Cooler weather...

This hot weather, combined with my post-holiday indolence, has meant that all I’ve managed to do for the last week is keep on top of email and catch up with some admin tasks. Today is cooler though, and I was up early reading two big new documents.

First, the 514 pages of the third report from the House of Commons Business Innovation and Skills Committee on the Kay Review of Equity Markets and Long-term Decision Making.

http://www.publications.parliament.uk/pa/cm201314/cmselect/cmbis/603/603.pdf

Following the web streams of the Committee’s hearings can be as fascinating as a soap opera but this document contains transcripts of the hearings as well as copies of all the written evidence submissions – a wonderful resource for anyone wanting to analyse in detail the responses to the Kay Review and the progress made in implementing its recommendations.

The Kay Review was a clearly written and penetrating analysis on which a series of recommendations were based. The Government response, while appreciative and supportive, has not led to any positive action so far and the BIS committee is critical of this. This report contains comments from Lord Myners who conducted a similar review more than a decade ago and is rightly disappointed that no action followed his recommendations either. The committee states that:

It is a huge disappointment that previous Governments have not implemented the recommendations of previous works nor have they kept regulation in line with the rapidly changing nature of equity investment. There is no point in commissioning a Review of the industry unless the Government is challenged to move forward and make radical changes to align the incentives facing every link in the investment chain. The Government has to deliver on the recommendations made by Professor Kay and the issues raised by his analysis. It must bring forward proposals to enhance the culture of long-termism, transparency and accountability.

Fine words but it remains to be seen whether there will be any government action. I wouldn’t bet on it….

I was interested to see that there is only one mention of the role of non-executive directors, arising in the discussion of whether major investors should be consulted in the appointment of executives. On p 21:

We asked Harlan Zimmerman, Senior Partner at Cevian Capital, how the

current appointment system could be improved and how external forces should influence the decision. He told us that it was not necessary for shareholders to be represented on the boards of companies because the non-executive directors were supposed to be fulfilling that role.

However, he went on to explain that the role of non-executive directors had been ignored and described the fact that this was overlooked by Professor Kay as being “the single biggest problem” with the Review: “Fidelity, even with the best will in the world, cannot look after the day-to-day operations of thousands of companies, so we have non­executive directors who are there, who are supposed to be doing that job for us. Now, the companies will say they do consult with their major shareholders on non­execs, and the asset managers will say that they do consult as well, but the reality is that when that happens it is a very superficial consultation in most cases. It very often takes the form of a Sunday night call before an announcement on Monday. If you look at one single damning fact, director elections here in the UK for non­executives are a rubber-stamping exercise.

I found that all a bit confusing, even when I read the detailed transcript. But it does suggest that major investors have expectations of NEDs that may not be satisfied, possibly can never be satisfied, even if investors have a specific involvement in NED appointments. Makes me wonder if the corporate governance focus needs to shift away from shareholders and back to directors, not in the sense that boards are not performing properly, which was a driver of Cadbury, but to re-examine the legal duties of directors to see if they need to be rethought in the context of the development of the investment intermediary chain.

The discussion about narrative reporting on p 74 reminded me of the BDO Terrapinium exercise, which I haven’t yet had a chance to study but looks very interesting:

http://www.bdo.uk.com/services/audit/terrapinium-group

  

The second report was shorter: Good Governance in the Public Sector—Consultation Draft for an International Framework, published by CIPFA and IFAC.

http://www.ifac.org/sites/default/files/publications/files/Good-Governance-in-the-Public-Sector.pdf

This proposes a framework of seven principles to underpin “good” public sector governance. Its scope is international which is ambitious and the report recognises that the public sector and the size and structure of the organisations it encompasses will differ widely across the world. The principles are simple enough:

2.1. The function of good governance in the public sector is to ensure that entities act in the public interest at all times.

2.2. Acting in the public interest requires:

A. Strong commitment to integrity, ethical values, and the rule of law; and

B. Openness and comprehensive stakeholder engagement.

2.3. In addition to the requirements for acting in the public interest, achieving good governance in the public sector also requires:

C. Defining outcomes in terms of sustainable economic, social, and environmental benefits;

D. Determining the interventions necessary to optimize the achievement of intended outcomes;

E. Developing the capacity of the entity, including the capability of its leadership and the individuals within it;

F. Managing risks and performance through robust internal control and strong public financial management; and

G. Implementing good practices in transparency and reporting to deliver effective accountability

Having set these out, the paper continues with more detailed guidance on organisations might follow the principles with some checklists and some examples under each one.  I don’t think anyone would argue with the principles but I think it’s quite difficult to distinguish between governance and management in some areas. More food for thought on whether this matters, as I discussed in my MARG presentation. I hope I manage to get all these ideas into a paper eventually.

