On the subject of removing limited liability:

We should be much more straightforward in saying that limited liability is a privilege to be used for the benefit of society, and with care, and that if obligations to society are not respect then it should simply be withdrawn with the shareholders and not society at large then having the duty to remedy the defect. When should that happen? Let me suggest the following occasions for a start:

1) When excess pay is allowed, as noted above.

2) When accounts are not filed on time, for any reason.

3) When corporation tax returns are not filed, for any reason. Of course these are not public documents now: they soon would be if this was the case.

4) Three months after any set of accounts is filed showing the company to be insolvent unless action to remedy the defect has been taken in the meantime.

Now, shareholders are generally considered to be absent owners. They've plonked down their money in a company and then they basically let managers get on with it. The system of corporate governance has evolved in order to ensure that managers don't simply run off with the money or spend it all on booze and fast women. 

The idea of limited liability is to encourage investment. When shareholders aren't worried that they may face future capital calls, they'll be prepared to invest more. 

So the idea that shareholders should lose their limited liability because they wanted to pay a superstar director (or other employee) what they think they're worth is totally ludicrous.

The next three are even more idiotic. Shareholders are, as we said, absent. They've delegated the responsibility of running the company to managers. So why should shareholders be penalised if managers screw up by not filing accounts or tax returns or by trading while insolvent? Ritchie's got this totally wrong. Directors are responsible for ensuring a company isn't trading insolvently, and they suffer if they fail in that responsibility. Not shareholders.

And by 'shareholders' we mean ordinary people like you and me, in our pension funds. It's you and me, Ritchie wants to clobber when directors screw up. Doesn't sound so good now, does it?

Filed under: Corporate governance with tags directors, idiots, limited liability, richard murphy, tax returns
58751 Comment »http%3A%2F%2Fwww.fcablog.org.uk%2F2012%2F01%2Fritchie-on-limited-liability%2FRitchie+on+limited+liability2012-01-11+22%3A48%3A02Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D5875

Ritchie writes, in relation to Olympus:

The first is to note that a situation where an overly strong board of directors with weak or non-existent nonexecutive directors, none of them accountable to effective shareholder scrutiny gives rise to a situation where corruption and abuse is far too easy. We should not be complacent and think that this applies to Japan alone. This is also an accurate description of the UK quoted company environment where boards are almost entirely unaccountable, whether to non-executive directors (almost all of whom are recruited from the same small coterie of people) or to shareholders, where institutions dominate. Since, however, those institutions show no willingness to act on behalf of those whom they are supposed to represent, but do instead align their self-interest with the City of London and in turn with the companies they are supposed to be monitoring, we have no effective governance of these arrangements in the UK either, so we have no reason to take comfort from this situation by pretending it is peculiar to Japan alone

So, a case of dodgy corporate governance that took place in Japan is proof that UK corporate governance is ineffective?

No, I can't accept it, Richard. Put up balanced, objective evidence from the UK, or shut up.

Filed under: Corporate governance, Other blogs with tags japan, olympus, richard murphy
5571No Comments »http%3A%2F%2Fwww.fcablog.org.uk%2F2011%2F11%2Fer-no-ritchie%2FEr%2C+no+Ritchie2011-11-10+22%3A37%3A49Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D5571

Ritchie gets riled by the brilliantly named @ssap9rulesok into spluttering the following:

Well, I happen to be an FCA too. And Ritchie is wrong. Here's why.

Just suppose you're a pension fund manager and you believe that a particular share of yours is overpriced, meaning that its price is set to fall. What would you do? Of course, you would sell it.

And suppose that you believe that that share is underpriced, meaning that its price is set to increase in the medium to long term. What would you do? Of course, you would hold it.

Now suppose that some fool comes along and offers to pay you to lend them that stock. You will get your stock back of course, and you will also get some cash for letting them borrow it. Clearly you think the share is underpriced, otherwise you would have already sold it. So, not only do you get to keep your share, you get some cash too. It's the ultimate example of having your cake and eating it.

