Friday frustrations

A bunch of  Zetoc alerts arrived this morning, conveniently, because I'd planned a reading day today, although my "to read" pile is very high already.... Two papers in different journals attracted my attention so I checked the library catalogue to get access to them.

The first is in a journal I read regularly but, when the issue came up on the EBSCO web site, the paper I wanted was missing. I checked the email again: it was definitely listed there. I went to the publisher's web site and it was definitely there too.  So to sort out the mystery I had to email our subject librarian who only works part-time so won't get the message until next week.  I have become so used to getting material at the click of a mouse that a failure in the system is very irritating, especially as the topic of the paper is something I want to read about NOW.

The solution to this problem may well be to submit an inter-library loan request but...

The other paper is in an economics journal I'm not familiar with.  Apparently we have access but there is a one year embargo. The solution to this problem is definitely an inter-library loan request. The online system for making ILL requests is straightforward and I submit it quickly but, instead of being directed to the usual copyright declaration form which has to be sent to the library in hard copy, I find I am now required to get the signature of the budget holder.

ILLs are expensive so some form of control is not unreasonable. But, as Open Access kicks in, the prediction is that publisher embargoes will get longer. This is likely to lead to more ILLs and more forms for the budget holder to sign. Has anyone thought this through?

So now I need to find out who the budget holder is...

Board gender diversity (2)

I wrote about this back in October but I've now put something together for a publication for a professional body. It repeats some of what I wrote in the earlier blog post and constrained to 1000 words I haven't been able to cite any sources. I wanted to restrict my assertions to those that could be backed up with evidence, though. I've already sent it round to a select band of experts but further comments would be welcome.

Almost every day there are reports in the media about progress in increasing the number of women on corporate boards. The accepted wisdom now seems to be that every board should include at least one female director, ideally more: “one is a token, two is a presence, three is a voice” is the catchy mantra which has been coined. The only debatable issue mentioned is how this can best be achieved: voluntarily or by mandatory quotas.

Evidence cited for or against the use of quotas draws on a very limited range of academic research, most of which describes the experience of countries where quotas have been introduced. These countries vary significantly politically, culturally and economically: their reasons for quota introduction vary similarly. Such differences are rarely recognised within the discussion. Perhaps surprisingly, no reference is ever made to research undertaken in the political sphere: gender equality in elected office has been a concern for far longer than in business, and political scientists are careful in their analyses to distinguish between political, social and economic arguments.

Such distinctions have not been obvious in the discussions about board gender diversity in the UK, which seems to rest on the assertion that the “business case” for gender diversity has been proven, ignoring any other basis for argument.  Although there is some evidence that suggests a correlation between gender diverse boards and effective performance, this is not proof of causality. Isolating specific features of board composition from other factors influencing corporate performance is an ongoing challenge for corporate governance scholars and most research is inevitably equivocal in its conclusions. However, policy makers tend to cite work that appears to support their position, conveniently ignoring the caveats which it often contains.

But let us take a step back and consider a more fundamental question: should board composition ever be mandated? In the UK, the first 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 (NEDs). This was seen as a way to strengthen the monitoring function of boards, particularly in regard to financial reporting, but there was little evidence available at the time to show that NEDs were effective monitors.[1] Indeed, research in the US, where boards were already predominantly non-executive, had questioned this possibility and concluded that, while a mixed board structure was generally appropriate, mandating specific aspects of board composition was not, due to wide variations between companies and industries.

Initially, there was considerable resistance to the idea that boards should be required to appoint independent NEDs but, 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 NEDs. However, across the FTSE 350 the most common area of non-compliance with the Code relates to the number of independent NEDs 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 demonstrates clearly positive outcomes from increased board independence is sparse. Indeed, there is evidence of negative effects: banks with more independent boards performed more poorly than others in the recent financial crisis. However, one consequence is clear: boards have become smaller since Cadbury and the proportion of independent directors has increased to the point where in many cases the only executive board members may be the CEO and CFO. The impact of this shift on the ability of NEDs to undertake their role has not been assessed but the pool of people with executive experience at main board level, from whom NEDs can be drawn, is inevitably reduced. This must be an impediment to diversity.

It is unfortunate that diversity has become synonymous with gender in media discussions of this issue. Even where other forms of diversity are mentioned, they are confined to measurable features:  one NED vividly described the range as “skirts, skin tones, wheelchairs and walking sticks”. More fundamental ideas of diversity of skills, experience and background have been neglected.  Just as independence of connection has clearly not guaranteed independence of mind and behaviour in directors, so identifiable outward markers of diversity cannot be reliable predictors of the desirable behavioural characteristics sought for effective boards.

It is instructive to turn to the somewhat neglected Tyson Report on the Recruitment and Development of

Non-Executive Directors, which followed the Higgs Review of the Role and Effectiveness of Non-Executive Directors in 2003.

The Tyson working party emphasised a much broader view of diversity, linking closely to the qualities needed by an effective NED, as identified by Higgs, and, in its recommendations, anticipated some of the practical problems of tapping into a wider pool of suitable directors.

