When persuasion is not enough

aksaroya —  8 May 2013 — Leave a comment

The contentious issue of how to ensure enough women are appointed to boards of companies is dividing opinion, with some insisting that mandatory quotas are the only way to effect real change, says Errol Oh

diversity

It has been almost two years since the Malaysian Government set the target of having at least 30 per cent women at the decision-making level in the corporate sector by 2016. This is part of the country’s Economic Transformation Programme (ETP). Leveraging women’s talent to raise productivity is a policy measure under human capital development, one of the ETP’s six Strategic Reform Initiatives.

`The decision-making level in the corporate sector’, although not officially defined, is widely understood to mean directors, CEOs and other C-suite positions, particularly those of large corporations and the influential government-linked investment companies.

Most people agree the immediate and more realistic goal is to raise the proportion of women directors of listed companies to 30 per cent. However, the pursuit of this target is not driven by a mandate; the Government prefers to rely on persuasion instead of legislation. It is perhaps time to reconsider this. Malaysia is not alone in rejecting the use of compulsory quotas as a way to get more women into boardrooms.

For example, in the United States, there has been no serious discussion on the subject, although board diversity is a hot topic there, as it is elsewhere in the world. Nevertheless, countries such as Norway, France, Spain, Italy and Belgium have made it a must for their listed companies to have certain ratios of women directors.

Last November, the European Commission proposed that by 2020, 40 per cent of the non-executives on the boards of companies listed on member states’ stock exchanges are to be women. The imposition of quotas for women directors is open to debate. The worry is that they will lead to tokenism – women will be made directors more to satisfy the quotas than because they are qualified and can add value. This may undermine the argument that companies with more women directors tend to perform better. Some who oppose the idea regard quotas as patronising to women.

One of them is Mai-Lill Ibsen, who once had almost 200 boardroom seats in Norwegian companies. In an interview with The Guardian in January, she said: ‘I’ve never seen the glass ceiling, I’m against quotas, they are discriminatory in a way. I feel we [women] are so strong we don’t need that.’

On the other side of the divide are those who have a similar view as that of Viviane Reding, the EU Commissioner for Justice, Fundamental Rights and Citizenship. More than once, she has said she is not a fan of quotas but likes what they do. That is an important point.

Mandatory quotas for women directors force decision makers – in Malaysia, these are almost always men – to include women as candidates. This is likely to make a difference, especially in the selection of independent directors. Often, boards of directors are seen as thinly veiled old boys’ clubs, where even independent directors are associates of the controlling shareholders.

It is not the best setting for good stewardship that protects minority shareholders’ interests. However, there is little incentive for change if the ratio requirement is voluntary. Having women directors will not automatically improve a company’s governance, but if male dominance is no longer acceptable in just about every sphere of life, why should it persist in the corporate boardroom?

Errol Oh is executive editor of The Star

This article first appeared in Accounting and Business, China edition, April 2013

In ACCA, Women in Business ,
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Through a glass darkly

aksaroya —  1 May 2013 — Leave a comment

The weaknesses of the credit ratings system are only too clear, but finding a way to address the conflict of interest issues without generating new problems is anything but straightforward, says Ramona Dzinkowski, economist and business journalist

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Since the Dodd-Frank Act of 2010, the US Securities and Exchange Commission (SEC) has had a multitude of objectives aimed at improving investor security in the US. One of the most important is to recommend a better system for rating securities to eliminate the potential conflict of interest between issuers and agencies while also taking measures to possibly eliminate investor reliance on the agencies altogether.

The crux of the matter is the issuer pays model, which is used by the vast majority of credit rating agencies. An agency is paid by an issuer for rating its security and the issuer generally then makes its credit rating publicly available for free. According to many observers, this creates an incentive on the part of the agencies to issue favourable ratings or delay possible downgrades. Ultimately, it’s seen as one of the many related problems underlying the financial crises of 2008.

In its December 2012 report to Congress on assigned credit ratings, the SEC reviewed a series of possible payment options for the agencies, including a model proposed by Congress whereby the SEC acts as middleman between issuer and agency. In other words, securities issuers will no longer be able to select their own rating agencies. The possible outcome of such a system has been the subject of much debate. For some, removing the choice of agency is a simple solution to the conflict of interest problem. However, others see it as a much more complicated issue, an affront to the free enterprise system as we know it, and a possible violation of the First and Fifth Amendments.