So any self-respecting pension fund would happily take the money of anyone who wished to pay them to lend out their stock. Why not? If you think the shares will, in the long run, increase in value you've got nothing to lose and everything to gain. Stock lending is not only consistent with good fiduciary duty, it's virtually required by it.

Filed under: Corporate governance, Other blogs with tags fiduciary duty, pensions, richard murphy, short selling, stock lending
50602 Comments »http%3A%2F%2Fwww.fcablog.org.uk%2F2011%2F09%2Fstock-lending-and-fiduciary-duty%2FStock+lending+and+fiduciary+duty2011-09-28+19%3A34%3A58Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D5060

In the February issue of Accountancy magazine, there's an article in the Institute pages about the ICAEW's submission to the government's investigation into the lack of women in boardrooms.

Now, there are some obvious, bad reasons why women aren't able to get onto company boards.  Maybe they aren't part of the "old boys" network.  Or perhaps they're felt to not fit in with the other old, mostly white, men who are already on the board. We already have laws that should eliminate this sort of unacceptable discrimination.

In addition to these, there are also some sensible reasons why women aren't getting onto boards.  Perhaps they don't want to. Or maybe it's down to taking a break to have children, which either disrupts their career progression or delays it while their male colleagues pull ahead. It's a fair question whether there are changes that can be made to reduce the impact of some of these factors.

It's a delicate subject which requires delicate handling.  So the choice of photograph to accompany the article is really very unfortunate.  They seem to have picked gone for a picture of a girl with the prettiest face and largest norks they can find. Yes, she is a girl; she looks like she's about 20 years old. And, rather than wearing the traditional office attire that's required of men - well starched shirt with double cuff shirt, windsor-knot tie, and sober suit - she seems to be wearing some sort of t-shirt.

There are some serious issues to be debated here. But the choice of picture completely trivialises the issue.  All it does is reinforce the stereotype that women on boards are there to provide some sort of eye candy for lecherous old men. Accountancy magazine really does need to do a lot better.

Filed under: Corporate governance, Other blogs with tags accountancy magazine, discrimination, gender pay gap, icaew
45961 Comment »http%3A%2F%2Fwww.fcablog.org.uk%2F2011%2F02%2Faccountancy-magazine-misses-the-point-on-gender-equality%2FAccountancy+magazine+misses+the+point+on+gender+equality2011-02-07+09%3A04%3A31Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D4596

An interesting tweet from Accountancy Age, who spent yesterday afternoon at the House of Lords debate on audit:

Myners: Professional adviser should be appointed to guide the audit committee and chair on complex risk and technical matters #lordsaudit

Myners, according to his Wikipedia article at least, has been Chairman of Guardian Media Group, Marks and Spencer and Powergen. So, he really ought to be more up to speed with UK corporate governance. Section B of the UK Corporate Governance Code, issued by the Financial Reporting Council, says:

The board and its committees should have the appropriate balance of skills, experience, independence and knowledge of the company to enable them to discharge their respective duties and responsibilities effectively.

...

All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge.

...

The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors.

So, all audit committees of UK listed companies should already be determining what skills they need. If they identify any skills gaps they must take steps to rectify the shortfall.

There's simply no need for any change in regulation to make this work, just a bit of enforcement of what's already there.

Filed under: Corporate governance, Other blogs, Politics with tags accountancy age, frc, house of lords, lord myners
45731 Comment »http%3A%2F%2Fwww.fcablog.org.uk%2F2011%2F01%2Flord-myners-at-the-house-of-lords-audit-enquiry%2FLord+Myners+at+the+House+of+Lords+audit+enquiry+2011-01-19+09%3A34%3A47Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D4573

Via a tweet from Ruth Bender which led to a post on Robert Goddard's excellent Corporate Law and Governance blog, we learn that the government is getting terribly worried about gender equality in the boardroom.  And then there's this, from the Guardian:

The European commission has warned companies that if they do not move voluntarily to ensure gender balance on executive boards, it will force them to.

