Comment

Comment

It may take another economic calamity for policy to once again become aligned to the legitimate interests of business. We forget in this era of the welfare state and social services that for many centuries, the only connection most people had with the government of the day was via the tax system or the penal system. There were tithes long before there were state pensions, excise duties long before there were state-sponsored schools and hospitals. Maybe there is some relic of this folk memory which engenders the hype and the debate about relatively minor tax changes each year. Tax debates are often a welcome distraction for government. They provide politicians with cover not to dwell on the vast sums expended on the health services, HSE and NHS alike that still leaves so many of us on waiting lists, or on the housing crises currently being suffered both in Ireland and in the UK. Add skills shortages and Brexit to this list, and there is an extraordinary confluence of concerns on the political agendas of both jurisdictions. Lost in the noise Business is having a tough job getting its concerns heard against the clamour of the major public policy items of housing and health. Even the Brexit political debate is now more centred around issues of migration and political sovereignty than trade and commerce. Given that the EU project started life as the facilitation of commerce to deflect causes of conflict, this is quite an extraordinary turn of events. But the official attitude among the negotiators seems to be that businesses will somehow find solutions and be able to cope. As a generalisation, that is probably true. It is informed by past commercial responses to various disasters which have crippled international trading opportunities, both natural and self-inflicted – from foot and mouth disease to oil crises to tariff wars. There is a qualitative difference, however, to the way in which government policies across the globe are impacting business this time, and that is the extent of the uncertainty in their impact. An embarrassment of uncertainty There is just so much we don’t know – from the status of professional qualifications and staff availability post-Brexit, to the future availability of tax credits for companies with a US footprint. Change to the regulatory, tax and trading environment is everywhere, but governments and institutions are either unwilling or unable to spell out the details of how these changes will take effect. Political expediency seems to be suggesting that policy change can be effected in broad brushstrokes. To keep away the devil, the details must not be provided. Instead, we are given a big picture and asked to buy into it – the prospect of re-invented trading arrangements, new tax regimes, a future with less regulation and red tape. The “post-Gove” era How has all this vagueness been allowed to develop and come so much to the fore? It may be partly down to the quality of our politicians and policymakers, who underestimate or have been poorly briefed on the complexity of the issues they deal with. It may be a rose-tinted perspective on the power of the information technology that supports business activity. To put it bluntly, the accountancy profession along with other expert professions do not get the same hearing from government as it did prior to the Great Recession. We are indeed in a “post-Gove” era where no-one wants to listen to experts. It may take another economic calamity – a hard Brexit, a tariff war, another banking collapse – for the development of policy to become more closely aligned again to the legitimate interests of business. That is too costly a way to repair the uncertainty. Dr Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland.

Oct 01, 2018
Comment

Against a backdrop of scandal and suspicion, charity leaders must prioritise trust and transparency if they are to survive. Demand for the services of Northern Ireland’s charities and social enterprises is increasing, according to the latest research by CO3, the membership organisation for third sector leaders in Northern Ireland, in conjunction with Ulster Bank. The Q2 2018 study found that 67% of respondents experienced higher demand in Q2 and 33% have added to their headcount to help them cope with the increase. This growing demand for services is putting pressure on resources throughout the charities sector. Many charities rely on fundraising for their income and organisations are increasingly aware that maintaining public confidence and trust must be key priorities for their leaders. The 2018 Edelman Trust Barometer recognises that trust is a valuable asset for all institutions and ongoing trust-building activities should be one of the most important strategic priorities for every organisation. So, what can organisations do to build trust?  Building trust As part of research undertaken by the Charities Commission for Northern Ireland, participants in group discussions believe that, to increase trust, charities need to: Be more open about how they spend their money; Provide better information about what the charity is doing; Display information publicly on how the charity is regulated; Review fundraising; and Review the remuneration of senior employees. Governance failures This research found that 84% of participants considered it important that charities are well-managed and transparent about the way they spend funds and donations. However, recent governance failures illustrate just how much work many charities still have to do to comply with best practice, not least in the area of trustee responsibilities and duties. Useful insights into the types of failings that commonly occur are included in the 2017 compliance report of the Charities Regulator in the Republic of Ireland. Listed issues include trustees being unaware of their legal duties and responsibilities; lacking knowledge of the requirements and conditions in their charity’s governing document; not holding meetings or not attending meetings; making decisions without documenting them in formal board minutes; and making significant decisions without seeking out specialist advice. Other issues include allowing one trustee or a group of trustees to control the charity and trustees not being aware of their legal obligations to the Charities Regulator. Public perception Factors the public associate with a trustworthy charity are highlighted in another recent study, which found that demonstrating high standards of conduct and behaviour is as important to trustworthiness as making a positive difference to a charity’s cause. This research, conducted by Populus for the Charity Commission in England & Wales, found that a person’s trust is closely associated with their donating behaviour. More than half (52%) of those whose trust has increased said they donate to charities more as a consequence, while 41% of those whose trust has decreased said they donate to charities less as a consequence. The study highlights some key drivers of trust such as charities being transparent about where money goes, true to their values, efficient in their use of resources, well-governed and well-managed, and able to demonstrate that they are making a positive difference. A new charities SORP Chartered Accountants working with clients in the charities sector should note that, in January 2019, the four charity regulators of the UK and Ireland will work together for the first time to develop the charity accounting framework for use across all four charity law jurisdictions. This follows approval from the Financial Reporting Council for the addition of the Charity Commission for Northern Ireland and the Charities Regulatory Authority for the Republic of Ireland as joint members of the SORP-making body, with the Charity Commission for England & Wales and the Scottish Charity Regulator. The enlarged SORP-making body will work towards a new charities SORP, building on the foundation of the existing SORP to promote a common approach to high-quality reporting by charities while respecting local differences and legal requirements. Teresa Campbell FCA is a Director at PKF-FPM Accountants Ltd.

