Ethics and Governance

Boards increasingly need to show how they measure their organisation’s culture, but the key information is likely already available within the business, writes Ros O’Shea. The South Sea Islanders have a word, “mokita”, which translates as “the truth that everyone knows, but nobody speaks”. Other notable definitions of culture include “a system of beliefs, shared values and behavioural norms”, “the way to do things around here” or even the “mood music” or “resting heart-rate” of an organisation. Whatever the definition, stakeholders, still shaken by a litany of corporate scandals including endemic ethical failures in financial markets, now recognise that, as Peter Drucker said, culture does indeed eat strategy for breakfast – and arguably for lunch and dinner too. Their demands have led to concerted efforts in recent years to rebuild trust and restore integrity to the heart of the enterprise. Figure 1 highlights some of these welcome developments, which go way beyond extending the rule book or adopting a tick-the-box approach to compliance. It seems everyone has seemingly landed on the same page, which says: you can have all the rules in the world but there is no substitute for character. Much has been written already about how to cultivate character and foster a values-based culture. Indeed, Chartered Accountants Ireland published my book on the topic, Leading with Integrity, in 2016 and has issued several related guides and research papers since. As organisations seek to embed cultural change, the question everyone is now grappling with is: how do you measure it? How can those charged with governance determine if the tone from the top is being cascaded through the ‘muddle in the middle’ and reflected via the ‘echo from the bottom’? Is it possible, with any degree of accuracy, to properly calibrate an organisation’s mood music or gauge its steady-state operating rhythm?  The answer is yes. My ‘5 Organisational Culture Caps’ (5OCC) approach aims to do just that. Loosely based on Edward de Bono’s ‘Six Thinking Hats’ system (where coloured hats represent different modes of thinking), with 5OCC, each cap is assigned to one of five different stakeholders. By donning each cap in turn and thinking about culture from each of these perspectives, a holistic view is developed of how your espoused values align with how your organisation behaves towards these key constituencies in practice. Four caps are pre-assigned – your customers, staff, shareholders and community all deserve their own headgear. You get to pick who wears the last cap, and your choice is likely to be heavily influenced by the sector in which you operate. For example, financial services firms may well pick the regulator; key vendors may be a valid choice for those downstream in the supply chain; whereas for other organisations, agents or brokers, or other business partners on whom they rely to deliver products or services, may get to wear a cap. Once you determine the full suite of stakeholders, the next step is to select key metrics that best capture their unique expectations of your organisation’s culture. Let’s don each cap in turn. The customer Arguably the single best way to actively test the consistency of stated values with the customer experience to attempt to buy the product or the service. Or you could try to make a complaint and follow what happens. Other key cultural indicators from the customer perspective include: Customer surveys; Net promoter scores; Complaints statistics; Feedback from customer focus groups; Social media and press coverage; Litigation and claims; and Awards and ratings. The staff Here, staff is defined in its broadest sense (i.e. from the boardroom to front-line employees). Again, boards should recognise that only so much governing can be done within the confines of the boardroom, and one of the most effective means of assessing the organisation’s tempo and temperament is to get out and about and engage with staff at all levels. Ideally, this should be done in informal ways and settings (such as townhalls or listening lunches, for example) so that site visits don’t become ‘state visits’. The HR department will be a deep reservoir of information to help you understand and monitor the extent to which values are truly lived across the organisation. There are many possible metrics under this heading, some of which are set out below: Staff surveys, engagement indices and culture audits; 360 reviews of senior management and board evaluation surveys; Remuneration and incentive policies; Ethics training and communication strategies, and their effectiveness; Statistics on staff turnover, absenteeism, safety and disciplinary actions; Whistleblowing and grievance reports, and relationships with unions; Diversity and inclusion data; Recruitment processes, succession plans and promotion decisions; Integrity awards or similar; and Online employee feedback (e.g. via Glassdoor and exit interview notes). The shareholder The nature and extent of shareholder engagement will very much depend on the type of organisation, and metrics will need to be calibrated accordingly. For private, charitable or state-owned firms, it may be a relatively straightforward process to monitor the strength and success of the relationship with the organisation’s owners, trustees or relevant government department – most likely by being party to regular discussions. Some of the following metrics may also be relevant and will certainly be pertinent for companies with a larger and more dispersed share register: Governance structures and board performance; Correspondence and engagement with key shareholders; The AGM experience; Internal and external audit reports; Independence and competence of risk, compliance, audit and legal personnel; Investor or analyst reports; Industry benchmarks; and Transparency and disclosures of financial and other reports. The community Here again the relevant community may be local or global, or somewhere in between, and metrics will need to be commensurate with the organisation’s scale and footprint. Particulars will differ but overall, they will aim to measure the extent to which the business is contributing to – and valued by – the communities in which it does business. Specific metrics are more elusive under this heading, but assessment of culture wearing a community cap will include discussions around: CSR activity in the community; In-house ‘green’ initiatives; CSR ratings and ESG credentials; Sustainability reporting; Progress towards committed UN Sustainable Development goals; Carbon footprint, water use and waste; and Local press coverage. A.N. Other As outlined earlier, you get to pick who wears the fifth cap. If, for example, suppliers are an important stakeholder group for you, measures such as promptness of payment, supplier audits and feedback from key vendors would be important to consider. If the regulator is to wear the cap, relevant areas of focus could include the number of fines, regulatory breaches, risk appetite exceptions, inspection reports and the general tone of correspondence. Metrics can also be devised for any other stakeholders by considering what aspects of your culture are likely to matter most to them. Such metrics may best be ascertained by directly canvassing their opinions. The most helpful aspect of the 5OCC approach is its practicality. Most, if not all, of the information required for the various measures will already exist in your organisation. It is simply a matter of collating and synthesising these valuable, but currently disparate, sources of data to provide a five-way mirror back to the organisation showing how the espoused values are truly living and breathing. There is no doubt that what gets measured gets done. Metrics matter. Boards and directors will increasingly need to prove and publish how they measure and monitor their organisation’s culture and I hope this model is a helpful aide in that endeavour. But again, we must remember that there is no substitute for character. All the KPIs in the world won’t displace the board’s most important role, which is to ensure they have the right leadership team who will do the right things for the right reasons. You can’t cap that.   Ros O’Shea FCA is an independent director and governance consultant.

