Some encouraging research on earnings quality

A tweet alerted me to this study. Following the links to SSRN you'll find not only the paper but links to teaching slides and another relevant paper. It's very encouraging to see researchers going to the horse's mouth and asking CFOs about it, rather than using proxy measures or experiments with MBA students. But it doesn't look as if these papers have yet been published in peer-reviewed journals. Is this another example of prejudice against research of this nature?

(I've tweeted this using the very useful  TwitLonger, which I have only just discovered.)

Board diversity and board size

Some new recommendations from the Cranfield experts in this area include the idea that companies should increase the size of their boards to at least 11 and appoint women to those seats.

No-one seems to have noticed the effect of the gradual reduction in recent years of the average size of corporate boards. Grant Thornton's 2013 corporate governance report states that:

"The composition of the average FTSE 350 board remains largely static, comprising one chairman,

three executive directors and 5.6 non-executive directors."

In 2011 they noted: 

"The average FTSE 350 board now has 5.3 NEDs, excluding chairmen, and three executive directors. This continues the trend of an increasing non-executive presence around the boardroom table: as recently as 2006, the FTSE 350 had more executives (4.6) than non-executives (4.4)."

The accepted wisdom is that a higher proportion of NEDs improves boards (research evidence on this remains far from conclusive). The reduction of the number of executive directors has led to the establishment of executive boards.

Tesco, for example, has a Board with 2 executives, the CEO and the CFO, and 10 NEDs including the chair. The Executive Committee includes the CEO and CFO with a further 14 executive directors and the company secretary.

Tesco's 2013 report has a diagram and an explanation of the role of the board and its committees which to me clearly emphasises that the CEO is the link between the board and the executive committee.

Two points arise:

1. Doesn't this structure look a bit like a two-tier board? At the time of the Cadbury Code, critics saw the establishment of the audit committee as a drastic backdoor move, undermining the concept of the unitary board and making UK plc boards look suspiciously like the continental European two-tier model. I have never understood why this should be seen as a Bad Thing.

2. Isn't the CEO in this structure ceded considerably more power if he is the main link between the NEDs and the execs? It's not clear from the Tesco report if they ever all get together but surely NEDs need to have some interaction with the full range of executives to learn about what goes on in the organisation?

The driving force behind the establishment of the UK corporate governance architecture was the apparent need to curb executive power. Could this have gone too far?

If the Cranfield recommendation is that boards should increase to 11 members specifically by appointing women from the executive ranks in their companies, that might make sense. But increasing board size with more NEDs seems much less practical to me.

A conference day out

Today I went to the annual corporate governance conference of the Institute of Chartered Secretaries and Administrators, ICSA. Attending practitioner conferences is always interesting: apart from meeting new people who may make useful research subjects, and possibly hearing some good speakers, you also get an insight into how practitioner organisations see themselves and how the people who run them define their role. They need to assert their specialist knowledge to carve out a commercial space for themselves. The people in charge stand out and it’s fascinating to see how they behave: their personal standing rests on how valuable practitioners believe the organisation to be.

Another issue for some practitioner organisations is their relationship to a broader profession. For example, there is no requirement for anyone working as an internal auditor to be a member of the Chartered Institute of Internal Auditors – they may well be qualified auditors through membership of a professional accountancy body but equally they may not. For company secretaries, ICSA probably has a similar relationship with the legal profession. These organisations represent a specialism, encapsulated within a specific and well-established corporate role that may well fall within a broader profession, but can they lay claim to their own professional status? What does chartered status signify for their members?

I’ve attended the ICSA conference twice before. The first time I was keen to hear a couple of the speakers and the second time (last year) I was invited to take part in a panel discussion on the impact of the Cadbury Committee. This year I again wanted to hear some of the speakers. These conferences are expensive. A long time ago my daughter worked for an events company and got me complimentary entry to several, which enabled me to make very helpful research contacts. Since then, I’ve always asked for a discount, pleading the poverty of an academic and it usually works. This time the quid pro quo for a free place was the request to write an article for the conference magazine (I’ve quoted it in full in my blog post of 30th January. I was interested to see that it was printed in full, no editing, but, as well as my name at the end, they had added the name of one of the speakers, an HR consultant, billed to speak about gender diversity: it made it look as if the article was jointly authored. I wonder how she felt about that. She may not have agreed with my views.)

The first speaker was Michael Woodford. He is an accomplished and entertaining speaker and his material held everyone rapt. The story he told was riveting. And beautifully timed – he began by saying that his talk normally takes much longer and he would have to condense it  and there was some banter towards the end with the chair but he ended on a perfect cliffhanger. So of course in the coffee break we queued up to buy the book which he signed with much pleasant chat: he is a consummate salesman and it was  a great pleasure to watch him at work. And the book is very well written – and due to be made into a film. (I asked who would play him and he said that Colin Firth had expressed interest.)

In his telling of his story (my academic scepticism clicked in early on as I wondered what the Japanese telling of this story might be) he gave a vivid glimpse of the Japanese corporate culture which is very unlike that of the West. I would have liked to learn more about the practical corporate governance issues he had encountered in running the European arm of a Japanese company, with perhaps a deeper comparative analysis to demonstrate the difficulty of transferring corporate governance mechanisms between countries. But he’s on an international speaking circuit and I guess, with a tale like his, there is little perceived need for tailoring to the specific audience.

The speaker following him was David Pitt-Watson who is an excellent speaker and had indeed tailored his talk about shareholder activism to the audience but it seemed a little pale after what had gone before.

I didn’t stay till the end of the day. I collected some very useful freebies from the exhibitors’ stands and trundled home, reading tweets to find out what I was missing. I think Twitter encourages speakers to slot in clever sound bites: I wonder if this is a positive effect? But I was pleased to see a tweet drawing attention to my article.

Reviewing, assessing, evaluating...

Over the last few years I estimate that I have spent roughly 3-4 days per month reviewing documentation for external bodies. This estimate excludes all the internal reviewing tasks that accompany any admin responsibilities but it includes:

• reviewing bids for funding bodies, mostly for ESRC and ICAEW
• reviewing papers, for journals and conferences
• reviewing book proposals, for publishers
• assessing promotion applications, for other universities in the UK and abroad
• reviewing course validation documents, for other universities and for professional bodies
• reading and examining PhD theses, for other universities in the UK and abroad

All part of the job. Some of these tasks are quite rewarding (some even attract small payments!). I have read some fascinating work from which I have learned a great deal and which has sometimes prompted me to think differently about my own research. I've seen occasional funding bids which have been so well put together, and cover such interesting topics, that I've almost been tempted to contact the researchers to ask if I could work with them!

But I've also had to read a great many poorly written documents, where I have struggled to follow an argument or even understand the content. Two types cause me the greatest trouble.

It is very depressing to read poorly constructed funding bids where the applicants have clearly not read the funding body's instructions about presentation or, more fundamentally, about the type of projects which the body will support. Some of these come from well-established scholars who should surely know better. Sometimes the research question is of great importance and a study should certainly be pursued - but the people who have applied to undertake it don't appear to be competent to do so.

And promotion applications can be particularly frustrating. Occasionally, candidates oversell themselves and take credit for activities that have clearly been initiated and implemented by others, but much more frequently people undersell themselves.

I think we can all improve the way in which we write. This is the book that I recommend to students.  Although it's designed for postgraduates, it can be usefully read by anyone seeking to improve their writing, and their reading, because the two activities are so closely interlinked. I've been lucky enough to benefit from attending two workshops run by the authors and as a result I think I read more efficiently, write more effectively and - I hope - review more helpfully.


Get it here.

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.