A publication from the IoD today: thanks to @dinamedland for the headsup. Nice word cloud on the front cover.
But why "great"? Is there a lesser governance debate? Is there a debate at all? And what is the purpose of debates? Motions carried or defeated? Is this a sensible metaphor for corporate governance? I think that good governance happens in all the small conversations between the people involved. The Cadbury Code was all about stimulating those conversations, providing a language and a framework in which they could take place. It certainly wasn't about measurement of any sort. (Henry Mintzberg recently offered some cogent words about this.)
I did get beyond the front cover. I got as far as page 8 and realised I could do with a cup of tea and a cuddle with my cats while pondering my own inadequacies with regard to statistics and wondering whether it would be worth trying to address these at this stage of my life. It didn't take long to conclude that I could manage without knowing what "support vector machine regression" means. It certainly implies academic rigour, as does the Cass imprimatur, so I parked my anxieties and turned to the conclusions.
Ok, these are interim conclusions, but really?
"Different questions give different answers"? Really?
"Companies with higher governance scores have reputational advantage." You don't say!
"High-profile companies have reputational disadvantage
Companies with lower scores in the predictive model (lowest tier) suffer from an average
reputational disadvantage of -42. High-street banks have some of the strongest reputational
disadvantages, ranging from -47 to -124."
Now that's quite interesting and might be worth exploring.
"Range of scores is relatively narrow.
We also note that the range of scores produced in the predictive model is relatively narrow. It
may be that lower-scoring companies are already moving to develop and improve governance
to deliver the levels seen by the higher-scoring companies."
That would also be worth investigating over time.
" Governance is a complex system. [Well, there's a surprise!]
The range of results from the instrumental factors in Section 6 above shows us that no single
factor can determine how well a company delivers corporate governance. Companies that
wish to improve their governance should address a wide variety of factors. Governance should
be seen as the responsibility of the whole organisation."
I would certainly take issue with that final sentence. I blogged about the problems of blurring of boundaries between governance and management last August and I'll have more to say on that in a future post.
This may not seem very positive: I should probably read the report in more detail, to be fair. But it's my contribution to the debate, for now. Is anyone listening?
Tuesday, 16 June 2015
Saturday, 13 June 2015
The truth about our norm core
Interesting article in today's FT by Tim Harford, pointing out that the classic studies of what has come to be called groupthink are too often quoted without mentioning the proportion of the subjects involved who did not follow the herd.
I'm still puzzled about the point at which consensus (considered good) becomes groupthink (considered bad). The evidence that board diversity will lead to less groupthink is very limited but this argument is frequently trotted out in support of board gender diversity.
And I'd like to see research on the relationship between consensus and diversity. In my research on audit committees, when I enquired about how contentious issues were resolved, board members told me repeatedly that dispute was minimal: many of their stories indicated that this was because consensus was achieved outside the board room through informal conversations. There have been many changes in the way boards work since I undertook that research but I doubt whether the importance of informal communication before and after meetings in achieving consensus has entirely diminished. How does that work for more diverse boards, I wonder?
Lots more interesting stuff to read:
A fascinating article by Paolo Quattrone on institutional logics: "Governing Social Orders, Unfolding Rationality, and Jesuit Accounting Practices: A Procedural Approach to Institutional Logics". A demanding read but worth getting to grips with.
Having read the sample chapter via Kindle, I was really keen to get hold of this and assumed that I would need to use the inter-library loan service, a ponderous process. The librarian who deals with ILL made my day when she told me that the Brookes library has it in ebook form!
I haven't read very far yet (and, because the author is a legal scholar, it has lengthy footnotes on every page so it's easy to lose track of citations, which I find very frustrating) but I like his initial analysis of the arguments which seems more comprehensive than anything else I've read. So far, there is almost no reference to non-US literature - I shall be ticking off citations against my lengthy bibliography on board gender diversity. I see that the empirical work was conducted in Norway: I hope he reflects on the difficulty of generalising from that special case.
Delighted with this, a freebie from OUP for reviewing a book proposal. It looks at accountability within everyday processes such as rubbish collection, traffic control and airport security, and how this relates to governance.
And a treat.
My other treat this week was listening to the wonderful Bob Monks speak at a CSFI roundtable event - always a pleasure to hear him speak, and I was able to give him a copy of the Cadbury book.
I'm still puzzled about the point at which consensus (considered good) becomes groupthink (considered bad). The evidence that board diversity will lead to less groupthink is very limited but this argument is frequently trotted out in support of board gender diversity.
