Ethics

C-suite executives deploying 4IR technologies have a tough ethical terrain to navigate. Putting in place a policy for ethical usage of technology could benefit their businesses – and society. By Timothy Murphy, Swati Garg, Brenna Sniderman and Natasha Buckley Leaders are increasingly demonstrating that they want their organisations to do well by doing good, and with reason. Doing good can be good for business, especially in an intensifying economic, social, and political milieu that is challenging organisations to reinvent themselves as social enterprises. Deloitte Global CEO Punit Renjen’s Success Personified in the Fourth Industrial Revolution report, released at the World Economic Forum conference in Davos, Switzerland, earlier this year highlights that leaders are putting a greater focus than ever on advancing society through their technology efforts. In fact, leaders rated “societal impact” (including income inequality, diversity, and the environment) as the number one factor in assessing their organisation’s annual performance, ahead of financial performance, customer experience, and employee satisfaction. This view manifests in their actions as well – more than 73% of the surveyed organisations have developed or changed a product in the past year to generate positive societal impact through Fourth Industrial Revolution (4IR) technologies. But as organisations strive to take society forward with 4IR solutions, they are often confronted with a host of ethical issues, which can have societal as well as business ramifications. Examples of ethical “missteps” by companies abound in the media these days. One issue highlighted in the news regularly is that of data privacy, and it has left consumers understandably worried about how their data is captured, saved, and used. Another emerging threat is algorithmic bias, where biased data manifests itself in biased recommendations, but we’re yet to fully understand the ramifications of algorithmic bias. Even lack of inclusivity in technology design can negatively impact consumers, as seen in some smart city designs where people in wheelchairs are unable to access eye-level retina scanners as they require the person to be standing. These ethical issues, and others, have led to product recalls, public backlash and/or lost revenue for companies. In this technologically and ethically complex environment, organisational values matter more than ever. If leaders don’t formulate and implement policies on the ethical usage of technology, it will likely become difficult for them to navigate the Fourth Industrial Revolution. More importantly, it could inhibit innovation and financial growth at their companies. Our survey data from this year’s study reinforces the link between ethics and organisational growth (see the sidebar, “Methodology”), providing further rationale for why companies should care about ethically using 4IR technologies. The study found a positive correlation between organisations that strongly consider the ethics of 4IR technologies and company growth rates (Figure 1). For instance, in organisations that are witnessing low growth (up to 5% growth), just 27% of the respondents indicated that they are strongly considering the ethical ramifications of these technologies. By contrast, more than half (55%) of the respondents from companies growing at a rate of 10% or more are highly concerned about ethical considerations. Ethical concerns don’t always translate into action Most executives responding to our survey were concerned about ethical usage of 4IR technologies. More than 30% of the respondents strongly agreed that their organisations are highly concerned about ethical technology usage and another 50% indicated a moderate concern. Yet when it comes to action, this number dropped significantly – just 12% of the respondents strongly agreed that their companies are actively exploring related policies or already have them in place. So, what’s preventing leaders’ ethical concerns from being translated into ethically driven actions? The answer may lie in the dynamics of the C-suite. Our survey found that concern over ethically using 4IR technologies is not consistent across the organisation (Figure 2). Starting at the top of the C-suite, only 15% of CEOs and presidents expressed strong concern about ethical technology usage (considerably less than the 30% average across the C-suite). The chief information officer (CIO), a role often charged with managing these technologies, averaged only 16%. Contrast this with roles like the chief sustainability officer (CSO) and the chief operating officer (COO) who indicated strong ethical concerns at 50% and 41% respectively, and a clear disconnect emerges between the CEO/CIO’s line of thought and that of the CSO/COO. Given that reputation and social impact are critical aspects of the CSO’s role, executives in this role are more likely to care about ethics. The COO, who oversees enterprise-wide operations, is likely to be more aware of how work is executed and, therefore, have greater awareness of potential ethical issues. However, those with more influence on the 4IR strategy – the CEO and, to a lesser degree, the CIO – seem to be disproportionately swaying organisational policy. Only 12% of the organisations whose executives were surveyed have policies in place or are actively exploring