Fundamental rights commissioner Viviane Reding told the European parliament: "Equality in decision-making is not yet a fact ... I do not rule out the possibility of putting forward legislation in this area."

I think this is based on a very dangerous and flawed line of reasoning.  Broadly speaking, it goes like this:  Boardrooms are full of white, middle class, public school educated men.  Boards sometimes fail to take account of major risks because they get sucked into this sort of 'groupthink'.  Therefore, what's needed is some outside influence from a more diverse range of people.  Women are currently underrepresented in boards.  Therefore, we need to ensure that there are more women in the boardroom.

While this might be compelling, the conclusions cannot be derived from the axioms.  It's far from obvious that the way to fix short-sighted boards is to force them to choose from a smaller pool of candidates without any regard for their skills.  Nor is it clear that, once these outsiders have been thrust upon boards, they'll be able to exercise any influence whatsoever.

What's needed is some evidence.  And a good place to look would be the public sector, because public bodies generally have the luxury of playing social science like this, in a way most private bodies do not.  So, it's instructive to look at the European Union's structures and its own gender balance.

The European Commission has 9 women and 18 men.  That's hardly balanced (although some might argue less imbalanced than many company boards).  The Commission also includes Baroness Ashton, widely mocked for being pitifully underqualified for her role as EU Foreign Affairs Head Honcho.

The European Parliament has 256 women and 479 men.  Again, horribly imbalanced.  Yet one cannot claim that this merely reflects the whims of sexist voters; company boards are subject to elections as well.

It seems extraordinary that the European Union should be pressurising company boards to take on more women, without substantive evidence, while itself being so unwilling to address its own gender imbalances.  If it's really the right course of action to be taking, and I remain unconvinced that it is, the EU must move first.

Filed under: Corporate governance, Politics with tags baroness ashton, diversity, european union, ruth bender
3843No Comments »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F07%2Fec-needs-to-get-its-own-house-in-order-on-gender-equality%2FEC+needs+to+get+its+own+house+in+order+on+gender+equality2010-07-16+08%3A53%3A25Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D3843

Via Larry Crumbley, an accounting professor at Louisiana State University, I receive the following:

Greetings:

Relative to many peer organizations, the AAA nomination process is less than democratic. The Executive Committee is currently in the process of suggesting some amendments that may make AAA even more undemocratic.

The Nomination Committee for many years has suggested only one candidate for each position. The Nomination Committee is composed of three former Presidents, and the four independent members have to be nominated by the Executive Council.

In the spirit of democratizing the nomination process, I would like to suggest that the by-laws for the nomination process should be amended to read as follows:

IX. Nomination and Election Procedures

Insert after first sentence:

The slate shall include at least two names for each position.

[Other sections (e.g., TLC, FIA, ABO) have this more open and democratic process. If sections can handle two-person slates, surely the parent organization can do the same.]

VII. Standing Committees

3. Strike three in front of "most recent Presidents" and replace with two.

Strike "four" and insert "five" in front of "members."

[This change makes the election process more open and transparent.]

New sentence: Rank-and-file may nominate persons to the nomination committee.

[Nominations for this committee should not be limited to those coming solely from the Council meeting.]

We need at least 100 signatures to get the above changes for vote by the membership (clause XIV). If you are in favor of either or both of the above more democratic and open changes, please sign your name and affiliation below and return to me by mail, fax, or e-mail.

Larry Crumbley
Department of Accounting
Louisiana State University
3106A Patrick A Taylor
Baton Rouge, LA 70803
dcrumbl@lsu.edu

The American Accounting Association (AAA) is the largest society for accounting academics in the world.  So it's intriguing that their own governance processes are so arcane.

If you're a member of the AAA (and I'm afraid you have to be a member of the AAA to participate in Larry's petition), you can download, sign and return the petition from here.

