Tuesday 22 May 2018

Is there a better way to fail?

In some instances of corporate scandal or failure, it seems clear who is to blame. Greed and incompetence are simple to attribute and, when punishment does not follow, outrage does. The outrage is usually addressed by promises of systemic change.

The pendulum signifying deficient behaviour swings between three poles. If the board of directors is at fault, we are told that we need improved corporate governance - more independent and diverse boards. If the auditors are at fault, we are told that we need to break up the big 4 to make the audit market more competitive. If the shareholders are at fault, it seems that we need to make them take more active interest in their investee companies and behave as owners rather than traders.

None of this makes a great deal of difference. Part of the problem is due to the process of corporate accountability. The reporting framework was devised in the nineteenth century and has not adapted sufficiently to changes in business activity, business structure, information requirements and communication channels.

There is also a problem of expectation. The literature on audit long ago identified the expectation gap between what people think auditors should do and what they are actually required to do. (I remember being taught that the auditor is "a watchdog, not a bloodhound" which may seem like a useful metaphor.. but don't they both bark?)

But there is also a very wide expectation gap between what the general public believe that companies should do and what they actually do. No corporate accountability system can work without some clear idea of what companies are for and what can be expected of them. This discussion is happening in various places:  for example, The Future of the Corporation, The Purpose of the Corporation, Tomorrow's Company Whether the insights from these different groups can be brought together and synthesised in any useful way remains to be seen but such thinking is needed to underpin policy and regulatory decisions which, at present, work on an ad hoc basis, selecting what appear to be the most pressing issues and tinkering with the system to try to address them.

Companies fail for all sorts of reasons. Risk is inherent in business and can't be managed out of existence. Honest and competent boards and management may make bad business decisions. Covering up may lead to incompetent and dishonest behaviour but no system can prevent that. The new focus on corporate culture assumes that a "good" culture will inhibit such behaviour but evidence of this seems very sparse.

We need to accept that companies will fail, even those that tick all the boxes. More boxes to tick won't change this. As well as identifying causes, perhaps we should be looking more closely at how the failure process is managed and how those caught in the fallout can be better protected.


No comments:

Post a Comment