And now I need to write some comments on this:

http://www.icaew.com/~/media/Files/Technical/Corporate-governance/dialogue-in-corporate-governance/icaew-tl-q2-web.pdf

More principles! One problem that the Cadbury Committee encountered was the demand for detailed practical guidance on how to apply principles, which rather undermines the whole idea of a principles-based approach which is intended to allow report preparers to use their initiative and tailor their reports to specific company situations. Perhaps the answer lies in some sort of Socratic dialogue…

Market based accounting research...

..is a bit of a mystery to me. Partly because of my innate suspicion of numbers but also because I don't really understand why the questions asked are important in any practical sense. The dominance of this type of research probably explains why it took me so long to realise that qualitative approaches to research were possible and that I could do a PhD that didn't have any numbers in it.

So how did I come to attend an MBAR conference this week? A couple of people I knew expressed great surprise to find me there. Well, the title was appealing - "What constitutes Financial Reporting Quality?"- and I was especially keen to hear an investor relations expert talking about how annual reports are put together. And to hear some discussion of narrative reporting from the perspectives of quants people. And there was no fee and the venue was very conveniently situated. And it's always good to step out of one's comfort zone occasionally.

The first speaker was a very engaging young woman from Stanford, talking about modelling the relationship between voluntary disclosure and earnings management. She was so good that I actually understood some of what she was saying: suddenly, complex equations and Greek letters began to make some sense. But at coffee when I remarked happily on this, an eminent scholar responded that she had misjudged her audience and made it too simple. Put me in my place..

The second speaker was also very engaging, a computer linguist from Michigan, on assessing the quality of annual report narratives. He began with a lengthy preamble on why the analysis of narrative reports is of research interest: he clearly anticipated that the audience would need convincing and early interruptions confirmed this (mostly from an irritating young man wearing red braces and bright blue socks with white circles). He went on to explain the considerable challenges of using computer analysis to move beyond examining the "bag of words" to more contextual analysis. And I began to see that the quants people have cottoned on to the importance of words - but they are trying to turn them into numbers.

The investor relations guy was very good. The organisers had sent him a list of 16 questions about the process of putting together annual reports and he answered them all, mostly with variations on "It depends". I liked "Who is your audience?" to which the answer was "We don't know". He had worked for a lot of big companies - interestingly, mostly ones where I had interviewed audit committee members, internal auditors and finance directors. He made the limitations of the annual report very clear, which seemed to surprise some of the audience. He suggested that it should be carved up into different chunks for different users distributed at different times, something that has for some time seemed sensible to me, especially as we now have the technology to do this relatively easily. He said firmly that his job was not about selling the company but about providing the best possible information for investment decisions but he did let slip that his background was in marketing. If I were studying how annual reports are put together I'd want to hear from a lot of other people who are involved - company secretaries, for example, not to mention the directors themselves. And the auditors, who weren't mentioned.

The other speakers were all interesting and I left feeling quite pleased with myself for having dipped a toe in the MBAR waters. But there is little doubt that the researchers I talked to think that qualitative research is easy, anyone can do a few interviews but qualitative researchers don't understand the stats which make quantitative research much more rigorous. When I emailed the organiser to thank him I observed that it had been fascinating to experience a different ontology. He replied that he didn't know what ontology meant but agreed that there is more than one way to skin a cat.

Canary Wharf

I spent some time yesterday wandering around Canary Wharf. It occurs to me that, in its contrast to the old buildings of City of London, it offers a powerful reflection of all the disadvantages of progress that we now seem to experiencing. It feels almost dystopian. I don't think I would like to work there (although I sometimes wish that I had a really comfortable modern office in a clean, smart building) but I really like visiting the place. Things that I noticed:

• street sweepers and private security guards in abundance
• areas between buildings designated as non-smoking
• crowds of smokers outside buildings in designated areas: passing among them, the smoke was almost tangible. One might have expected conversations to be taking place but these were all solitary individuals who did not appear to be enjoying their cigarettes. Have sociologists explored the implications of this strange corralling of addicts and its impact on corporate culture, I wonder? (Having written that, I'm very tempted to spend the rest of the afternoon searching online instead of getting on with coding interviews which is my main task for today...)
• coffee shops full of people having meetings: don't these huge office blocks have meeting spaces? I suppose that there must be something about the neutrality and informality of Carluccio's (where I noticed that people were also eating huge bowls of pasta at 10.30 am: presumably jet setting executives still operating in different time zones? I really wanted to ask) that is conducive to business meetings. But there is outside seating and it was very sunny at the time. 
• the shopping malls: up-market retailers like Tiffany cheek by jowl with high street chains and the same disorienting sensation I get in large malls in N. America, the oppression of things I have no need or desire to own demanding my attention
• signposting: extensive but confusing, especially to the DLR and underground stations
• people pushing prams: many of them, which seemed odd in a space that is predominantly devoted to work

It is not difficult to imagine that in this carefully designed, artificial environment it would be very easy to behave quite differently, to forget the ethical norms of civilised society outside the financial sector and to view the traditional and tried and tested as old-fashioned.