the implementation of policies (tracking closer to the level of concern conveyed by the CEO and CIO) on ethical usage of technology. Extending ethical thinking across the organisation While 4IR technologies offer immense opportunities, they also bring many ethical challenges as they’re poised to transform the way we live, work and interact with each other. As a result, leaders at the helm of companies looking to benefit from these technologies need to navigate a complex ethical environment. Organisations could benefit from ensuring that proper policies are in place and are adhered to. The following steps can help leaders move forward in this direction: Set the tone at the top: if the CEO doesn’t consider ethics a priority, it will likely be difficult to get the rest of the organisation to do so. Not only should the CEO emphasise the importance of ethical considerations in the usage of technology, they should also encourage other members of the C-suite to express their concerns. The CSO and COO, by virtue of their roles, have a unique line of sight into the importance of ethics in supporting growth initiatives. This knowledge-sharing between the CSO and COO and the rest of the C-suite can empower executives in the organisation to tailor their solutions with ethics as a top-of-mind design consideration; Cultivate an ethical culture: ethics is not only an issue for C-level executives to consider, but it is also of prime importance to an entire organisation. It starts with clearly messaging ethical policies and guidelines – and leading by example – but it also includes giving your workforce a voice in the discussion. As senior executives work out strategies to integrate these technologies into every facet of the workforce, it’s important that they provide other employees with avenues to express ethical concerns about their usage; and Iterate the policy: 4IR technologies are rapidly changing and accordingly, policy too should change. Just as government regulation is trying to keep pace with autonomous vehicles and smart cities, organisations should establish constant touchpoints to ensure that their ethical policies keep pace with the rapidly changing technology environment. For CEOs and other C-level executives, integrating the ethical considerations of employees across the organisation and other stakeholders into their day-to-day operations also makes good financial sense. The organisations that set the tone at the top are the ones that are likely to be best positioned to help their businesses – and society – flourish. This article was originally published by Deloitte Insights. View the article at www.deloitte.com/insights/industry-4-0-ethics Methodology This research is an extension of the Success Personified in the Fourth Industrial Revolution report, which is based on a survey of 2,042 global executives and public sector leaders conducted by Forbes Insights in June–August 2018. Survey respondents represented 19 countries from the Americas, Asia and Europe, and came from all major industry sectors. All survey respondents were C-level executives and senior public sector leaders including CEOs/presidents, COOs, CFOs, CMOs, CIOs and CTOs. All the executives represented organisations with revenue of US$1 billion or more, with half (50.1%) coming from organisations with more than US$5 billion in revenue. 65% of the public sector leaders represented organisations and agencies with budgets of US$500 million or more.

Oct 01, 2019
Ethics

The Institute’s new guide, a five step approach to considering organisational culture,  serves as a useful starting point for a board, or those in executive or senior management positions. By Níall Fitzgerald The Business Roundtable is a group of influential CEOs from America’s leading companies, and it recently renewed its “statement of purpose”. Having spent 22 years following a shareholder-first philosophy, the group has adapted to societal expectations for better business behaviour by expanding its fundamental commitment to deliver value to other stakeholders including customers, employees, suppliers and communities. It is hard to imagine how this commitment will be honoured without changes to organisational culture by the 181 CEOs who pledged to lead their companies for the benefit of all stakeholders. Closer to home, the UK Corporate Governance Code was revised by the Financial Reporting Council (FRC) in 2018. Its original source from 1992, The Financial Aspects of Corporate Governance (otherwise known as The Cadbury Report), outlined the importance of a principled corporate governance code “for the confidence which needs to exist between business and all those who have a stake in its success”. The only stakeholders mentioned in that version, and successive ones, were institutional investors and shareholders. Twenty-six years later, the Code not only refers to “a wide range of stakeholders” but also formalises the board’s role in aligning an organisation’s culture with its purpose (vision), values and strategy (mission). Reflecting this trend, investors and business analysts are ramping up their cultural assessments of organisations. A study conducted in 2015 by global culture organisation, Walking the Talk, with Stamford Associates in the UK, revealed that 94% of investment managers based mainly in the United States (US) and UK include culture