Dec 03, 2019
Ethics and Governance

Níall Fitzgerald explains how to achieve consensus, do your duty, and be yourself as a charity or non-profit trustee. There is something exceptional about those who volunteer their time, skill and expertise to a board, or sub-committee, for the benefit of a cause they feel passionate about. As Nelson Mandela put it, “there can be no greater gift than that of giving one’s time and energy to help others without expecting anything in return”. But being a board or sub-committee member (trustee) for a charity or not-for-profit organisation is not without its challenges. These challenges can present themselves around the board table in the form of disagreement or frustration as you strive to get things done. People skills and leadership skills will be called on in order to listen effectively and convey concern, constructively challenge and support the ideas of other trustees in order to achieve consensus. Difficult dilemmas Achieving consensus is not always easy, especially when resource constraints (financial or otherwise) impact the organisation’s ability to realise its strategic objectives. Difficult dilemmas can be tabled at board meetings, which can present challenges for the organisation and test the core values that compelled each trustee to volunteer in the first place. A classic example involves proposals to suspend services in one area to the detriment of some beneficiaries in order to ensure continuity in another. An avalanche of conflicting priorities around the board table can result in an impasse. Challenges like these can make a trustee grateful for a good governance framework. Such a framework can provide clarity on their duties and responsibilities to the organisation, including the various stakeholders it serves. There can be comfort in understanding the policies and procedures that ensure the collation and adequate flow of accurate information from the front-line service providers (both staff and volunteers) and senior management to the board. Such information results in better decision-making that is in the best interests of the organisation as opposed to any individual or group of trustees. Such a framework will also provide a welcome format for effective and well-chaired discussion at the board, and ensure that the right level of diversity, skills and expertise are enabled to inform the decision-making process. Rule of law But what about the rule of law regarding the trustee’s duties and responsibilities? An understanding of these rules will help channel a thought process towards what is important for the organisation. A trustee does not need a law degree to understand these requirements. Rather than feel overwhelmed, it is useful to first understand the organisation (including its vision, mission and values), its legal structure (e.g. company, trust, unincorporated etc.) and the area within which it operates. This process will highlight the laws and regulations that are most relevant for consideration. Figure 1 illustrates the types of legal and regulatory duties that apply to trustees. Notice that some overlap and they have a common design to ensure that the organisation is always the focus of consideration. Being involved as a trustee can be the gift that keeps on giving for the individual and the organisation. Challenges present opportunities for trustees to exercise values, apply skills, provide expertise, assess problems and inform decisions in a different way – for example, through the lens of life-changing consequences. A good governance framework and adherence to the rule of law will provide another useful lens to guide, rather than impede, trustees towards consensus on trickier dilemmas.

