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.