as an important consideration in their investment decisions. In January 2019, State Street Capital, one of the world’s largest asset managers, wrote to the chairs of more than 1,100 organisations in the S&P 500, FTSE 350 and similar organisations in France, Germany, Australia and Japan, calling on them to review their culture and explain its alignment with their strategy. Investors are voting with their feet, which was evidenced by the dramatic fall in Barclays’ share price in 2017 following CEO Jes Staley’s attempt to identify an internal confidential whistleblower, which went against the organisation’s espoused values and culture. Institutional investors are also taking a more active role in driving change by making their expectations clear – not just around the rate of returns, but also on the organisational culture they wish to align with. The Japanese Government Pension Investment Fund (GPIF), one of the largest pension funds in the world, implements an environmental, social and governance (ESG) investment decision-making methodology. This methodology considers factors such as the quality of a company’s culture as well as management, risk profile and other characteristics. They are not alone, with many other institutional investors following a similar approach. In producing Chartered Accountants Ireland’s Concise Guide for Directors: A Five-Step Approach to Considering Organisational Culture, we identified a consensus that organisational culture plays an increasingly important role in influencing behaviours in an organisation. Given the importance of organisational culture, several questions were raised during the production process. Four of the most common are outlined below: 1. Who is responsible for organisational culture? The board has overall responsibility for ensuring that an organisation’s vision, mission and values are aligned with the culture of the organisation. In the same way the board is responsible for approving the strategy of the organisation, it is also responsible for agreeing on what the target culture of the organisation (i.e. the culture the organisation should aspire to) should be. Each member of the board, executive or non-executive, has a responsibility to lead by example and promote the target culture; this involves ensuring that adequate time is allowed on the board agenda for discussions on organisational culture. 2. Who influences organisational culture? It depends. This is where the phrases “the tone at the top” and the “echo from the bottom” comes into play. Unlike strategy, culture is an organic and fluid ecosystem, and while a target culture will be agreed by the board, the process of shaping and realising it is gradual. It involves leadership from the top of the organisation (top-down) and engagement from the bottom of the organisation (bottom-up). Who has the greater influence in shaping organisational culture will differ from one organisation to the next. For example, it may be the director(s) in a small owner-managed family business, the CEO in a multinational, the founder in a not-for-profit organisation or the legacy staff in a government department. It isn’t just internal people or politics that influences the target culture. It will be influenced by many other internal and external factors including, but not limited to, regulatory landscape; political environment; social norms; trade union participation; the history of the organisation; leadership capability within the organisation; level of ambition of people to lead change; common values shared across the organisation; and both internal and external drivers of change (e.g. digitalisation). The organisation’s culture ultimately influences and shapes the interactions with all stakeholders. 3. What are the best organisational culture traits to have? There is no one-size-fits-all. What works for one organisation may not work for another in a different stage of development or in a different sector. The objective is to determine common cultural traits that can be embedded across the entire organisation, while recognising and accepting that sub-cultures also exist. For example, larger organisations may have subcultures in different geographies or in various departments or business units. To be effective, cultural traits should be realistic and counterbalanced. Promoting a culture of collaboration and collective responsibility, for example, should be balanced with ensuring that people are individually accountable for their contributions and actions. It is also important to acknowledge that organisational culture is dynamic; it is constantly changing in response to internal and external influences. Culture risks exist, like any other risk, and organisations will need to manage accordingly. Mitigation measures include ongoing communication and reinforcement of the organisation’s core values and behaviours, combined with risk-based culture audits or reviews. Internal controls with early warning systems are useful for alerting management to behavioural changes that can negatively impact culture – for example, where a production line debriefing identifies that downtime is being recovered by taking shortcuts to stay on schedule. 