Dec 03, 2019
Tax

The Sunday Business Post, 1 December 2019, Britain, as the Brexit process constantly reminded us, is our largest trading partner.  It is also a major competitor.   The prospect of Brexit, particularly a crash out hard Brexit rightly put the frighteners on everybody, so much so that our own Minister for Finance could push a Budget through the Dáil with almost no tax benefits for everyone (other than the self-employed) and scarcely a murmur of dissent.   Brexit or not, the British will have a new government after December next.  It will be new either in political hue, or new in the sense that it will be another Tory government operating from a different manifesto.  Now that the manifestoes of the two main parties, Conservative and Labour, have been published, what could change in the competitive environment between our two countries?   Cross-border trade is heavily influenced by tariffs and trade agreements, but it is also influenced by business sentiment and consumer spending power.  Consumers vote; businesses don't, so election manifestoes usually treat most categories of voters with kid gloves.  The Tories are promising that there will be no increases in income tax, national insurance (the equivalent here is PRSI) or VAT over the next 5 years.  The Labour party is making the same promise, but limited to anyone earning below £80,000 per annum, and other terms and conditions (particularly for married people) apply.    Were either party to secure a majority and then follow through on their election promises, it seems that consumer spending power for most voters would be largely unaffected in the UK.  That’s good news for Irish producers and exporters of consumer goods.    For UK companies though the manifestoes from both parties hold less promise.  Previous Tory plans to continue the downward trajectory of the Corporation Tax rate have apparently been reversed, and the promised rate of 17 per cent will not now materialise – the standard Corporation Tax rate in the UK will remain at 19 per cent.  Under a Labour government, the rate is promised to increase to 26 per cent.  Neither of these proposed rates would be the highest by international standards, and both are still lower than the 28 per cent rate paid by companies in the UK a decade ago.    Perhaps more worrying for UK companies is that the manifestoes of the main parties seem tone-deaf to the challenges of attracting foreign direct investment (FDI).  Although the UK economy dwarfs the Irish economy in size, the importance of inward investment is common to both and our industrial agencies compete with their UK counterparts.    It is tricky to make direct comparisons about FDI between countries.  This is because cross border investment can take many forms and can be channelled in different ways.  For example a US company investing into the UK could make the investment via a European subsidiary, blurring the distinction between EU investment and US investment.  Nevertheless, analysis from the UK’s Office of National Statistics identifies the US as the major source of investment into the UK by some distance, but followed by significant annual investments from Germany, France and the Netherlands.  This broadly mirrors the profile of foreign investors into Ireland (if we omit the UK which itself is a source of investment here).   There is a very positive impact of FDI on employment in the UK.  Again according to the Office of National Statistics, despite only 2.0% of UK businesses having any FDI link, they employed 29.8% of UK workers.  That’s 8.5 million jobs.  This also mirrors scale of the impact of FDI on the employment market in this country.   It’s hard to see how either party manifesto will advance the cause of foreign investment into the UK.  Larger industry will balk at the new regulatory regime promised by a Corbyn administration and the prospect of “Inclusive Ownership Funds”.  The idea here is that up to 10 per cent of a company will be owned collectively by employees, with dividend payments distributed equally but capped at £500 a year.    The Tory manifesto isn’t a hazard free zone for companies looking to invest in the UK either.  The Tory slogan to Get Brexit Done is not going to resonate with the very many business people who see Brexit as an impediment to, rather than an opportunity for, trade.  Businesses are also aware of the importance of securing existing EU sourced investment in a post Brexit environment.  Spotting this, the Liberal Democrat manifesto is simply titled “Stop Brexit” and promises a “remain bonus” of £50bn though like Labour they too would push up the Corporation Tax rate.   The competition for FDI is one which it seems to me none of the UK parties are concerning themselves much with at all.  That’s an extraordinary omission for any political system which has been so dominated by three years of Brexit debate on foreign relations and trade.   Dr Brian Keegan is Director of Public Policy with Chartered Accountants Ireland

