Diddums den! Company directors are finding it all too hard.

Directors have been told what’s what!  No, I’m not talking about British MPs and their views of Rupert Murdoch’s fitness to serve.  I’m talking about the fall-out from two court cases brought by the Australian Securities and Investments Commission (ASIC): James Hardie and Centro.  The lessons people are drawing from the judgements include:

• Directors must read documents.
• Directors can’t rely on others.
• They must read the financial statements and form own judgements.
• They must read board minutes before approving them.
• They have a responsibility to see that board minutes and statements to the stock exchange are accurate.

Is this really so onerous?

Holding directors to account doesn’t happen everywhere.  Directors’ duties are spelt out in UK corporate law but until they are tested in the courts the question remains: are they enforceable and, if not, are they worth the electronic bits and bytes in which they are written?  However, the UK Corporate Governance Code does provide further guidance to directors on what they should do to fulfil their responsibilities. Perhaps the ASX Corporate Governance Principles and Recommendations need an overhaul to provide real guidance to directors.  The place to start is to consult with shareholders and governance experts to find out what they expect from their board of directors.  The Australian Institute of Corporate Directors is calling for a wider policy debate on this issue.

At the same time, many commentators are saying that we shouldn’t enforce the accountability of directors because it will put people off taking the job.  But, if we don’t insist that people meet the requirements of the job, what’s the point of having them there in the role?

The concerns expressed about delegation are more worrying.  Yes, sitting at the apex of a large modern corporate is daunting – that’s why these directors get the big bucks.  But, the principles of delegation stand:

1. You delegate the task but not the responsibility.
2. You have a responsibility to assess the quality of the people or organisations to whom you are delegating.
3. You have to insist on receiving reports that enable you to assess whether you think a good job has been done or not.
4. You assess all of this by receiving different information from different sources and forming your own judgements.
5. You are accountable for those judgements.

It is a big question for senior managers and directors: how do you know?  If you set a policy and hire a staff and set them to implement the policy, how do you know that it is being done the way you want to?  As an observer, I’ve long wondered how the members of the board and C-suite can do their jobs and I’ve admired their ability.  In recent years I was also amazed to hear a well-respected governance guru state clearly that he didn’t – couldn’t – know what was going on throughout the organisation – and that he relied on internal audit as a key source of reliable information to help him fulfil his duties as a director.

Which brings us to what’s in it for internal audit.  Internal audit is a cornerstone of governance, not because board directors can simply abdicate their responsibilities and pass all of it to internal audit, but because it is a source of information that is within the organisation, understanding the nuances of aspiration and attainment within the organisation, yet organisationally independent of the main management reporting line.  To fulfil that role the internal auditor needs to be a professional, advocating, insisting on and following the professional standards promulgated by the Institute of Internal Auditors – the International Professional Practices Framework.

So, my message to the hard-pressed corporate director: recognise that you are accountable; delegate deliberately and intelligently; create multiple sources of information; weigh them up against the other; insist on having high quality internal audit to support you; and step up to provide visible and effective support for that professional internal auditor.

Titanic risk management

Reblogged from chiefauditexecutive:

I have been struck by all of the Titanic centenary memorials and programmes, much like the ship itself, out of my compartmentalised risk management thinking. It is not man’s natural state to risk manage, but have we really progressed so little that scenes from the Costa Concordia in 2012 could be quite happily spliced into footage of the Titanic film relating to 1912?

Read more… 533 more words

Very interesting. Should internal auditors be considering the community and moral aspects of risks? Is this part of what is meant by the public interest of our profession?

Titanic risk management

Reblogged from chiefauditexecutive:

I have been struck by all of the Titanic centenary memorials and programmes, much like the ship itself, out of my compartmentalised risk management thinking. It is not man’s natural state to risk manage, but have we really progressed so little that scenes from the Costa Concordia in 2012 could be quite happily spliced into footage of the Titanic film relating to 1912?

Read more… 533 more words

Very interesting. Should internal auditors be considering the community and moral aspects of risks? Is this part of what is meant by the public interest of our profession?