4. Where do I start when considering organisational culture? The five-step approach to considering organisational culture is presented in Figure 1. This approach serves as a useful starting point for a board, or those in executive or senior management positions, to consider organisational culture. It is designed to work in tandem with the vast reservoir of tools and methodologies for assessing, defining and shaping organisational culture. The steps can be summarised as follows: Assess current culture: every journey has a starting point and it is important to understand the current culture of the organisation before agreeing the path forward. Evaluate effectiveness: determine what works well with the current culture, and what doesn’t. Are there opportunities for quick, positive change for better business behaviour? And what will require more effort? Define/refine target culture: what influences the organisation’s target culture? And does it clearly align with the business purpose (vision) and values? Identify gaps: identify, prioritise, risk-rate and cost the gaps between the target culture and the current culture in order to inform the organisation’s cultural change programme; and Close gaps: prepare the change programme to shape the organisation’s culture. Throughout the journey, it is important to communicate the changes, evaluate whether the implemented changes are having the desired effect, and reinforce the reasons for change and how they align with the organisation’s vision, mission and values. Organisations are investing more in getting their culture right. The various roles that Chartered Accountants play within organisations involve a level of influence in assessing, defining and shaping organisational culture. While this influence may not seem obvious at first, it becomes more apparent when you consider that many Chartered Accountants hold positions that provide a strategic, overarching view of what is happening in their business unit or across their organisation. By applying their analytical and reporting skills, Chartered Accountants can use their access to information and insights, as well as their opportunities to observe behaviours across the organisation, to significantly support the development of a healthy culture. Whatever role you play within an organisation, consider how you can positively influence and shape a healthy organisational culture.   The Concise Guide for Directors: A Five-Step Approach to Considering Organisational Culture is available to download from Chartered Accountants Ireland’s Governance Resource Centre. Níall Fitzgerald ACA is Head of Ethics and Governance at Chartered Accountants Ireland.

Oct 01, 2019
Tax

Sunday Business Post, 29 September 2019 Were the events of the past week genuinely unprecedented? No. There really is a tedious sense of déjà vu about the headlines which have been grabbing our attention.  It is not the first time we have seen impeachment proceedings launched against the US President.  It is not the first time we have seen a young woman, in this instance Greta Thunberg, deservedly grabbing the headlines for bringing injustices to international attention. Remember Malala? And while the decision in the UK Supreme Court that the prorogation of Parliament in Westminster was unlawful may, of itself, be unprecedented, the Brexit stridency in British politics that followed it is certainly not. Nor was the Taoiseach's statement earlier this week to the United Nations Climate Action Summit unprecedented.  All new revenue raised from carbon tax in Ireland from next year will be ring fenced to fund new climate action and “just transition”. Just transition apparently means the protection of people who are most exposed to higher fuel and energy costs, or who will lose their jobs because of the shift from one type of energy to another. It's already been well signalled that carbon taxes will increase from the current rate of €20 per tonne of CO2 ultimately to a rate of €80 per tonne. It can scarcely be in doubt that this process will commence in the Budget statement next Tuesday week, 8 October.  All that is open for debate now is the number of steps it will take to get from the €20 per tonne rate to the €80 per tonne target rate, and how big those steps will be.  Scarcely mentioned in the Taoiseach’s statement were options within the tax system to forgive a charge on taxpayers who make environmentally sound purchasing decisions, and in fact there are quite a few such incentives. If an employer provides an employee with the use of an electric car, no taxable benefit will be ascribed to the employee, if the car isn't too expensive. Given that the highest amount of benefit in kind on company cars is 30% per annum of the value of a new car, that's not a small concession.  When buying a car outright, there are also VRT rebates on various types of hybrid engineered models.  