Oct 01, 2018
Comment

The board of directors’ most important responsibility is the appointment – and, in certain cases, dismissal – of the CEO. A non-executive director is not a passive function. The increasing wonder, apart from family businesses, is that anybody is willing to be a non-executive director at all. Directors can find themselves in the firing line of inquiries, allegations, parliamentary scrutiny and media attention, usually unexpectedly. Charities, banking, entertainment and hospital sectors are recent examples; and organisations controlled by the State. Furthermore, a director is expected to be versed in corporate governance, which includes myriad obligations and regulations relating to Revenue, environmental, company law and employment; not to mention anticipating financial pitfalls and actually monitoring the business itself. I have regularly seen papers provided to directors in advance of a directors’ meeting running at more than 50 pages. In summary, responsibilities for a director are high and not readily delegated, hence the importance of the CEO’s role. A moment’s thought will demonstrate that a large business is organised as a pyramid, with the CEO on top and power devolving downwards. In politics, the prime minister is on top but, in fact, power devolves upwards. As an aside, in my opinion, this is why businesspeople make poor politicians and vice versa. It is the CEO who carries out the policies set down by the directors. In practice, policies are usually developed unconsciously over time by custom and practice. CEO complacency can readily occur; seven years is commonly spoken of as the appropriate tenure of a CEO. It can be difficult for a board of directors to be aware of critical matters. Certainly, there can be quality financial information provided, but often there are important issues or circumstances not apparent from financial appraisal alone. As explained earlier vis-à-vis the pyramid structure, the CEO is the pinch point on policies and information as to upwards or downwards. This is where the relationship between the chair and the CEO has great importance. It is up to the chair, separate to board meetings, to have regular face-to-face contact with the CEO, primarily to identify issues or circumstances that should be advised to the directors. A strong chair is a necessity. A dominant CEO can happen whereby the directors are given circumscribed information or, at worst, treated as rubber stamps. This particular trait became evident, not just in Ireland, but in the banking and related sectors in the fallout from the financial crash. Large businesses are complex. Tragic events can happen. In recent times, directors have been heavily criticised for explosions on oil platforms, the sinking of a ferry, the bursting of a mining dam and other events. The famous saying of US president, Harry S. Truman, comes to mind: “the buck stops here”. A ‘who’s who’ board of directors is not reassurance in itself. Around the world, many of the banks and insurance companies that carried out the worst excesses prior to the financial crash had prominent boards of directors. This is also true of quite a few large business failures. The dismissal of a CEO, and the willingness to do so, is also a prime responsibility of the directors. It is not just a question of firing a CEO for a material misdemeanour; there is also the question of performance. The temptation is to look inwards for a CEO, but a competent line manager promoted to CEO may lack the broader skills and leadership qualities required of a CEO. It can often be difficult for directors to distinguish personality from ability. Careful identification of the skills necessary for particular circumstances is best addressed or assessed by outside advisers, though obviously the ultimate appointment is made by the directors. The hiring, firing or resignation of a CEO in a quoted company can, and frequently does, move the share price. The money people recognised long ago that it is the CEO, for good or bad, that makes things happen. Des Peelo is author of The Valuation of Businesses and Shares, published by Chartered Accountants Ireland.