Meanwhile, the SEC is a long way down the road of removing requirements and references to rating agencies in its rules in an effort to eliminate the reliance on external agencies. The December 2012 SEC report declares: ‘Reducing reliance on credit ratings could mitigate conflicts of interest to the extent that it causes investors to use factors other than credit ratings to make investment decisions. If credit ratings are no longer used in statutes and regulations to confer benefits or relief, the incentive to obtain credit ratings that meet these requirements should be eliminated.’

For me, taken together, this presents an intellectual dilemma. On the one hand, Congress has taken measures to minimise the reliance on rating agencies by requiring the SEC to remove references to them in its rules; on the other, it proposes to increase their perceived or ‘endorsed’ credibility by having the SEC independently assign agencies to rate new issues. What is the policy direction here?

Also, there’s the lingering question of how these assignments would be made, given the annual SEC review of the agencies. Would the best agency win, all the time, resulting in a preferred agency with better compliance results being assigned a greater number of new issues, on average? Would this ultimately improve agency performance, or boost the market power of one of them in an already monopolistic industry? In addition, how many new SEC personnel would be required to administer the new system with its potential thousands of new complex releases every year?

There are still more questions than answers here. The SEC is currently organising a public roundtable to invite discussion from supporters and critics of the possible alternatives.

This article first appeared in Accounting and Business, International Edition, April 2013

In ACCA, Economy
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10 years of ACCA in the Czech Republic

accapr —  29 April 2013 — 1 Comment

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By Katka Benešová, head of ACCA Czech Republic, Slovakia and Hungary

This year marks the ACCA office in Prague changing the way professional accountants develop careers in the Czech Republic, Slovakia and Hungary for 10 years.

Earlier this month ACCA’s vice president, Anthony Harbinson, hosted a gala dinner in Prague to mark this great anniversary. Together with members and partners we discussed and celebrated how the past 10 years have been.

In reaching this milestone, we felt that it was time to look at how the accountants’ role, reputation and public value is perceived among our members and students. We commissioned extensive research on the Changing role of the finance professional in both the Czech Republic and Slovakia – 271 respondents were polled.

Despite the economic issues of past the five years, accountants believe that the public perception of them has improved or stayed the same since 2008 (50 per cent). However 37 per cent said it had declined. Technical skills (61 per cent) and trustworthiness (57 per cent) were considered to be key personal attributes for accountants. They are followed by professional ethics and personal integrity (49 per cent).

Eighty per cent of the accountants who responded to our research believe professional accountancy bodies help ensure those within the profession act responsibly.

Czech and Slovak accountants often deal with conflicting demands. Eighty-five per cent said they follow the interest of their employers. But 51 per cent say accountants should follow the public interest in their work. Eighteen per cent of accountants reported that they have had serious dilemmas between public, personal and their employers’ interests.

The findings of our survey revealed the accountancy profession is keen to act ethically and responsibly for the commercial success of their company, financial markets’ stability and economic prosperity. It is good to see that our members see certain transactions and acts as an ethical dilemma and we also appreciate their openness to share this information in our report.

The research findings shows that professional accountants are seen as business partners and contribute to the overall business success of their organisations. This will have a positive impact on the local profession, and professional accountants, regarding what value they bring to the organisation. And as they already face ethical dilemmas in their jobs, this can also have a positive impact on the local economy in the Czech Republic building transparency and enhancing public value.

In ACCA, National Offices, Public Value , , , , , ,
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A shareholder spring on audit?

aksaroya —  26 April 2013 — Leave a comment

Bringing down the barriers to shareholders subjecting company management to frank and public questioning at the annual general meeting will take more than a beefed up auditor’s report, says Jane Fuller, former financial editor of the Financial Times and co-director of the Centre for the Study of Financial Innovation think-tank

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‘The first resolution of this AGM will be related to the receipt and consideration of the company’s accounts and the reports of the directors and the auditors.’

So there it is, the number one item at the annual general meeting of a typical quoted company. Cue a well-informed debate between investors who have studied all x hundred pages of the annual report, the directors who produced it and the auditors who scrutinised their work. Dream on.

In the real world the only contentious issue is likely to be directors’ pay. One audit partner told me that in many years of attending annual meetings he was asked only one question: ‘Is the audit partner here?’ The answer was ‘yes’ and that was it. A key point of initiatives to beef up the auditor’s report is that it will provide ‘hooks’ for a dialogue between the company and its shareholders, and even (whisper it softly) between the auditor and the shareholders.