If you're comfortable with self-propulsion, the tax system will allow you a full deduction for the reasonable cost of a bike and the gear that goes with it so you can cycle in and out to work. If the distances are too great and a public transport option is available, employees can get what in effect is a full deduction from their taxable income of the cost of a commuter ticket. The cycle to work tax scheme and the travel passes scheme are two of the more efficient ways for an individual to reduce their income tax bill. For all that, some environmentally sound tax measures have not been followed through. There has been a law on the statute books since 2008 to reduce the tax charge on company cars by reference to their emissions, but this law was never brought into force. A tax incentive for investment in renewable energy generation lapsed some five years ago. The Home Renovation Incentive, which ceased last year, could usefully have been extended to encourage homeowners to retrofit their homes with more efficient heating or insulation. There are special tax allowances when a business buys energy efficient equipment, though anecdotally there seems to be little enough take up of this particular scheme. Have these failed through lack of publicity, or through a lack of willingness to create workable incentives? Probably both. If the preference is now to apply tax charges which might be avoided, rather than introduce tax reliefs which can be claimed, such new charges may not be quite as effective or as universal as is sometimes thought. A recent OECD study highlights that the average effective carbon tax rate on the archetypal carbon culprit, coal, is close to zero across many developed economies.  Even at our current rate of €20 per tonne, Ireland ranks high in the international carbon tax comparison tables. We share this rate with the UK but our rate lags behind countries like Finland, France and Norway. The tax loving Swedes enjoy a carbon tax rate of some €100 per tonne of CO2. Once carbon taxes are introduced, the rates must increase over time. An efficient carbon tax will reduce consumption of carbon emitting fuels, which in turn will reduce revenues from the carbon tax. Tax revenues may decline, but you can be sure that the government’s appetite for the taxes raised will not, and thus the rates must continue to increase.  Carbon taxes can only work when there are alternatives in place. There is no point in levying ever-increasing taxes on traditional fuels like coal and diesel without offering access to cleaner energy sources like wind energy. As in the Taoiseach’s statement, it’s easy to be specific about levying a tax while being vague about “just transition”. We have seen this before.  Déjà vu all over again. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland.

Sep 30, 2019
Tax

The Sunday Business Post, 22 September 2019, A veritable totem of the British dislike for the EU, it is relatively easy to get the attention of the European Courts in Luxembourg.    But the Court building itself is not an easy place to get into.  There are separate entrances for journalists, staff members, lawyers and, at the extreme end of the building amid the roadworks, there is a small structure designed to welcome visitors to the courtrooms.  Beyond that, on the day I attended the Apple State Aid case, a stand had been set up within the concourse to promote environmentally friendly travel.  With absolutely no hint of irony, the gift for everyone who expressed interest in the stand was an apple.   By contrast there was no shortage of irony within the court chamber itself.  The EU Commission’s case is that tax arrangements for Apple companies operating in Ireland through branches constituted State Aid, because not enough tax was charged.  This, they argue, has the same effect as if the Irish Government had selectively provided a grant to the company.   Under European jurisprudence, not only can the parties directly concerned plead their case, but others may also be permitted to join the proceedings and make their points formally to the five judge court.  On the side of the EU Commission, the Polish weighed in to point out how unfair competition via the tax system not only distorted the market but diluted the tax take in other EU member states.  Also on the side of the EU Commission, the European Free Trade Association (representing Iceland, Liechtenstein, Norway, and Switzerland) offered strong criticism of what they claimed was a la carte taxation by Ireland.    For Ireland, Luxembourg presented itself as an ally.  That country’s barrister pointed out to the court that the Commission was not challenging Ireland's tax laws but rather their method of application.  This is a perspective perhaps informed by Luxembourg’s own recent travails under State Aid and tax.  While the scale of the Commission’s challenge to Ireland, €13 billion plus interest, is unique, the type of challenge itself is not.   These interventions seemed almost like afterthoughts, made as they were following the presentation of the main contentions of the parties directly involved – the Commission, Ireland and the company itself.  At the risk of grossly oversimplifying the arguments which were made, the Irish position seems to be that the Commission doesn't understand tax law particularly as it applies to cross border trading arrangements.  The Commission's position seems to be that it can't understand how the Irish Revenue could apply the law as they did.  Apple's position seems to be that the Commission does not really understand their business model.    It is from these pleadings supported by voluminous amounts of material that the court must finalise their deliberations.  I gather that the judges have particular expertise in competition law rather than tax law.  They will need all their experience, not just because of the vast sums of money at issue in the case but also because many of the strands of the reasoning from all the parties, as teased out in the spoken depositions and their own questioning, ring true.    