Dec 02, 2019
Thought leadership

Sunday Business Post, 24 November 2019 A few months ago I attended a briefing from the UK revenue authority, HMRC, about their projected tax receipts. In one particular area of debt recovery, we were told their estimates were going to be “a tad out”. It turned out that for a revenue authority collecting almost £700 billion per annum, a “tad” meant a staggering £1 billion. For most types of tax, the UK tax take dwarfs the Irish tax take by a factor of ten or more.  Missing a target by €1 billion or more in Ireland would be considerably more than just a tad. But according to a research paper published last week by two Department of Finance economists, that’s how much our estimates of corporation tax receipts have been wrong.  And not just for one year, but on average for five years in succession.  That comes to the price of three children’s hospitals. So how did the estimates go so badly wrong? As a general rule, tax receipts are directly tied to economic performance. If the economy grows by 1%, tax receipts can be expected to grow by 1%, all else being equal. This rule of thumb seems to break down when it comes to corporation tax, and may partly explain why a government group has been established to work out a new methodology for the increasingly dark art of estimating the tax take. Estimating tax receipts is important for two reasons. One has to do with prudent economics, and the other has to do with prudent politics. An overestimate of tax receipts that don’t ultimately materialise means that there will be an exchequer shortfall.  That doesn’t make for prudent economic management. Equally serious, however, is an underestimate of the amount received.  Politicians like to spend what they have and underestimates mean that the political system can’t deliver as much to voters as it should.  It particularly annoys backbenchers in marginal constituencies when largesse which is actually available isn’t provided because the Department of Finance estimates of receipts were out. For a country that’s often accused of being a corporate tax haven, we are remarkably good at amassing tax from companies.  As the Department of Finance economists point out, Ireland has relied more heavily on corporation tax receipts in comparison to other forms of tax receipts than most other European countries, not just in the past few years but over the last 20 years.  This reliance also makes Exchequer receipts vulnerable.  A particular concern has been the relatively small number of companies making the bulk of the corporation payments – just ten companies in 2018 paid 45% of the total in 2018. The situation was ever thus – only a small handful of companies paid the bulk of tax, and the survival rate of this cohort is quite high.  Three-quarters of the biggest-paying companies a decade ago are still alive and well and paying tax in Ireland.  Of the 150,000 or so companies that sent in tax returns in 2016, more than half were profitable.  So why do relatively few companies account for so much tax? The answer, I think, lies not so much in economics but in a vagary of the Irish tax system.  Irish tax law harbours particular negativity towards a “close” company – close in this sense meaning that the stakeholders are connected closely either by family or commercial links.  Most Irish companies are close companies. These close companies are subject to additional tax surcharges if it seems the company structure is being used to sidestep income tax liabilities for their owners.  As a result they are often run at break-even or close to it.  Profits get paid out as wages and salaries and are taxed under income tax rules, not corporation tax rules.  This is borne out by another finding by the Department of Finance economists, which is that foreign multinationals (which typically are not closely held) account for close to 80% of all corporation tax receipts. Predicting corporation tax receipts is not just a matter of predicting the economic outcomes for our corporate sector as a whole.  In practice it is about assessing the tax environment for multinationals.  While some politicians and commentators find it distasteful, providing a stable tax environment for foreign investors is key to ensuring that the recent high corporation tax receipts, so often described as windfall, become routine.  This is also why the current round of OECD consultations on revisions to the way multinationals are taxed is so important to the Irish economy overall. We simply cannot afford to get our corporation tax receipts a tad out in future.   Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland.