The debate about gender diversity has raised awareness of issues which boards should certainly consider. But should we not trust boards to configure themselves in a way that best supports the specific strategy and objectives of their businesses? The concept of “comply or explain” embodies such trust and flexibility and implies engagement in a conversation with shareholders to determine the most appropriate board composition, focusing on diversity of skills and expertise.

The corporate governance role of the board is to direct and control. It is right that boards should be accountable to shareholders to explain how that direction and control is achieved. But imposing demands for boards to demonstrate independence and diversity in their composition with no real understanding of how this influences board dynamics may be prove ultimately to be counter-productive.

---

[1] A detailed account of the influences on the Cadbury Committee in this regard may be found in  The Cadbury Committee: a History by Laura F Spira and Judy Slinn (Oxford University Press, 2013)

Happy New Year and some reflections on 2013

Happy 2014 to my readers!

2013 was quite a good year, professorially speaking. Finally submitting the book manuscript at the beginning of the year felt like a great achievement and the process of getting it into print was relatively trouble free. The book launch in October at ICAEW was great fun. Unfortunately my co-author had to miss it through illness so she didn't hear the very positive comments from the four speakers (Martyn Jones, ICAEW President; Robert Hodgkinson, ICAEW Executive Director, Technical; Sir Adrian Cadbury; Sir Christopher Hogg)

The incomprehensible royalty statement I've just received suggests that 90 copies have been sold so far which isn't bad, given that the OUP marketing department seems oddly unconcerned about trying to sell the book. Review copies have yet to go out but there have been various mentions on line:

Two mentions by Robert Bruce:

http://www.iasplus.com/en-gb/news/2013/10/bruce-column-audit-committees

http://www.accaglobal.com/gb/en/member/accounting-business/domestic-dilution.html

Comments from James McRitchie on his excellent corporate governance blog:

http://corpgov.net/2013/11/review-reflections-the-cadbury-committee/#more-18240

Mentions of book launch:

http://uk.standardlifeinvestments.com/institutional/governance_and_stewardship/news/index.html

(scroll down to October 2013)

http://www.seechangeconsulting.co.uk/news.html

Another highlight was receiving the Lifetime Achievement Award at BAFA in April:

I had hoped to get some substantial writing done before the end of the year but I seem to have spent far too much time reading ill-informed media, LinkedIn and Twitter comment, firing off corrections and engaging in fairly fruitless arguments. But perhaps this is more useful activity than writing papers that will take a long time to get published and may only be read by a handful of people?

So it's about 17 weeks until I officially retire in April, at which point the university will award me the title of emeritus professor (or an emerita professor as some female professors seem to prefer, can't decide what I think about that). Not yet sure exactly what that will mean but I certainly won't stop doing professorial things, although I should have a bit more freedom to choose exactly what I want to do.

My friend Cath Gowthorpe has the right idea about New Year resolutions: call them intentions instead.

Here is a link to her very creative blog.

So my intention is firstly to move forward the various projects that have been stumbling along in the wake of the book, especially the work on NEDs in the public/third sector with Thom, the third Arthur Andersen paper with my Canadian colleague and the overview of the board diversity literature. There may also be a paper to be written out of the book. That's more than can be accomplished in 17 weeks but I hope I can make a good start.

Exactly.

Should all accountants have an accounting degree?

Tweets from this week’s Audit Quality Forum meeting revealed that Professor Peter Pope, now at LSE, had asserted that all accountants should have degrees in accounting. This caused both amusement and derision among those tweeting, professionally qualified accountants with degrees in a range of humanities and arts subjects. The tweets don’t record how Peter supported this assertion. With a degree in economics and accounting and extensive experience of delivering, examining, reviewing and developing accounting degree programmes since 1985, I have what might be considered a fairly well-informed view on the topic.

It would be foolish to prescribe that all accountants should have a degree in accounting without considering the content of accounting degrees and their relationship to professional training. There is much to be said for ensuring that the profession benefits from the broad range of experience and views that results from welcoming trainees from many other disciplinary areas. Employing firms have been known to complain that trainees with accounting degrees can present problems: these young people begin their employment knowing a bit about the area and this may lead to over-confidence. Someone with a degree in French or geography may be more malleable initially.

A more fundamental question is: what is the purpose of an accounting degree? - a particularly pertinent  question in these days of increasing university fees, Higher Apprenticeships and attempts to widen access routes to the profession. In theory, there is little point in a strongly technically based accounting degree programme.  In general, university lecturers, if they have a professional qualification at all, will, with the best will in the world, be somewhat out of touch with practice. Subsequent professional training is far more important in providing understanding of up-to-date approaches to the "how" of accounting.

What an accounting degree can provide is an introduction to the "why" of accounting. All accountants should have a good grasp of the role of their profession in society, they should take pride in the history of the profession, the huge contribution of accounting to economic growth. An understanding of this heritage is essential for the future development of the profession.  And, at a time when the profession faces considerable criticism, the accountants of the future should appreciate the immense power that the accountancy can exercise for good. There is little scope within professional training to develop critical thinking about these big issues. Accounting programmes could provide the space and support for this complementary study, not necessarily in the form of a traditional 3 year undergraduate degree.