Oct 01, 2018
Comment

Independence in the world of corporate governance isn’t simply a matter of circumstance, it is a state of mind. The concept of the independent non-executive director is a very familiar one. In fact, the new UK Corporate Governance Code for certain listed companies (in a similar manner to the 2016 code that went before it) goes so far as to list the relationships and circumstances that are relevant to the determination of a director’s independence. In addition, guidance is provided as to the measures that can be taken to manage and preserve independence. This guidance includes a careful consideration of a non-executive director’s contribution to the board and their effectiveness on the board when proposing a director for re-election. It seems, therefore, that the determination of the independence of a director must go beyond relationships and circumstance; it should also look to the state of mind and behaviour of the director in question. This brings into the frame the concepts of being independent and independence of mind. The application of these concepts to an independent non-executive director is obvious. However, when assessing the ability of any director – independent, executive or non-executive – should we expect the presence of independence of mind as a minimum requirement? Being independent It is abundantly clear that for a director to be independent, they cannot have any present or recent relationships or links with the company or its management that could influence their objective and balanced judgement. Past employment, material business relationships, close family ties with other board members or senior management, cross-directorships, excessive board terms and representation of a significant shareholder or stakeholder would all suggest a lack of independence. Being independent is a matter of fact. It is either the case that there are circumstances that are likely to impair or that could impair a non-executive director’s ability to take decisions independently or there are not. Independence of mind The less obvious concept of independence in the context of board members is that of independence of mind. Acting with independence of mind is a pattern of behaviour shown during discussions and decision-making that demonstrates the ability of a director to make their own sound, objective and independent decisions and judgments. These behavioural skills include having the courage, conviction and strength to effectively assess and challenge decisions of other members of the board, the ability to ask questions of those closer to the executive function of the company or closer to certain aspects of that executive function and, very importantly, the ability to resist ‘group-think’. Independence of mind is not a fact, but a skill. On closer examination, it is a skill that is integral to the ability of every director to effectively undertake their role and fulfil their duties. The law The Companies Act 2014 codifies the principal fiduciary duties of directors. This codification acts as a signpost as to the standards of conduct that the law requires of them. The duties that are now “up in lights” speak to directors acting in good faith in the interests of the company, acting honestly and responsibly in relation to the conduct of the affairs of the company, agreeing not to restrict their power to exercise an independent judgment, avoiding conflicts of interest and exercising the care, skill and diligence that might reasonably be expected of them. To successfully navigate and deliver on these duties, a director must be able to act in the best interests of a company without being affected by influences that compromise professional judgement, thereby allowing them to behave with integrity while also exercising objectivity and professional scepticism. Successfully navigating and delivering on these duties requires a director to have independence of mind. Claire Lord is a Corporate Partner and Head of Governance and Compliance at Mason Hayes & Curran.

Oct 01, 2018
Comment

It is a significant development when a major politician resigns, but one’s true motive may not always be apparent. As Oscar Wilde nearly said, to lose one cabinet minister is unfortunate, but to lose two looks like carelessness. The resignation of David Davis and Boris Johnson from the British cabinet last month has a direct impact on the manner in which one of the world’s largest economies leaves one of the world’s most important trading blocs. By the time you read this, there could have been even more resignations and changes. From the outside looking in, you could be forgiven for wondering whether these are principled resignations or merely tactical resignations; a suspension of involvement in the hope of achieving something better later. Another explanation, equally plausible, is that a resignation simply removes people from an uncomfortable position and puts them out of the firing line. Political journalists make a career from such speculation. Project Maven There is always difficulty discerning what is principled from what is pragmatic. One of the earliest exponents of the novel in English, Henry Fielding, focused largely on what he saw as the hypocrisies of contemporary life in his era. His recurring theme is that virtue is most often exercised by those who have no option but to do so. Some 300 years on, he could take a different line: that virtue is most often exercised by those who actually do have a ‘Plan B’. Project Maven may be an example of virtue on the part of those with a ‘Plan B’. Maven was a project undertaken by one of the larger high-tech multinationals on behalf of the US military. It involved using advanced artificial intelligence and recognition technologies to analyse drone footage. It has been widely reported that the company concerned suspended its activities on the contract because of walkouts and threats of walkouts among staff members. The feeling was that involvement in a contract which impacted on people’s privacy to such an extent was unethical. Taken at face value, the behaviour of the employees could be seen as principled and laudable, and I am sure that in many instances it was. Credit is also due to the company for responding to those concerns. However, it also relevant to point out that highly-skilled people in the tech sector can walk out of a job one afternoon and find themselves in a new job the next. Sometimes ethical decisions are not borne from the constraints which Fielding pointed out, but from the capacity of the individual to recover personally from the consequences of their stance. It is noteworthy how many resignations from government or other accountable posts are taken by individuals with plenty of opportunity to recover both financially and socially from their “principled” action. Principles, or options? There is no room for complacency in any profession. Dr Elaine Doyle from the University of Limerick, who trained as a Chartered Accountant, has carried out important research into how professionals take ethical decisions. She has found some evidence to suggest that people are actually better at taking ethical decisions when they are not working within their own professional sphere. This in turn raises questions as to the impact of codes of conduct and professional standards in day-to-day decisions and if they are set at a high enough bar. Perhaps the most compelling reason for questioning the motives behind an apparently principled resignation is to assess whether or not the individual concerned could put matters right more effectively from within, rather than from outside the organisation they are leaving. Taking an ethical position should not be a passive activity; matters should improve from the decision to resign. A resignation from a position of responsibility may signal high principles. But sometimes it merely signals that the person concerned has plenty of options. Dr Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland.