And I'd like to see research on the relationship between consensus and diversity. In my research on audit committees, when I enquired about how contentious issues were resolved, board members told me repeatedly that dispute was minimal: many of their stories indicated that this was because consensus was achieved outside the board room through informal conversations. There have been many changes in the way boards work since I undertook that research but I doubt whether the importance of informal communication before and after meetings in achieving consensus has entirely diminished. How does that work for more diverse boards, I wonder?
Lots more interesting stuff to read:
A fascinating article by Paolo Quattrone on institutional logics: "Governing Social Orders, Unfolding Rationality, and Jesuit Accounting Practices: A Procedural Approach to Institutional Logics". A demanding read but worth getting to grips with.
I haven't read very far yet (and, because the author is a legal scholar, it has lengthy footnotes on every page so it's easy to lose track of citations, which I find very frustrating) but I like his initial analysis of the arguments which seems more comprehensive than anything else I've read. So far, there is almost no reference to non-US literature - I shall be ticking off citations against my lengthy bibliography on board gender diversity. I see that the empirical work was conducted in Norway: I hope he reflects on the difficulty of generalising from that special case.
And a treat.
My other treat this week was listening to the wonderful Bob Monks speak at a CSFI roundtable event - always a pleasure to hear him speak, and I was able to give him a copy of the Cadbury book.
Monday, 1 June 2015
Chasing audit quality
The accountancy profession continues to struggle to demonstrate the value of audit to the wider world. Like the activities of boards of directors, audit is opaque: the title of Beattie, Fearnley and Brandt's prize-winning book on audit "Behind Closed Doors" was well chosen. If it is difficult to show what auditors actually do, it is even more difficult to assess the quality of what they do.
My recent reading has pointed up two rather different approaches to this problem, a difference which underlines the worrying gap between academic research and practice. Academics investigating the relationships which might affect audit quality use proxies for audit quality such as abnormal accruals. There is a sizeable literature dating back to de Angelo's widely cited paper published in 1981. This is a useful overview from 2004.
A practitioner reviewing some proposed research in this area recently observed: "..it has always been slightly unclear to me how you can establish an appropriate proxy for something that has itself not been clearly defined, and for which no agreed methodology of assessment has been developed."
The FRC seems to ignore all this and takes a pragmatic approach, well illustrated in the recent practice aid for audit committees, developed thus:
"The FRC organised five roundtables where an approach to assessing the effectiveness of the external audit was field tested, with a focus on audit quality and the financial statement process. The roundtables included key market participants relating to companies with a UK Premium listing – including audit committee members, investors, financial management and auditors, who gave feedback on the proposed approach, and shared some of their own experiences and expectations."
This would not pass the tests of rigorous empirical research (but is there any such thing? Paul Williams examines it here) but it has generated an analysis of the potential components of audit quality which recognises the subjectivity and judgement involved in its assessment but still offers a practical way forward.
Accounting academics are subject to all sorts of institutional constraints which militate against producing studies which could be of practical help to practitioners: they often complain that access to people is difficult, making ethnographic approaches, which could provide insights into behaviour, too problematic to undertake. But the fundamental questions which interest each group are the same. It would be in everyone's interests to bridge the gap.
My recent reading has pointed up two rather different approaches to this problem, a difference which underlines the worrying gap between academic research and practice. Academics investigating the relationships which might affect audit quality use proxies for audit quality such as abnormal accruals. There is a sizeable literature dating back to de Angelo's widely cited paper published in 1981. This is a useful overview from 2004.
A practitioner reviewing some proposed research in this area recently observed: "..it has always been slightly unclear to me how you can establish an appropriate proxy for something that has itself not been clearly defined, and for which no agreed methodology of assessment has been developed."
The FRC seems to ignore all this and takes a pragmatic approach, well illustrated in the recent practice aid for audit committees, developed thus:
"The FRC organised five roundtables where an approach to assessing the effectiveness of the external audit was field tested, with a focus on audit quality and the financial statement process. The roundtables included key market participants relating to companies with a UK Premium listing – including audit committee members, investors, financial management and auditors, who gave feedback on the proposed approach, and shared some of their own experiences and expectations."
This would not pass the tests of rigorous empirical research (but is there any such thing? Paul Williams examines it here) but it has generated an analysis of the potential components of audit quality which recognises the subjectivity and judgement involved in its assessment but still offers a practical way forward.
Accounting academics are subject to all sorts of institutional constraints which militate against producing studies which could be of practical help to practitioners: they often complain that access to people is difficult, making ethnographic approaches, which could provide insights into behaviour, too problematic to undertake. But the fundamental questions which interest each group are the same. It would be in everyone's interests to bridge the gap.