Then I went to Greenwich, to the gracious Wren buildings in which the university is housed and learned something about the conflict that has to be managed on a daily basis between the demands of a modern university and the constraints of the preservation of ancient buildings which were not designed for students.

And I rounded off a day of thinking about different sorts of space with a visit to a fascinating exhibition:

http://www.rmg.co.uk/visit/events/visions-of-the-universe

Some very beautiful displays to look at, although none quite as compelling in my opinion as Commander Chris Hadfields' tweeted pictures from the International Space Station over the last few months. I had never before realised how far space is filled with explosions of matter: it's just as well we can't hear it all happening.

Now back to coding interview transcripts...

Monday morning

Time for elevenses, after reading and commenting on the delayed literature review which arrived first thing. Not a bad effort, the student has done a great deal of relevant reading but it needs a bit of restructuring. And the referencing is poor. I can understand why international students sometimes confuse authors' first names and surnames but misspelling names is very careless and if a citation in the text does not appear in the references my plagiarism detector goes into full alert.

I have been dipping into a weighty tome entitled "The Oxford Handbook of Corporate Governance"

http://ukcatalogue.oup.com/product/9780199642007.do#.Ub7dtvZ4anM

The book has four editors. Editing such a volume must be a real labour of love: everyone I know who has produced an edited book has found it a struggle, even with the most co-operative of contributors.  I've been asked to edit a special issue of a journal but I'm still pondering whether I want to deal with the hassle: a book must be much worse.

The copy editing of the Handbook leaves something to be desired but having struggled with this with our book, with only two authors and the OUP subcontracting system, I'm not surprised. The use of "forward" for "foreword" on page 57 jumped off the page at me. And a reference to "the Cadbury Review" jarred: perhaps working on the book has made me ultra sensitive but how can I correct students' citation errors when the books they rely on for sound scholarship on which to base their work are not reliably accurate? Although published in the UK, all the spelling is US style: behavior and labor are especially noticeable.

And why a "handbook"? It's far too big even for two hands and, to me, a handbook implies something practical, a ready reference source, a manual. This book is not really any of those although it provides comprehensive overviews of a range of topics.

I began by reading the chapter on the history of corporate governance. It is a comprehensive account but, written by a North American legal scholar it takes, as one might expect, a very US-centric approach. I see that I referred to the SSRN draft of this book chapter in my blog post on 30 Dec 2011. In his reply to my message, the author said that he would seek out and include a citation to the Eells book I referred him to ,as an early use of the term "corporate governance", but in the event he obviously didn't think it was important enough to do so. I think that the way such a term, used initially by single individuals, is then adopted more widely and evolves in meaning, is of significant interest in tracing the history of a concept.

I was more interested in the chapter on boards and governance which reports a longitudinal qualitative study conducted by Annie Pye. The insights from this work are very valuable in considering, among other issues, the impact of regulation over time: "Increasing regulation merely indicates increasing one's trust in a system of regulation  rather than increasing trust in the behavior or people being regulated." (p152)

Next I turned to the chapters on board committees and on auditing and was pleased to see my work cited in both, although, where the citation just appears in a list of similar ones in parentheses at the end of a sentence with no other comment, it is difficult to see what the authors might have gleaned from my work. I suppose that's better than where an author has got hold of the wrong end of the stick, though.

I'll save the chapters on nonprofits and financialisation for later.

Following an alert to a paper which looked interesting, I found that, among the acknowledgements, delegates at the Brussels workshop last year were thanked. But although the paper was accepted for the workshop, I remember that neither author actually attended.... This resonated with this article in today's Independent:

http://www.independent.co.uk/news/science/the-bad-science-scandal-how-factfabrication-is-damaging-uks-global-name-for-research-8660929.html

It will be interesting to see how this requirement filters down into the university bureaucracy.

Not the most productive week...