Not just a spark, but also sweat – that’s what we need

I’m not sure why I am so bothered by an article in today’s Australian Financial Review about how: “The only people who believe that managers are leaders are managers, and some of them are not sure.”  But I am.

Three thoughts:

Firstly, I find the article confusing, presenting a series of ideas with little linking them. Maybe it was badly edited.

Secondly, it is perhaps a false dichotomy.  Wikipedia defines leadership and management in these terms:

• Management is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively. Management comprises planning, organising, staffing, leading or directing, and controlling an organisation (a group of one or more people or entities) or effort for the purpose of accomplishing a goal.

• Leadership has been described as the “process of social influence in which one person can enlist the aid and support of others in the accomplishment of a common task”.

(And, yes, I know it is Wikipedia but it rings true to me in this case.)

The concepts are not very different then, although the definitions may imply that leadership is all about inspiring effort while management is all about the making effort!

In that case, why come over all clever and criticise managers for seeing themselves as leaders.  Does it matter?  Can that really be the source of great problems if the roles of a manager and of a leader are so similar?

Thirdly, whatever my misgivings about the article and the distinction it draws, I remain intrigued – an ill-formed insight tapping on my shoulder and trying to get me to pay attention to it.

Let me use this blog to try and start to give it shape.

The article’s most interesting two sentences are: “In business and government we need effective managers. We do not need leaders.”

It seems to me that people in the business world spend a lot of time talking about theories of leadership or empowerment or governance, or whatever is the current buzz-concept.  However, maybe what is really needed for our society to flourish is for people to buckle down to the hard daily grind of agreeing what we want to do, developing a realistic view of the resources we need to do it, gathering and keeping those resources, completing all the tasks, big and small, glamorous and mundane, checking our progress against our plans and just doing it!  In other words, what you might call the efforts of “effective managers”.

So, that is part of what is attracting my attention: it seems to support one of my views of the world.  Nevertheless the article itself doesn’t actually explain what “effective managers” would do so maybe the writer wouldn’t agree with my views.

In addition, I disagree with the second sentence above about not needing leaders.  Just because we need effective managers, it is not to say that we don’t need people to paint a picture and to inspire people to do the work that makes it real – in other words, leaders.

What we in fact don’t need is a collective view that inspiration is everything.  We need a reiteration that inspiration and perspiration are both essential to long term success: a spark and lots of sweat, to be more Anglo-Saxon about it all.

And, what does this matter to internal auditors?  Well, effective managers help our organisations to achieve their objectives.  In fact, it is through the efforts of managers and workers that organisations do anything.  So, I think our role is to evaluate how well managers are working – and to do that we need a yardstick against which to measure them.  We need to keep abreast of what makes a good manager, look at whether our organisation has any and help the ones we have to get better. What do you think?

Reference

“Hit and misses of a ‘born’ manager” by Robert Spillane, Professor of Management at the Macquarie Graduate School of Management and author of The Rise of Psychomanagement in Australia, (Michelle Anderson Publishing: Melbourne, 2011), published in the Australian Financial Review on 10 April 2012, link here (Registration required)

Who’s afraid of the women risk-takers?

I’ve just seen the piles of recent media coverage for the academic paper, published by the Bundesbank, which concluded that women on the board lead to more risk-taking, not less, as suggested by several earlier studies.

The paper, entitled “Executive board composition and bank risk taking”, can be found here (it’s in English). It’s a serious study and I worry a little about the message we might be sending in jumping on it and criticising it – what, just because we don’t like the findings? However, I’m not worrying that much because I’m going to add my own couple of comments!

Firstly, in relation to the authors’ belief that the report provides good input to the policy debate in Europe and elsewhere on measures to encourage diversity in the boardroom, I want to draw readers’ attention to the fact that this is research on the Executive board.

The German governance model is the two-tier system. The Executive board is the body of full-time executives, running the company. The Supervisory board is the non-executive board. A lot of the board diversity initiatives are actually geared at the non-executive level so it may be that this research has only limited relevance for these initiatives.