Nov 25, 2019
Thought leadership

Sunday Business Post, 17 November 2019 In New Zealand, parliamentarians must stand for election every three years. That three-year interval was the quid pro quo for the abolition of the New Zealand upper house of parliament almost seventy years ago.  If an upper house wasn’t going to scrutinise lawmakers, then the voters should have the opportunity to vote those lawmakers in or out more often.  Or so the logic went. Aside from that, the New Zealand parliamentary system is strikingly similar to our own.  Much of the active parliamentary work is done in committees.  Part of the fallout from the awful shooting atrocity in Christchurch earlier this year was dealt with by the New Zealand Finance and Expenditure Committee.  That's because restricting gun licenses and sales has a fiscal impact.  Another issue they are examining at present is the pension system. Unlike Ireland, New Zealand has had an “opt-out” style of pension contribution for employees since 2007.  The system, known as KiwiSaver, ensures that all employees and employers pay a fixed percentage contribution into a pension fund unless they opt out of doing so.  Contributions are modestly topped up each year by government.  The concept is not unlike the one currently being promoted by the Minister for Employment Affairs and Social Protection known as Auto Enrolment.  Like Kiwisaver, Auto-Enrolment means you automatically save for a pension, unless you choose not to do so. As employers and employees alike consider the financial implications of Auto Enrolment for Ireland, the New Zealand experience is instructive.  How would a ShamrockSaver compare to KiwiSaver? The key difference between the New Zealand pension regime and the Irish pension regime is that the New Zealand pension regime is tax neutral.  Here, one of the best forms of tax relief for employees are personal pension contributions.  Most amounts contributed to a pension fund in Ireland earns a tax deduction at the employee’s top rate of tax.  Putting €100 into a pension fund in Ireland only costs €60 to an employee paying tax at the top rate.  For the Kiwis, that's not the case as the employee gets no tax break for the contributions made. But the converse is also true.  In Ireland, pensions are taxable.  In New Zealand, the amount of pension savings crystallising on retirement can be drawn down tax free, more like a savings account then a pension fund.  Perhaps the most critical difference between the Irish system and the New Zealand system is how the funds which are invested are taxed.  In Ireland, the pension fund does not pay tax year by year as it gathers value.  In New Zealand, the investment returns in the fund are taxed each year.  This can make a huge difference to the amount finally available on retirement. New Zealand Treasury officials sometimes make the point that supporting personal pension funding through tax incentives tends to benefit the higher paid rather than the lower paid.  They also point to the non-means tested government pension, payable to all New Zealanders when they reach the age of 65.  I gather that in practice, many New Zealanders use funds which accumulated in the Kiwi Saver account to finally pay off their mortgages, and some continue working either in full or part-time employment beyond pensionable age to supplement their public New Zealand pension. All this suggests that the ShamrockSaver Auto-Enrolment system now being proposed for Ireland must preserve tax relief for contributions.  At least as important, it should preserve the tax free status of earnings within the pension funds themselves.  Unless it does so, it will be little more than a dilution of the current pensions regime for private sector workers.  These aspects must not fall off the table as the development of the scheme progresses Less clear is who will actually carry out the administration of the Irish Auto-Enrolment system.  In New Zealand, the job falls to their tax authority, the Inland Revenue Department.  From speaking to tax officials there, one of their main challenges in running the system are to ensure that employers collect the appropriate amounts from savers who are enrolled in the system.  More significantly, the Inland Revenue Department to ensure that contributions which are collected are properly paid over by the employers to the appropriate pension funds.  It should not be assumed that this enforcement is best left to the Revenue Commissioners here.  Overall, the direction of pension policy travel with auto-enrolment is correct.   Far too many of us are reliant on the state's own system of pension provision, and personal levels of contribution have to improve.  The Minister has claimed significant support for the proposals from unions and employer groups alike.  Auto-enrolment has worked in countries like New Zealand.  As we introduce the idea, we must not drop the better aspects of the pensions system we already have.   Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Nov 18, 2019
Press release

