interest.

Theatre, art and corporate reporting

This week I went to the cinema to see the Royal Shakespeare Company's production of Twelfth Night streamed live. It was an excellent production, set in the Victorian era with fine sets and brilliant music. Adrian Edmondson's Malvolio was very good (although he did seem to be channelling the late Leonard Rossiter at one point). But although the camera work allowed many very effective close-ups of the actors' faces, and of the costume and set details, which the audience in the theatre wouldn't always see, I would have much preferred to see the play in the theatre. I was very conscious that I was being forced to see the action through the eyes of the director and the camera operator. I wanted to see the entire stage so that I could decide where to focus my attention at any point.

What has this got to do with corporate reporting?

Every number in a financial report is the result of processes of measurement, estimation, valuation - judgements and decisions made at various levels within the organisation. The auditor's report similarly rests upon a range of judgements about the integrity of those processes. The contents of the report have been through many eyes before publication. While this is addressed to shareholders, many of them rely not on the report itself but on the further interpretation by analysts and the news media.

We are unable to view the fundamental activities which underpin a company's business model and we know little of how those activities are measured and how they come together to form a revenue-generating process. Our view of the outcomes is mediated through many decisions made by people we know almost nothing about. As outsiders, we rely on intermediaries to assess the credibility of people and processes. Boards are similarly distanced from the fundamental activities that make up companies and they too rely on intermediaries.

I don't think that these intermediate processes and their potential effects are sufficiently considered. Numbers in particular look very definitive: we forget all the judgements that lie behind them. The standardisation of the reporting of those numbers hides further judgements and decisions. Corporate reports are layered outcomes, built on many hidden assumptions. We can't see through them: their presentation focuses our attention on specific areas, often chosen by regulators. The increase in narrative reporting may allow us to see more of the action, unimpeded by the complexity of numbers. But we are still not seeing the entire stage through our own eyes.

This is noticeable when companies collapse. Although the crisis may be a surprise, after the event it often appears that the information was there in the financial reports all along. It may have been overlooked or interpreted incorrectly. We look for where things went wrong, the bad decisions. But perhaps we should be paying more attention to when things go right, to where the decisions about the numbers proved to be accurate, and studying the processes of judgement that made that happen.

This week I was also privileged to attend a preview of the new BBC series "Civilisations" which was followed by a panel discussion with the three eminent historians who present the series. It provided  a fascinating insight into the intellectual judgements underpinning the creation of the series - decisions about what to include, what to leave out, how to present the works themselves and the explanation of them. Knowing this will provide me with a deeper appreciation when I watch the series. [1]

I was very struck by Mary Beard's provocative observation that we look at classical statues - and other art works - with a kind of awe that impedes discussion of their merits and prevents us from being honest about whether we actually like them or not. It seems to me that we treat the numbers in corporate reports in a similar way.

Perhaps we should recognise more explicitly that even directors and auditors are viewing the information that they report and attest through other peoples' eyes and that each number hides multi-layered decisions and judgements. We might then arrive at a more useful view of the strengths and limitations of corporate reporting and how it might be changed for the better. We may not be able to see the whole stage but we could make our own critical judgements about the choices made by others about where our attention should be focused.

[1] At academic conferences I have for many years been frustrated by researchers' presentation of their findings. I want to know more about how the study was undertaken - what prompted the research question, how choices were made about research methods - and I think that then provides a better contextual understanding of the findings. I want to see the whole stage. (Books about how research is done - rather than how it should be done - are few and far between but Frost and Stablein's "Doing Exemplary Research" is worth reading.)

Carillion redux

I watched with interest the BEIS committee grilling of Carillion directors.

The directors tried to paint a picture of a perfect storm of high debt inherited from acquisitive predecessors, combined with unforeseen problems in major projects, slow paying clients and an uncertain economic environment; of an embattled group trying to manage all these factors beyond their control, who, if given time and support to manage the cash flow problem could have sorted it all out; and who had fully deserved their high pay.

Whoever prepared them for their appearance before the BEIS committee had done a poor job.  The apologies were rehearsed (some repeating almost identical words) but were shown to be sham in the blistering final five minutes faced with Rachel Reeves’ barely contained fury at their unwillingness to put their money where their mouths were.