Tuesday, 26 May 2015
The PRA on board responsibilities
The Prudential Regulation Authority is consulting on this. The paper sets out a very clear articulation of board responsibilities which would apply to any company, not just those regulated by the PRA. The paper provides a couple of neat summaries of the effective board from the PRA perspective:
"An effective board is one which understands the business, establishes a clear strategy, articulates a clear risk appetite to support that strategy, oversees an effective risk control framework, and collectively has the skills, the experience and the confidence to hold executive management rigorously to account for delivering that strategy and managing within that risk appetite."
"The desired outcome from a regulatory standpoint is an effective board, which is one that:
• establishes a sustainable business model and a clear strategy consistent with that model;
• articulates and oversees a clear and measurable statement of risk appetite against which major business options are actively assessed; and
• meets its regulatory obligations, is open with the regulators and sets a culture that supports prudent management."
The focus on risk, while obviously most relevant in financial services, might also help other companies to consider business decisions more carefully: from the perspective of negative outcomes, it is not always easy to distinguish between bad corporate governance and bad business decisions.
But the system still relies heavily on NEDs. I wonder if there is any recent research on the effect of NEDs on the boards of financial services companies over the last decade.
And I'm still struggling to understand what "culture" means.
"An effective board is one which understands the business, establishes a clear strategy, articulates a clear risk appetite to support that strategy, oversees an effective risk control framework, and collectively has the skills, the experience and the confidence to hold executive management rigorously to account for delivering that strategy and managing within that risk appetite."
"The desired outcome from a regulatory standpoint is an effective board, which is one that:
• establishes a sustainable business model and a clear strategy consistent with that model;
• articulates and oversees a clear and measurable statement of risk appetite against which major business options are actively assessed; and
• meets its regulatory obligations, is open with the regulators and sets a culture that supports prudent management."
The focus on risk, while obviously most relevant in financial services, might also help other companies to consider business decisions more carefully: from the perspective of negative outcomes, it is not always easy to distinguish between bad corporate governance and bad business decisions.
But the system still relies heavily on NEDs. I wonder if there is any recent research on the effect of NEDs on the boards of financial services companies over the last decade.
And I'm still struggling to understand what "culture" means.
Tuesday, 14 April 2015
Brief thoughts on abstracts
In a Twitter conversation yesterday @fcablog observed that the abstract of this Piketty paper did not properly represent the contents. This post to the excellent LSE blog about the importance of social media presence to academics prompted his further comment on the need for better abstracts.
Writing abstracts is difficult and the challenge is not always recognised, partly, I think, because of the way academic papers are developed. These days many conference organisers demand the submission of full papers rather than just abstracts but when I first started attending conferences all that was needed was an abstract. My most frequent co-author had a happy knack of constructing very interesting abstracts from some rather vague research ideas with which we had been tinkering: we would send the result off to a conference (chosen largely on the basis of being held in a place we quite fancied visiting) and when the abstract was accepted we would then be faced at a later stage with actually writing the paper. We could change the abstract, of course, but our paper would have been allocated to a presentation stream on the basis of what we'd originally said so there were limitations.
Amazingly, this process worked rather well and we ended up with some sound publications which have stood us in good stead over the years of our careers.
I thought I'd take a look back at the development of the abstract for our most widely cited paper. This paper was one output of a research project financed by the Institute of Chartered Accountants in Scotland which also resulted in this report.
This is the abstract from the final published paper which is entitled "Risk management. The reinvention of internal control and the changing role of internal audit". Sadly the frog metaphor had to go (although we kept it in a footnote), the language is more academic and the whole tone is far more serious.
Writing abstracts is difficult and the challenge is not always recognised, partly, I think, because of the way academic papers are developed. These days many conference organisers demand the submission of full papers rather than just abstracts but when I first started attending conferences all that was needed was an abstract. My most frequent co-author had a happy knack of constructing very interesting abstracts from some rather vague research ideas with which we had been tinkering: we would send the result off to a conference (chosen largely on the basis of being held in a place we quite fancied visiting) and when the abstract was accepted we would then be faced at a later stage with actually writing the paper. We could change the abstract, of course, but our paper would have been allocated to a presentation stream on the basis of what we'd originally said so there were limitations.
Amazingly, this process worked rather well and we ended up with some sound publications which have stood us in good stead over the years of our careers.
I thought I'd take a look back at the development of the abstract for our most widely cited paper. This paper was one output of a research project financed by the Institute of Chartered Accountants in Scotland which also resulted in this report.
This is the original abstract sent to the first conference at which we presented our ideas. The title was "From Frog to Prince: the Metamorphosis of Internal Audit".