Filed under: Corporate governance with tags american accounting association, larry crumbley
34791 Comment »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F06%2Fdemocracy-american-accounting-association-style%2FDemocracy%2C+American+Accounting+Association+style2010-06-23+10%3A05%3A36Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D3479

The ACCA has published a fascinating paper covering a massive amount of topics, including risk, the pursuit of profit, ethics and sustainability.  Called "Risk and reward: tempering the pursuit of profit", it probes the apparent inconsistency between the pursuit of profit at all costs and the concept of sustainability.  The authors attempt to deal with this by aligning sustainability with sensible risk management, which translates it into a slightly less intractable problem - how do you ensure that profit-making isn't at the expense of excessive risk taking?  That's more obviously a behavioural problem, and the paper looks at how those problems can be addressed.

This is somewhat reminiscent of John Kay's recent book Obliquity: Why our goals are best achieved indirectly, which suggests that the pure pursuit of profit may lead to bad outcomes.  Conversely, the most successful companies are those that focus on other things, such as customer service or product quality.  In the context of the crisis, the ACCA makes the case well - it's sort of obvious that when times are tough, people take more of an interest in risk management, but when there are profits to be made they'll put it back in its box.

The paper also, correctly, observes that regulation doesn't always work as intended.  This is particularly true if regulation is seen as a compliance activity or, worse, a list of rules to be followed without common sense.

This is a rich paper, which covers a lot of areas.  There's a section on business ethics, rather reminiscent of the ICAEW's paper on integrity in financial reporting, and another section on the thorny issue of how to enforce rules and principles.  This chapter suggests that, although principles are generally to be preferred to rules, you can't just dump principles-based regulation onto businesses that are used to complying to the letter of rules.

This is a fascinating introduction to lots of intriguing philosophical topics.  The ACCA has really upped its game on this publication, and it'll be interesting to see how they follow up the strands they've started here.

Filed under: Corporate governance, Ethics, Institutes with tags acca, icaew, john kay, principles, risk reporting, sustainability
3216No Comments »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F06%2Fnew-acca-paper-on-risk-and-reward%2FNew+ACCA+paper+on+risk+and+reward2010-06-04+09%3A43%3A47Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D3216

The European Commission has issued its long-awaited green paper on corporate governance in financial institutions.  The green paper seeks to answer the question as to why so many banks needed to be bailed out, given that they were supposed to have world-class corporate governance, lots of regulation and all had received clean audit opinions.

The paper is nicely balanced.  For example, "it is clear that boards of directors, like supervisory authorities, rarely comprehended either the nature or scale of the risks they were facing.  In many cases, the shareholders did not properly perform their role as owners of the companies." (p.2)  Hallelujah!  They haven't fallen into the lazy narrative that it's all the auditors' fault, a line that I note Francine McKenna was (rather naively, in my view) peddling again this week.

The "it's the auditors, stupid" explanation hands too many guilty parties a get-out-of-jail-free card.  OK, so some executives in America have been given a fairly hard time, but British bank executives have largely emerged unscathed - financially at least.  And it's high time that regulators were called to account for why they failed to do their job properly.  It's pure laziness to blame the auditors, who will always be the last link in the chain, for everything.

However, there's one bit in this report that is not so good.  It notes that "members of boards of directors did not come from sufficiently diverse backgrounds.  The Commission, like several national authorities, notes a lack of diversity and balance in terms of gender, social cultural and educational background." (p.6)  This is dangerous territory.  It's a significant leap of faith to go from the observation that boards are not diverse to the conclusion, rather like the new UK Corporate Governance Code, that what you need to do about it is stick more women on boards.

Today, Harriet Harman, acting leader of the Labour Party, was on similar turf.  Today she told UNITE members:

We have 81 Labour women MPs – more than all the other parties put together. Labour is the only party in parliament which speaks up for women in this country. We have some excellent experienced women and some brilliant new women MPs.  We still do have twice as many men MPs as women.  The labour men are great – but they are not twice as good as the women – so I want the PLP when we revise our rules for shadow cabinet elections to have 50.50 men and women in the shadow. It’s time for Labour women to step out of the shadows.