Secondly, one of the key findings highlighted from the report makes me question the values of the researchers in one particular way. They say: “If group members come from heterogeneous backgrounds in terms of experience and values, this might increase the potential for conflict inside the group and hinder decision-making.”

My opinion is that the world is complex and full of diverse views. For organisations to thrive in this world, the people in them must create ways of working that acknowledge diversity, use it to explore issues in the round and then make decisions based on that holistic perspective. So, this is all good – and if women, and other people who are or were in a minority (whether they are from ethnic, racial, political or stakeholder groups), can catalyse the change, more power to us. Therefore, in my world, the findings are pro more women, not against.

Finally, there are two great critiques of the report that are worth a read. The first is in Time magazine and can be found here; the second is in the Financial Times and can be found here. The first piece questions whether the shaking up of boards is a bad thing. The second majors on the fact that the study didn’t control for levels of experience. (You’ll need to subscribe to the FT, or at least register so you can read a few articles a month without subscribing, to read that piece.)

Anyway, it’s always good to get a bit of controversy across the world-wide web – and this report has certainly stirred up the discussion!

As an aside, the finding about diversity hindering decision-making is, if you read the report itself, not a finding as such. It forms part of the review of existing literature and is presented only as one side of the argument. So, two points arise: one, the researchers are not in fact speaking from the homogeneity-is-best camp; and, two, be careful about drawing conclusions from someone else’s summary…

Yes, that includes mine! So, go to the report, here’s another convenient link, and judge for yourselves.

Rentokil & KPMG: NOT IA provided by EA

On 31 July 2009 a UK listed company, Rentokil Initial plc, included in its half year reporting a statement that it had contracted with accounting firm, KPMG, to provide its external, statutory audit and its internal audit services. This turned out to be a problematic statement.

For a start, KPMG was NOT providing all of Rentokil’s internal audit services. The head of internal audit and her team remained in place, undertaking the majority of the internal audit work. What KPMG had agreed to do was to undertake extra testing of internal financial controls. The work was to be done in conjunction with external audit visits but providing extra assurance specifically to the Rentokil board.

In addition and lasting to this day, the statement started a huge debate about whether accounting firms should provide internal audit services to their external audit clients. Personally, I still think it is better to have a different entity providing internal audit services to the board from that providing an external audit opinion to the shareholders. I think that gives a better chance of challenge and better protection from group-think.

But, putting that aside, one key lesson to learn is that the KPMG-Rentokil case is *not* an example of all external and internal audit services being provided by the same firm.

Extract from 31 July 2012 statement:
“The Company has conducted a review of audit provision to obtain better value from the external and internal audit processes by seeking to improve the effectiveness of the processes and reducing costs overall. The Company invited its existing auditors PricewaterhouseCoopers LLP as well as KPMG Audit Plc to submit proposals for a more integrated financial assurance process extending external audit coverage to some work undertaken by internal audit. The board has decided to proceed with KPMG, who will be appointed to undertake the 2009 audit. Combined internal and external audit costs will reduce by approximately 30%.”
Find the statement here.

Facing opportunities

In the middle of this month I leave my job at Chartered Institute of Internal Auditors
(Ch IIA). It is a time when the volunteers and staff face some amazing opportunities to build the profile and status of the profession in the UK and Ireland. However, I face an amazing opportunity of my own: to move to Australia for a few years.

I am joining Institute of Internal Auditors – Australia as Director – Policy and Technical. In this post-GFC world, I know that the profession down-under will also face great opportunities. I’m really looking forward to working together with all the volunteers and staff to make the most of those.

I know that my knowledge and experience will be valuable. At the same time I realise that there are numberless things I don’t know. I’m looking forward to learning about them all from the community out there. I hope I can count on you all.

I shall miss my fellow internal auditors, all my colleagues and practitioners in the UK and Ireland. All the best to you in these exciting times; see you in a few years.

Meanwhile, travel gods willing, I’m due to be in Sydney at the ACIIA CAE Leadership Forum on Sunday 4 March, followed by the SOPAC conference, including the Australian CAE Services event on Monday 5 March. I hope to meet lots of you there. If you see me, stop by and say “g’day”!