"Over the last decade, the term ‘audit’ has become widely used in spheres of accountability beyond the purely financial (Power 1997), while accountancy firms have begun to re-brand audit services under the banner of ‘assurance’. This change has been paralleled by a shift in external audit focus from detailed compliance and financial system analysis to a broader strategic emphasis on business risk (Lemon, Tatum et al. 2000). Corporate governance policy recommendations have highlighted the importance of internal control and raised the profile of the internal audit function. In a similar shift to that observed within external audit, the role of internal audit now emphasises risk management (Selim and McNamee 1999), notably in the assumption of a close link between internal control and risk management underpinning the recent Turnbull guidance (Turnbull Committee 1999). In practice, the extent of this shift may be limited (Griffiths 1999). This paper explores the evidence that suggests that these changes are taking place, using interviews with leading internal audit practitioners, set against the background of changing sociological perspectives on risk."
I can't find the notes of our earliest conversation that will have led to this but I'm fairly sure that those citations are a manifestation of my lack of confidence in the broad assertions of my co-author! Including citations in an abstract is rarely helpful: they take up the limited space and the full references don't often accompany the abstract which makes it difficult for a reader to follow them up.
This is the abstract from the first full conference paper draft:
"The publication of the Turnbull report in the UK represented a radical redefinition of the nature of internal control and internal audit as features of corporate governance in the UK. It is surprising that the redefinition has been largely unremarked. In this paper we chart the implied change in the role of internal audit, evaluate evidence that such a change has actually occurred and identify the pivotal role of the concept of risk in the change which is occurring. Competition for organisational turf and influence is identified as a driving force; ownership of risk management is seen as an occupational vacuum which internal auditors are seeking to occupy as a means to acquiring influence on corporate strategy formation. At the same time compliance with systems and verification of internal control are in danger of becoming neglected. Internal auditors are seeking to professionalise their occupation and to compete with external auditors and non-executive directors in providing strategic advice. Meanwhile, who is minding the shop? "
I like that second sentence: well, *we* were surprised. We did eventually come up with evidence to support some of these claims.
"The
publication of the Turnbull guidance represented a radical redefinition of the nature
of internal control as a feature of corporate governance in the UK, explicitly
aligning internal control with risk management. This paper explores this
change, using sociological perspectives on risk and its conceptualisation to
frame the debate about internal control and risk management within
the UK corporate governance arena - the most recent manifestation of an ongoing
competition for the control of economic and social resources. The paper
demonstrates that developments in corporate governance reporting requirements
offer opportunities for the appropriation of
risk and its management by groups wishing to advance their own interests. This is
illustrated by a review of recent changes in internal audit."
It's worth noting that the journal in which this was published now demands structured abstracts.
Looking back at the abstracts I'm not at all sure that they would satisfy @fcablog. But it has made me think more carefully about the role of the abstract and what readers require. I confess that when I've reviewed papers for journals I haven't always paid a great deal of attention to the abstract, other than to check that they are in line with the paper contents. It might be quite interesting to write a paper about writing abstracts...
Thursday, 2 April 2015
A US perspective on women on boards
Wonderful stuff in the New York Times: The Effect of Women on Corporate Boards. Professor Krawiec is spot on! And good to see the Catalyst view criticised.
Monday, 30 March 2015
Happy to admit when I'm wrong but...
On Saturday this article irritated me, as you might expect, so I shot off a letter to the Guardian noting in particular that the reference to Jimmy Choo was inaccurate, according to their web site.
Today I've had a message from the Readers' Editor's department, pointing out that Judith Sprieser left the board of Jimmy Choo with immediate effect earlier this month. Well, my bad. The Stock Exchange announcement cites"personal reasons unrelated to the company".
This raises a question about naming and shaming boards which do not appear to be suitably diverse in their composition, in terms of the impact of timing and movement of directors. Presumably the Jimmy Choo board will be expected to appoint another woman. Suppose they had reached the magic number of three women on the board and one left: would they be expected to replace her with another woman? Extend this supposition to encompass representation of other groups: is the assumption that for every group there will be an appropriate number which should always be maintained? Won't it be a tad difficult for boards to ensure the right balance of competence and experience within these limitations?
Just askin'...
Today I've had a message from the Readers' Editor's department, pointing out that Judith Sprieser left the board of Jimmy Choo with immediate effect earlier this month. Well, my bad. The Stock Exchange announcement cites"personal reasons unrelated to the company".
This raises a question about naming and shaming boards which do not appear to be suitably diverse in their composition, in terms of the impact of timing and movement of directors. Presumably the Jimmy Choo board will be expected to appoint another woman. Suppose they had reached the magic number of three women on the board and one left: would they be expected to replace her with another woman? Extend this supposition to encompass representation of other groups: is the assumption that for every group there will be an appropriate number which should always be maintained? Won't it be a tad difficult for boards to ensure the right balance of competence and experience within these limitations?
Just askin'...
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