A fundamental aspect of the Irish argument that Revenue can neither raise nor forgive taxes, unless as provided under Irish law, is absolutely correct.  The strength of that argument is somewhat undermined by a scarcity of documents from the early 1990s when consideration was first being given to the proper amounts chargeable to Irish tax from the profits of branches of Apple companies.  The Court also heard from the Apple side that tax on the profits which gave rise to the €13 billion in tax allegedly uncollected by Ireland is now being collected by the US in stage payments in accordance with the rules of the US Tax Cuts and Jobs Act of 2017.  Nobody went so far as to suggest that as everything is being taxed correctly, there is really nothing to see here and we should all move on.    The outcome of the case is uncertain, and may even be subject to appeal, but nevertheless the process itself has unearthed some hard facts about the international environment in which we operate.  One is that the Commission will continue its crusade against what it sees as the use of tax policy as a proxy for State Aid.  The “tax lady” (as US President Trump dubbed her) Margrethe Vestager, will likely continue her role as Competition Commissioner in the new EU commission taking office in November.    The world has indeed moved on since the Commission’s issues with Irish tax and State Aid came to the fore some four years ago.  The case predates the US Tax Cuts and Jobs Act, Brexit, the successes of the OECD projects to curb multinational tax planning and the EU’s own Anti-Tax Avoidance Directive.    The impact of these changes are real, and one outcome has been a boost to the amount of Corporation Tax this country collects.  That might not have happened unless it was clear, particularly to outside investors, that if this country formulated a tax policy, it would stick with it and with the civil servants who implement it.  That is the other hard fact this case has unearthed.  It’s an approach which could well find Ireland in the courts again in the future.   Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Sep 23, 2019
Thought leadership

The Sunday Business Post, 15 September 2019, What a wonderful time for any government to be framing a Budget! All the Finance Minister has to do next month is surf the zeitgeist created by the bow wave of Brexit.  After Minister Donohoe’s announcement earlier this week that the Irish Budget statement on October 8 will be framed in the context of a no deal Brexit, no one will expect very much, so few will be disappointed.  The national narrative has played down any sense that Brexit is a good thing for any of us, a perspective which is largely correct.  This is not just the result of political reportage.  Even advertising is reinforcing the tone – for some reason I find the warnings about the future shortcomings of a UK driving licence in this country particularly depressing.  We are stepping back to an age where having the wrong paperwork routinely undoes the endeavour of the unwitting, and when duty-free was a thing.  The way we talk about things now matters even more.  There is a significant difference between talking about an Irish backstop and a British backstop.  The phrase “Irish Backstop” is fundamentally inaccurate, as the backstop is a British requirement.  Yet the phrase “British backstop” hardly ever features and the emerging term “Northern Ireland backstop” is a lot more accurate in what it describes.  This type of verbal gymnastics is hardly surprising in a week that saw the Taoiseach deliver a reminder about appropriate behaviour to his British counterpart using a motif – the story of Hercules and Athena - from Greek mythology. Another kink in the language which featured again this week is the notion of a “tax expenditure”.  Just as “Irish backstop” mistakenly connotes some notion of a grudging concession to Ireland which we don’t deserve, “tax expenditure” is redolent of some kind of grudging and undeserved concession to taxpayers.  Last Sunday, Michael Brennan of this paper highlighted the cost to the Exchequer of not taxing the child allowance.  In 2017, the last year for which figures are available, the Revenue estimated this tax expenditure amounted to some €550 million.  Yet how is it a “tax expenditure” if the State forbears to tax a benefit to its children?  Isn’t this something the country should be doing anyway? There are of course worthy and precise economic descriptions of what constitutes a tax expenditure, but that doesn’t entitle it to an entry in the lexicon of legitimate public comment.  For most people the phrase itself is at best misleading, at worst oxymoronic.  Further, its meaning can be entirely subjective.  Most people paying LPT, for instance, would agree that the exemption for new houses constructed since 2013 is indeed a “tax expenditure”.  I suspect however that this would be disputed by anyone living in that category of new house.  Similarly, is it a “tax expenditure” not to apply higher rates of income tax to the better off, or not to apply universal social charge to people on lower incomes?  That very much depends on your political point of view.  