Chartered Accountants Ireland launched its online Boot Camp programme to support Senior Cycle Accounting students at an event in Dublin on Tuesday. The programme, which is also being launched at events in Cork and Sligo as part of Chartered Accountants Ireland’s annual school engagement, is designed to help build a strong foundation in the fundamentals of accounting and will give students an understanding of what it’s like to be a professional accountant. Pictured are (L to R): Ian Browne, Deputy Director of Education at Chartered Accountants Ireland; John Munnelly, FAE Paper Development Executive at Chartered Accountants Ireland; Orla Aherne, Marketing Executive at Chartered Accountants Ireland; and Brian Feighan, ProTutor and creator of Boot Camp. The programme is currently open for enrolment. It is free for teachers and only €10 for students. To find out more about Boot Camp, please visit: https://chartered-bootcamp.teachable.com/ Recent independent research highlighted concern among accounting teachers that the new Junior Cert Business Studies syllabus does not adequately prepare students for Senior Cycle Accounting. This is despite the growing popularity of the subject at Leaving Cert level with almost one in every seven students now choosing accounting in Senior Cycle. Boot Camp solves this problem by providing an easily accessible online programme that teachers can run in their classrooms. Students who join Boot Camp can also take part in the Boot Camp Challenge, a national competition which gives students a chance to test their business smarts in a real-life business simulation. The regional and national winners of the challenge will be honoured at a special ceremony at Chartered Accountants House in May 2020. Ian Browne, Deputy Director of Education at Chartered Accountants Ireland, said: “It is great to see so many accounting teachers have already signed up to the Boot Camp programme and we look forward to welcoming many more in the coming weeks. Ultimately, our goal is that every student who chooses accounting for the Leaving Cert will benefit from the skills they will learn in Boot Camp and get a flavour for the profession.” Brian Feighan, FCA founder of online learning portal, ProTutor and the creator of Boot Camp, said: “Digital learning is fast becoming an essential part of the student experience in second level. Practical subjects such as accounting are a perfect fit for this trend. Under the guidance of their teachers, Boot Camp will help students master the fundamentals of accounting and develop their understanding of how to use financial information to make smart business decisions. We hope that Boot Camp will set the next generation of business leaders on their paths to success.” ENDS For editors About Chartered Accountants Ireland Chartered Accountants Ireland is Ireland’s largest and longest established professional body of accountants founded in 1888. The Institute, which is an all-island body, currently represents over 27,000 members around the world.  Reference Fiachradh McDermott | Gibney Communications | 087 655 7070 | fmcdermott@gibneycomm.ie Rachel Pattison | Chartered Accountants Ireland | 01 5233927 | Rachel.pattison@charteredaccountants.ie    

Nov 14, 2019

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