So will it lead to a shareholder spring of protests at AGMs along the lines of those seen over pay? Maybe, eventually, but there are several barriers. Sadly, it is a romantic notion that the AGM is a forum for frank public debate on fundamental issues between a company’s owners and their managing agents. As the Kay Review of UK equity markets pointed out, ownership is very fragmented. More than 40% of the market is attributed to non-UK holders; UK pension funds and insurers hold only about 20%, individuals 11%.

But even for those based in the UK, the diversity of their portfolios and the concentration of AGMs into a March-June season make it physically impossible for most shareholders to attend; hence, the reliance on proxy voting agencies. An awkward question may be asked by an individual, but the risk is high that this tiny stakeholder will be fobbed off. It does help, however, if something specific in the audit committee’s report – and, in future, the auditor’s commentary – can be pointed to.

Another issue is the passage time between the preliminary announcement, the publication of annual report and the AGM. At present the most incisive bout of public questioning comes via the company’s webcast presentations to analysts on the day of the announcement. But two problems remain: the prelims do not have all the notes; and even when the annual report is published at the same time (hats off to HSBC), no one has time to study the information properly before the meeting.

The best opportunities to question management are afforded to big institutional investors, the ones the management wants to see, in one-to-one meetings in the days after the preliminary announcement. They should not get any new price-sensitive information, but such access is highly prized. The FT reported that some asset managers were paying brokers $20,000 an hour to meet CEOs. Better reporting by audit committees and auditors cannot improve the dialogue by itself. More opportunities need to be provided to pose the prompted questions – preferably in public via webcasts, and definitely not in paid-for privacy.

This process should start after publication of the annual report and run for some weeks, taking in the AGM. Questions could be emailed in advance to the audit committee chairman and the audit partner – some could be dealt with via a dynamic frequently asked questions page. The meeting itself should be asked to approve – not just receive – the financial and audit reports. Anything that aids a considered approach to a company’s accounts and prompts auditor independence should benefit the company, its long-term shareholders and market efficiency. That would be green shoots indeed.

This article first appeared in Accounting and Business, UK edition, April 2013

In Audit, Corporate governance
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China makes the case

aksaroya —  24 April 2013 — Leave a comment

China’s experience of IFRS convergence makes a convincing case for other economies, says ACCA president Barry Cooper

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Given China’s increasing influence in the world, not only as producer but as major consumer, there’s growing interest in how to do business there. I’ve worked in China on and off for over 25 years and have been fascinated to see how it has developed into an economic world power.

With that growth has come some challenges, not least in the US where the Securities and Exchange Commission recently raised questions about the ways in which Chinese companies report their performance. So I was particularly interested to see some research commissioned by ACCA, which has looked at the impact of China’s convergence with International Financial Reporting Standards (IFRS), and what it has meant for corporate reporting.

The ACCA report, produced independently by Dr Edward Lee and Professor Martin Walker of Manchester University, together with Dr Colin Zeng of the University of Bristol, shows that IFRS convergence has benefitted the Chinese economy, by making accounting earnings more informative and therefore more useful to domestic and international investors.

After examining all Chinese companies listed on the Shanghai and Shenzhen stock exchanges between 2003 and 2009 the study found that the value relevance of earnings (the degree to which changes in reported earnings affect share prices) had increased following IFRS convergence in 2007, almost certainly as a result of convergence itself. The research also revealed that IFRS convergence resulted in better quality corporate disclosures only where there were other strong incentives for companies to do so, such as a high level of dependence on the equity markets for funding.

The findings underline the importance of IFRS as the international standard for financial reporting, particularly where companies have legal, governance and commercial incentives to provide high-quality disclosures. Convergence has undoubtedly worked for China. Other emerging economies – along with some significant developed ones yet to converge with IFRS – must now take notice. To consolidate and build on the benefits of convergence, the legal and regulatory accounting framework will need to be enhanced on a continuous basis, which will provide challenges and opportunities for all finance professionals.

Professor Barry J Cooper is head of the School of Accounting, Economics and Finance at Deakin University, Australia

This post first appeared in Accounting and Business, International edition, April 2013

In Barry Cooper, IFRS
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