If all the myriad ways of extracting tax from an unwitting populace that could be applied were captured on the Revenue list of tax exemptions, it would extend considerably further than the 140 or so items it does currently include. Given that we face a no deal Brexit Budget, Revenue are unlikely to be troubled too much having to recalculate upwards the cost of these 140 tax expenditures in 2020, or for that matter having to add more items to the tax expenditure list.  Anything that is done for people in the Budget on October 8 is more likely to feature on the spending side, supporting (we are told) sectors and regions most exposed to Brexit-related disruption.  Don’t be surprised however if there is also something to favour the elderly in our population who are understandably less tolerant of delays and deferrals.  The Finance Minister can make a Budget statement replete with quiet disappointments on October 8 secure in the knowledge that the political response and adverse commentary will be muted.  It seems that the Fianna Fáil confidence and supply arrangement will not be shaken on October 8.  He could well be forgiven if he doesn’t top up the war chest known as the Rainy Day fund.  It must be galling anyway for any Finance Minister to have to create reserves for future political rivals to spend.  Post Budget, Minister Donohoe may even be praised for his prudence; that elusive virtue most often practised by those who have no option to do otherwise.  The Minister could signal that further support will be forthcoming from the EU.  The new Commission might be willing for once to turn a blind eye to those troublesome state aid rules which have so plagued the Irish political and tax narrative in recent years.  There is no technical reason why any form of state aid to a particular sector in an EU Member Country can be blocked in a time of crisis.  The State Aid rules say that aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State can be disregarded as State Aid.  Brexit probably qualifies as both.  Pulling the Budget figures together is never easy, yet I can't remember a time when it would be easier for any Finance Minister to push a disappointing Budget through the Dáil.  All the Minister has to do is surf the Brexit wave.  What indeed could go wrong? Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Sep 16, 2019
Ethics

Francis McGeough reports on a study of governance practices in fifty of the largest charities in Ireland which reviewed the information contained in their annual reports.   The importance of good governance in charities was highlighted by shortcomings in two well-known charities last year (Rehab and the Central Remedial Clinic). Bad publicity from these events had a serious impact on the fundraising efforts of all charities with many reporting a substantial drop in donations. Donors to charities need to be assured that their funds are being used appropriately and the requirement for increased accountability highlights the importance of governance practices in charities. Charities must not only apply the highest standards but must also be seen to be behaving appropriately.   A key task of the recently established Charities Regulatory Authority (CRA) is to increase public trust in the charitable sector. The legal framework under the Charities Act 2009 gives the CRA legal tools to do this. However, the essence of good governance lies in the culture of an organisation rather than following the letter of the law.  Governance The word governance originates from the Latin word meaning to steer or to give direction. While, there is no all-embracing definition of governance, there is agreement that governance involves taking responsibility for managing the organisation, balancing the needs of stakeholders, ensuring accountability to stakeholders, and ensuring that the organisation achieves its objectives. Therefore, the Board should have a strategic focus; with a focus on organisational performance, and a clear division of responsibilities between the board and managers.   Charities have a valued status in society due to their good deeds. Consequently, charities are likely to be held to a higher set of standards. Thus, when things go wrong, they are particularly susceptible to public disillusionment. Therefore, charitable organisations must ensure that they maintain their reputation. Good governance practices can help in this process by underpinning public confidence in the charity, and reduce the likelihood of scandal.  Complexity of governance in charities  In publicly quoted companies, the Board represents shareholders and they hold the management to account for their performance (measured by profits and share price). However, for charities, there are a number of complications: Firstly, there may be many stakeholders with conflicting views on how the organisation should be run; secondly, there may be no agreed measure of performance and stakeholders may have different views on what is good performance which increases the difficulty for the board in holding the managers to account; thirdly, many charities rely on the goodwill of their volunteers and managers who may become resentful if their actions are constantly questioned by the Board.    