Aug 01, 2018
Comment

Many corporate governance mechanisms are symbolic rather than substantive, which only serves to worsen the malaise. Corporate governance reforms have placed much focus on director independence. While director independence and conflicts of interest are related, the finer subtle points of handling conflicts of interest have received less attention. Conflicts of interest are pervasive in corporate governance – conflicts between corporate objectives versus other objectives. Directors’ duty is to look after the interests of their company, not their own personal interests. Directors’ personal interests may conflict with the company’s interests, which can compromise good corporate governance. Conflicts of interest can occur between directors and their company, shareholders and their company, shareholders and directors, parent companies and their subsidiaries, parties in a joint venture, government ministers and state companies, and stakeholders (customers, employees) who are also board members. They are a feature of family businesses, where there may be conflict between family interests and business objectives. Mechanisms are in place to manage conflicts of interest, such as declaring conflicts of interest at the start of board meetings, directors leaving board meetings when an agenda item with which they have a conflict is being discussed and not circulating papers/minutes to directors concerning the conflicted issue. So-called “Chinese walls” are another mechanism, acting as a barrier to the exchange of information between conflicted parties. Such mechanisms may work when the conflict is occasional but, in my opinion, can rarely operate successfully where the conflict is systematic and pervasive. Like many corporate governance mechanisms, they may operate in a symbolic rather than substantive manner. Take, for example, the following anecdote I heard: an item arises at a board meeting and the chairman says: “Seán, should you step out of the meeting?” At this point, the whole board burst out laughing! Disclosure is the most popular mechanism for handling conflicts of interest. Disclosure offers something to everyone. It is a symbolic rather than substantive response to the problem. Disclosure of a conflict of interest offers the recipient the opportunity of discounting advice from a conflicted party, thereby helping the recipient make better decisions. But there is evidence that recipients may not sufficiently discount the biased advice.  Disclosure may have the added pernicious effect of legitimising bias from the conflicted party. Thus, rather than mitigating the risks from the conflict of interest, it may exacerbate those risks. This perspective prompted the following comment in the New Yorker: “Transparency is well and good, but accuracy and objectivity are even better. Wall Street doesn’t have to keep confessing its sins. It just has to stop committing them.” Disclosure has minimal impact on the status quo for the conflicted parties. For example, disclosing a connection on a board of directors is better than the more substantive action of resigning from the board to address the conflict. An additional insidious consequence of conflicts of interest in boardrooms is their effect on decision-making. The Financial Reporting Council’s Guidance on Board Effectiveness identifies the risk of conflicts of interest distorting judgement and introducing unconscious bias into decision-making. Research has shown that the mechanisms to manage conflicts of interest are no match for unconscious bias. Handling conflicts of interest requires different types of thinking, along the lines of Daniel Kahneman’s Thinking Fast and Slow. Academics have compared the automatic mental processes concerning self-interest as being fast, effortless, involuntary, not amenable to introspection; managing conflicts of interest, on the other hand, involves slow, effortful, voluntary introspection. Shareholders appoint the directors at the annual general meeting. The law provides relatively little redress to shareholders where things go wrong due to the actions of directors. If shareholders appoint unsuitable persons as their directors, then they must bear the consequences. Shareholders need to take care not to appoint persons to the board that have systematic conflicts of interest with the company. I question the wisdom of appointing worker directors (especially elected worker directors) to state boards because of their conflict of interest to look after the best interests of the state entity versus to look after the best interests of their electorate with a view to being re-elected. Substantial elimination of conflicts of interest is the first line of defence. It would help to also change the mindset of business from a self-interested individualistic culture, in favour of a pro-social good-of-society perspective. Prof. Niamh Brennan is Michael MacCormac Professor of Management at UCD College of Business.

Jun 01, 2018