Why boards and the shadow cabinet aren't balanced, I don't know.  But I do know that blindly shovelling more women onto them, without understanding why, is likely to weaken them, not strengthen them.  Boards need members with sufficient experience and skills to fulfil their duties.  Many women do have those skills, and serve very effectively on boards.  But there are many more men with the necessary skills and experience, leading to the disparity in board numbers.

Until we address the root cause, not merely the symptoms, we' risk only making things worse.

Filed under: Corporate governance, Current issues, Politics with tags banks, diversity, european union, francine mckenna, frc, harriet harman
3207No Comments »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F06%2Feuropean-commission-green-paper-on-corporate-governance-in-financial-institutions%2FEuropean+Commission+green+paper+on+corporate+governance+in+financial+institutions2010-06-03+20%3A05%3A42Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D3207

The UK's Financial Reporting Council has announced a set of revisions to the Combined Code. Now to be known as the "UK Governance Code", the main changes are:

• To improve risk management, the company‘s business model should be explained and the board should be responsible for determining the nature and extent of the significant risks it is willing to take.
• Performance-related pay should be aligned to the long-term interests of the company and its risk policy and systems.
• To increase accountability, all directors of FTSE 350 companies should be put forward for re-election every year.
• To promote proper debate in the boardroom, there are new principles on the leadership of the chairman, the responsibility of the non-executive directors to provide constructive challenge, and the time commitment expected of all directors.
• To encourage boards to be well balanced and avoid “group think” there are new principles on the composition and selection of the board, including the need to appoint members on merit, against objective criteria, and with due regard for the benefits of diversity, including gender diversity.
• To help enhance the board’s performance and awareness of its strengths and weaknesses, the chairman should hold regular development reviews with each director and FTSE 350 companies should have externally facilitated board effectiveness reviews at least every three years.

Of all of these changes, it's the requirement for boards to have consideration to gender and other diversities that has got the press excited.  So excited, in fact, that the new Code made the local BBC news on Friday night - quite an achievement!  The requirement for annual elections was perhaps less interesting because many listed companies already require their directors to submit themselves to annual elections.

Like Holmes's dog that didn't bark, there's significance in a change that they didn't make: to the UK's system of "comply or explain".  You see, most of the provisions of the Combined Code/UK Governance Code aren't actually mandatory at all - they're all optional.  What's mandatory is for companies to either comply with each of the provisions or explain to their shareholders why they haven't complied.

In recent years, this has seen companies like Marks and Spencer breaking the provision that the role of Chief Executive and Chairman should be separate.  They explained this as follows:

Throughout the year ended 28 March 2009 the Company complied with all Code provisions with the exception that from 1 June 2008 the role of Chairman and Chief Executive has been exercised by the same individual, Sir Stuart Rose (A.2.1). We plan to revert to recommended best practice no later than July 2011.

We recognise that our current Board structure is out of line with the Code and we understand the concerns of our shareholders but believe that we still can – and do – maintain robust governance while at the same time, benefiting from having Stuart at the helm. As long as we have robust governance and make sure that appropriate challenge to the executive is in place, we believe the right balance can be maintained.

Although it's inarguable that it should be the shareholders, as ultimate owners of the company, who get to decide whether this is appropriate, it has led to calls for a tightening of the system to address situations where owners aren't exercising their responsibilities properly.  The FRC has decided not to address this problem through the UK Governance Code; instead it has been consulting on a separate Stewardship Code for investors.

Filed under: Corporate governance with tags combined code, diversity, frc, marks and spencer, sir stuart rose, stewardship code, uk governance code
31281 Comment »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F06%2Fa-new-governance-code-for-uk-business%2FA+new+governance+code+for+UK+business2010-06-01+09%3A44%3A17Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D3128