Therefore, charities must find the right balance between trust and control. Too much control can lead to distrust and poor relations with the board. On the other hand, too much trust can lead to complacency and potentially bad behaviour. Survey The annual reports of fifty of the largest charities in Ireland were reviewed to determine the level of disclosure of the key elements of governance. The charities were identified from the Boardmatch Ireland listing of the hundred largest charities in Ireland. The annual reports were downloaded from the charities’ websites in October 2014. Therefore, it would be expected that the latest reports would be for 2013; however, 30% of the charities had annual reports relating to 2012 or earlier (Table 1). While there may have been a delay in uploading the accounts onto the websites, it is surprising -- given the importance of the website as a communications tool -- that the websites did not have the latest annual reports.    In relation to the disclosure of the key elements of governance, Table 2 sets out twelve elements of governance are derived from governance codes such as Boardmatch Ireland and the UK’s Charity Commission’s Statement of Recommended Practice (SORP) and shows the number of organisations which reported each element in its annual report.    Most of organisations examined provided the names of the board members in their annual report (forty three organisations representing 86% of the sample).     In relation to the elements that could be used as proxies to determine the effectiveness of the board, the level of reporting by the organisations examined is mixed (the percentage of organisations disclosing these details is outlined in brackets following the element). Board effectiveness can be measured through the recruitment process for board members (26%) biographical details of the board members (6%); length of time on the board (6%); the existence of induction processes (16%); the number of board meetings (24%); and the existence of sub-committees (52%). Therefore, readers of the annual reports would have difficulty in assessing board effectiveness in managing the organisation.    Notwithstanding the recent controversy about pay levels for managers in some charities, only fourteen organisations (28%) disclose the pay levels for their senior managers.    In relation to resource management, the level of disclosure is again quite low, with 44% of organisations identifying their key risks and outlining how they manage these. In addition, only 20% of the organisations outline what their policy in relation to reserves is.   In relation to the disclosure of non-financial information, a majority (58%) disclose some information. The study does not attempt to evaluate the quantity or quality of the non-financial information disclosed but simply examines the existence of non-financial information.    The final element examined is whether a statement of compliance with a governance code is made. The research finds that just 22% of organisations disclose such a statement. This may be due to the relative newness of a governance code and as such, it is expected that this will improve in the future.   Table 2 shows that only three of the twelve elements are disclosed by more than half the organisations. Overall, this suggests that the level of disclosure is limited and this is further emphasised by Table 3 which outlines the range of elements disclosed by the organisations examined. Table 3 shows that thirty of the organisations (60%) disclosed three or less of the twelve elements. While, only four organisations (8%) disclose ten or more elements. Conclusion The research suggests that there is considerable room for improvement. In relation to the dates of the annual reports, it is a matter of concern that fifteen organisations did not have their latest accounts available on their websites. The research suggests that organisations are publishing a very limited amount of information. Thirty organisations (60%) disclose three elements or less, while four organisations (8%) close nine or more elements. Furthermore, only three elements are disclosed by more than half of the organisations.    In overall terms, it would be difficult for the readers of the annual reports to be able to assess the effectiveness of the board. Furthermore, given the recent controversies about remuneration levels in two Irish charities, it is somewhat surprising to see that only 28% of the organisations surveyed disclosed remuneration details of their senior managers.    The annual report provides a window into what is deemed important by the organisation and is also an opportunity for the organisation to account to its stakeholders for its stewardship. If that is the case, the evidence presented here would suggest that Irish charities place limited emphasis on presenting information on governance and performance. In today’s environment, this is a missed opportunity. However, this does not imply that there is a problem with governance standards in Irish charities but it does suggest that charities must review the information provided because they should not only apply the highest standards but must be seen to do so. In this regards, there is much room for improvement.    Francis McGeough PhD lectures in Accounting and Finance at the Institute of Technology, Blanchardstown. This article is a shortened version of a paper to be presented at the British Accounting and Finance Association annual conference in Manchester in March 2015.  

Sep 13, 2019

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