However, I know from experience that making even a small shift towards emphasising the “why” of accounting is really difficult. Students choosing accounting degrees often seem to believe that numeracy is the most important requirement. This impression can be confirmed by a curriculum which emphasises technique and in assessment does not weight interpretation of numbers more heavily than calculations. They are likely to be more comfortable with  calculation and may be resistant to studying the history and sociology of accounting. Lecturers who have not studied these areas themselves may feel that they are having to work outside their own comfort zone.

Accreditation of accounting degrees by professional bodies is viewed as a useful marketing tool: the assumption is that students wishing to train as accountants seek degree programmes which will exempt them from some professional examinations. This aligns the curriculum to those examinations and reduces the space for studying the “why” of accounting.

There can be very few currently practising accountants who remember a time before accounting standards existed. (In a laudable initiative, ICAEW have harnessed the historical skills of Professor Steve Zeff and produced a record of that distant time: 

http://www.icaew.com/~/media/Files/Technical/Financial-reporting/Information%20for%20better%20markets/IFBM/Principles%20before%20standards.pdf 

Accounting standards were established to address the problem of trust in the profession. That problem has not gone away but standards have proliferated to the extent that financial reporting has become increasingly complex.  How can tomorrow’s accountants visualise a new solution if their training has not included some study of the history of the problem and some tools with which to critique the status quo?  This is what broadly based accounting degrees can  - and should – offer.

Board gender diversity: some thoughts

Having flu means I have just enough energy to read Tweets, anything longer requires too much concentration. And having a befuddled brain is not conducive to clear articulation of ideas but it's time I wrote something about board gender diversity, as well as collecting material for the literature review I have been planning for more than a year and harrumphing about what I see as misleading tweets about the issue. Here are some thoughts.

The debate, if it can be called that, about board gender diversity is now focusing on how to get more women on boards, not why this should be a sensible objective.The Davies review asserted that the business case was proven: women on boards improve corporate performance. But the evidence is very mixed. The authors of academic studies which identify a correlation between board gender diversity and various measures of performance are generally careful to note the limitations of their studies: correlation is not causation and the study may relate to a very specific context and not be generalisable. Media reporting of such studies often ignores such caveats. Policy makers and regulators are also prone to reviewing evidence selectively: Davies did not present a thorough review of the available research, possibly because it is scattered through various disciplines.

But why are the other arguments for increasing board diversity (in all forms) not widely discussed? There are undoubtedly good social and moral arguments to be made. US legal scholars have highlighted this: see for example the paper by Lisa Fairfax at http://www.nclawreview.org/documents/89/3/fairfax.pdf

Whether consciously or unconsciously, those who are pushing for change have chosen to present only the business case: is this because they see this as the best way to influence men, using the type of discourse with which they think men are most comfortable? It doesn't seem to be working too well.

The political aspects of the debate may be obscured by this focus on the business case. Viviane Reding and Angela Merkel, for example, are astute politicians who happen to be women: the board diversity issue provides them with a convenient platform. (I wonder how Margaret Thatcher would have positioned herself on this issue? Perhaps more interestingly, why wasn't it an issue in her day?) The issue also fuels the political ambitions of those who purport to be supporting male interests in the face of feminism.

One important effect of the Cadbury Code was to begin to make prescriptions for board composition acceptable. The consequences of this are still playing out. Although there was some initial resistance, board structures in large public companies have changed significantly over the last twenty years out (it's worth noting that current board structures are looking remarkably like the two tier boards that Cadbury critics were so afraid of, but that's a story for another blog) and the role of the independent non-executive director has become firmly embedded in the corporate governance architecture. But the notion of independence in this context is very problematic. Independence of connection which can be objectively demonstrated is a poor proxy for independence of mind which is the real goal. And the jury is still out on whether an independent board is always a good thing: see, for example, Bhagat and Black's study at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=133808

The gender diversity of a board is very easy to measure. But conflicting evidence is emerging as to whether gender diverse boards do result in all the benefits claimed for them. Does diversity of board composition promote diversity of thinking? It's easy to trot out mantras like "One is a token, two is a presence, three is a voice" but we are short of evidence as to how that voice influences board behaviour.

Is it cynical to sense an implicit expectation that boards need "good" women to restrain "bad" men, with gender providing some sort of innate distancing, just as independence is expected to assist NEDs in monitoring executives. In 1993, John Corrin, then chief executive of Allied Textiles, compared the  Cadbury Committee's report to "… a script for a ‘soap’ where the non-executive director is cast as saint, the auditor is a tarnished guardian angel, and the executive director is a villain."

 (Corrin, J. (1993) ‘A Blatant Slur on Executive Directors’ Integrity.’ Accountancy, April, 81)

However much people try to focus on the apparently objective business case, diversity remains a much more emotive subject than independence.

This is the sort of journalism that I find so frustrating:

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/10390970/Diversity-is-the-key-to-superior-performance.html

The headline "Diversity is the key to superior performance" is completely misleading: the article has interesting things to say about other aspects of boards. But my goodness - nine children! Did she have to mention that? To my mind, it undermines the whole tenor of the discussion.

At last....

.. the book!

Can't quite believe it!