.. but I have caught up with some reading and passed quite a lot of links to people who I think should be interested in, for example, this:

http://www.frc.org.uk/Our-Work/Publications/Professional-Oversight/Key-Facts-and-Trends-in-the-Accountancy-Profession.aspx

Visiting the library, a blessedly peaceful spot at the moment, I found "The Great University Gamble: Money, Markets and the Future of Higher Education" by Andrew McGettigan which is a riveting read, although rather bleak because it's difficult to see how the very complex situation could possibly be unpicked. It's reviewed here:

http://blogs.lse.ac.uk/lsereviewofbooks/2013/06/05/book-review-the-great-university-gamble-money-markets-and-the-future-of-higher-education/

Thought I would have to spend time sorting things out after my office move but the removers did such an excellent job that there is no need. I'm now back in the tiny office where I started in 1986, 14 moves later. One of the offices I've inhabited has vanished because the building has been replaced. And the best ones are all now occupied by administrators!

Emails from MSc students: one thanking me, which is cheering, and one saying that his dissertation literature review, due today, will be delayed. Sigh. But the volume of email has fallen quite noticeably: everyone must be off on their hols already.

How the world has changed...

It's been some time since I analysed any data. For the last few projects I used MaxQDA, a neat little piece of software that I installed on my first netbook which was one of these:

I bought it nine years ago when I first started working for ICAEW and it cost more than the Mac I've just bought! But it fitted in my handbag and meant that I could work easily in the Members and Guests room at Chartered Accountants Hall (which is now the Business Centre, with lots of PCs available and none of the old comfy sofas that one often found aged members snoozing in). I could also work on the bus to and from London because the two bus companies were among the earliest public transport to offer free Wi-fi access. I used it a lot so I think the expense was justified. It still works, but slowly, running XP. It's had a couple of new batteries over the years but I put it away at the point where a charge was only lasting a couple of hours, compared with the eight or more when it was new. And I inherited a newer, lighter Vaio model from Son.

I managed to transfer all the data from it to the newer model but couldn't get MaxQDA to run. I had a note of the code but it wouldn't work. And I haven't needed it lately. But now I've transferred over to Macs.  You'd think there would be plenty of CAQDAS stuff for Macs. But there isn't. MaxQDA for Mac is due out later this year, and looks expensive. I've looked at some other software but it's either very user unfriendly or costs a lot. So for the moment it looks like back to highlighting and annotating Word docs. Still, it could be worse: the version of Word I used when I wrote my PhD thesis didn't even have a highlight function....

Presidents and posh meals...

My plan to write a paper about the role of dinners in the City is still in my mind, especially after attending the incoming ICAEW President's lunch last Wednesday, a jolly affair with pleasant food and drink and quite good speeches. See
http://www.icaew.com/en/about-icaew/newsroom/press-releases/2013-press-releases/incoming-presidents-speech
Only one lady was wearing a hat but there was a toastmaster and quite a few chains of office clanking about. Those attending were provided with a booklet containing menu (lots of details about the champagne and wine), table plan and list of attendees, presumably to facilitate networking. I wonder who constructs the table plan for these occasions. I was seated between a senior member of the Learning and Professional Development department, from whom learnt some interesting things about future plans, and the corporate governance manager who I know quite well. I would have liked to chat to the journalist across the table but the noise and my poor hearing militated against it.

The rest of the day was spent at Chartered Accountants Hall, doing an interview for our public sector NED research study (in a little meeting room on the mysterious floor 6.5) and a NED SIG event in the evening about internal audit.(in the restaurant where the aircon was so fierce my teeth chattered)  Very good presentation by Paul Boyle, now chief IA at Aviva: I think he will have some interesting things to say when my PhD student interviews him.

CAH is a splendid building - there are some pictures here: http://www.icaew.com/~/media/Files/Library/subjects/accounting-history/cah-presentation.pdf

- but it can be too hot or too cold. Although the Main Reception Room is stunning it's really hard to have a conversation in there. And the concrete environment of the Great Hall is a bit off-putting - there are no pictures of it at that link.

Thursday was a day of meetings, not all very successful in terms of outcome. There are some issues about how to code the data for the charities project. And I'm glad that I won't have to attend PDRs any more when I stop being Research Lead at the end of August.

Today students' exam results have been released and I can already see some queries in my inbox. There is also a request from a Publishing student to complete a questionnaire. The first question would require an essay, I think: "Can you please explain the publishing process as you understand it and the responsibilities and duties of publishers?"

LinkedIn has started sending me alerts about jobs that might suit me. As the search term they are using must be governance, it's throwing up some interesting things which reinforce my idea that the word is being misused. Royal Mail are looking for a "Governance Gating and Compliance Analyst": I wonder what "gating" means in that context?