Here was a company which on the surface complied with corporate governance best practice but with a board apparently not up to the job of grasping the risks inherent in the company’s complexity.  (Watching three successive CFOs expressing surprise at what the numbers under their control revealed was quite bizarre.) Sound corporate governance cannot prevent poor business decisions but code compliance seems to carry an implicit assumption that it can mitigate the negative outcomes of poor business decisions. Is this expectation justified?

To what extent can NEDs be expected to sort out the consequences of poor business decisions compounded by Ponzi-like attempts to plug gaps in the hope of rescue or turn around? Even if NEDs know what is happening – and this board insisted that they were provided with full information, that they challenged management and yet they were all surprised at what happened – at what point should they take action? And what action should they take? This board did sack the CEO and the CFO, actions that the committee did not appear to probe in detail: examining  the background to those decisions might have been revealing.  A NED rolled up his sleeves and took on the CEO role: it would be interesting to know how board dynamics changed at that point.

I have watched many of these hearings. On this occasion committee members, especially the female ones, seemed better prepared and asked more probing follow up questions. The female members of the Carillion board were less impressive (someone should have coached them so that they didn’t start every answer with “So…”).  There was no evidence in this example that the presence of women on the board had had a positive effect.

I think the unravelling of this particular corporate collapse is going to provide clear evidence of the impossibility of our current regulatory system to meet  the expectations placed upon it. Tinkering with the corporate governance code will not help. We need a radical rethink of our assumptions about corporate accountability and the tools needed to achieve it.

Carillion and NEDs

 As the aftermath of Carillion begins to unwind, it is inevitable that concerns will be raised about the company’s corporate governance.  Among news reports on Monday, I heard the BBC’s attempt to talk to Baroness Sally Morgan: she said that as she had only been on the board since last July she wasn’t the person to talk to.

Now, I wouldn’t want to be put on the spot by a reporter in those circumstances but she is the senior independent director, a significant role. And she’s had six months to get used to it. Six very turbulent months, if reports are to be believed. I’m a little surprised that she hadn’t got her ducks in a row for the possibility of this outcome for the company.

The other female NED is Alison Horner who is also head of HR at Tesco. I’d have thought that job would be quite enough for anyone without the added workload of a NED post on a huge complex company in a completely different sector.

I think this raises an important question which, as far as I know, has never been researched: why do people seek NED appointments? The expectations placed on NEDs in the UK corporate governance regime are very high and, I have always thought, impossible to achieve.

When I interviewed audit committee chairs in FTSE 100 companies for my PhD research back in the 1990s, two of my interviewees were also FTSE 100 finance directors (when  did we start calling them Chief Finance Officers? And why?).

One explained that the chairman of his company had encouraged him to seek a NED appointment: he found it quite challenging in terms of time but saw a major advantage for his company in the information he was able to gather about how other companies grappled with similar problems to those he faced in his FD role.

The other FD held several NED appointments: he told me that he did this for intellectual stimulation and so that other companies could benefit from his extensive experience and it wasn’t that much of a challenge as he had his FD role running very smoothly and well under control (as it happens, that company disappeared not long after I talked to him…).

I once asked Adrian Cadbury why his committee set such store by NEDs, when there was already evidence from the US that they had difficulty in performing the oversight role assigned to them. With a twinkle in his eye, he first told me that that was the one thing that the committee could agree on … but then he explained his firm conviction, based on his own experience, that boosting the NED role would improve corporate governance.

That may well have been the case in the business environment of the late 1990s when boards included more executive directors than now and when there was a good supply of potential NEDs like Adrian: of sharp intellect, with many years of experience on boards and a strong belief in the public interest role of the public company. That generation is no longer with us: such men are few and far between these days.

Yes, they were men. It would be even more interesting to know why women accept NED appointments. Today they are greatly sought after, since appointing female NEDs is a quick way to satisfy demands for board gender diversity. But we’re told that the pool of available candidates is still small because the pipeline through to senior executive appointments is still slow, so I wonder about the pressure this then places on the women in that pool. And are they the first choice of headhunters? An inability to recruit NEDs would be a powerful signal of corporate problems…

A better way to increase board gender diversity could be to enlarge boards and to bring back the members of the executive group to main board membership. This would also ensure that NEDs sit around the same table as senior executives. At the moment, it is unclear how such interaction takes place. If contact between the board and the executive group is mediated through the CEO, this surely undermines an important purpose of UK corporate governance arrangements. which were originally intended to boost the oversight function of NEDs and curb management power.