MANAGEMENT ACCOUNTABILITY AND CORPORATE GOVERNANCE

This book consists of a series of essays by eminent businessmen and academics on the extent to which, and the manner in which, companies should be accountable to their various participants, including share­holders, employees, consumers and the general public. The main focus is on large quoted companies, but one of the essays gives particular attention to a new approach to the problem of ensuring an adequate, but not unreasonable, degree of responsibility from the owners of small companies.

On the issue of accountability of large, quoted companies, it is the questions raised by the authors as much as the conclusions reached which will excite the interest of readers. For example: What is the difference between accountability and responsibility? How useful are reports and annual accounting statements? Can they be misleading? Is reporting to the Annual General Meeting a discipline or a procedural facade? Does the presence of non-executive directors on the board enforce accountability? Should shareholders be represented by their own appointees on supervisory boards? If so, could members of a supervisory board know enough about the internal and technical affairs of the company to enforce ultimate control? If not, should a body of manage­ment experts be set up to act on behalf of all shareholders generally? Is the potential power of institutional shareholders too great?

The authors of the various papers include company chairmen, directors and executives, the Secretary of a professional body deeply concerned with company administration, a financial journalist, the Chairman of the US Securities and Exchange Commission, and academics who have undertaken research in this area. While there is no unanimity among the authors as to solutions to the various problems, there is agreement on the need to find means of ensuring that companies are properly accountable - no more and no less - in the pursuance of their objectives.

Each chapter is prefaced with an introduction by the editor.

Kenneth Midgley, the editor, is Principal Lecturer in Finance at Brighton Polytechnic. He is a partner in Carter, Midgley and Company, a small firm of publishers, and his early career was in banking and catering management. He is the author of many articles and books including Business Finance and the Capital Market (with R. G. Burns), and his book Companies and their Shareholders: the Uneasy Relationship, based on his London University doctorate, was published by the Institute of Chartered Secretaries and Administrators.

Also by Kenneth Midgley

COMPANIES AND THEIR SHAREHOLDERS: The Uneasy Relationship

With R. G. Burns

BUSINESS FINANCE AND THE CAPITAL MARKET THE CAPITAL MARKET: Its Nature and Significance BUSINESS CASE STUDY SERIES

MANAGEMENT ACCOUNT ABILITY AND CORPORATE GOVERNANCE Selected Readz"ngs

Edz'ted by Kenneth Midgley

Selection and editorial matter © Kenneth Midgley 1982 Chapters 1, 2, 4, 5, 7, 8 and 9 © ICSA 1982

Chapter 16 © The Macmillan Press Ltd 1982 Softcover reprint of the hardcover 1st edition 1982

All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means,

without permission

First published 1982 by THE MACMILLAN PRESS LTD

London and Basingstoke Companies and representatives

throughout the world

ISBN 978-1-349-05946-1 ISBN 978-1-349-05944-7 (eBook)DOI 10.1007/978-1-349-05944-7

Contents

Foreword by Barry Barker vu Acknowledgements vm Notes on the Contributors 1x

Introduction by Kenneth Midgley xm

PART I BOARDS AND ACCOUNTABILITY 1 The Aims and Objectives of Corporate Bodies

Szr Arthur Knight 3 2 Board Structures John B. H. Jackson 15 3 The Independent Director Bob Tricker 27 4 The Role of the Corporate Secretary in Promoting

Corporate Accountability - a United States View Harold M. Wz'lliams 41

5 To Whom should the Board be Accountable ... and for What? Kenneth Mz'dgley 61

6 One Board or Two? Peter McGregor 78

PART II SHAREHOLDERS AND ACCOUNTABILITY 7 The Relationship between Public Companies and

their Shareholders Barry Barker 85 8 The Function of Ownership and the Role of

Institutional Shareholders Lord Carr of Hadley 91 9 Social Responsibility and the Institutional

Investor T. f. Palmer 102 10 Too Much Power at the Top? Kevin Page 114

PART III COMPANY REPORTING AND ACCOUNT ABILITY

11 Financial Accounts - What They Do and Don't Reveal Susan Dev 129

12 Corporate Objectives: the Key to Financial Reporting C. R. f. Foley 141

PART IV THE SOCIAL RESPONSIBILITY CONCEPT 13 What is Accountability? Charles E. Medawar 155 14 Analysing Corporate Social Performance:

Methods and Results Lee E. Preston 163

PART V ACCOUNTABILITY TO THE EMPLOYEE 15 A Question of Disclosure Arthur Marsh and

Roger Rosewell 185

PART VI ACCOUNTABILITY AND THE SMALL COMPANY

16 The Price of Limited Liability - Accountability and Small Companies Mt"chael J. Page 213

Index 227

Foreword

Governance is a Middle English word which the Americans have brought back to us in the expressive phrase 'corporate govern­ance' - the purposes and method of how we structure and control our companies large and small.

The main questions of the day on this subject are concerned with the accountability of boards of directors - to whom and for what; the participation in the decision-making process of all those, not just unionised employees, who are initially concerned with corporate success or failure; and thirdly the framework of law which may provide the structure and even the regulation which will promote rather than inhibit the successful develop­ment of a business enterprise.

These are, unfortunately, areas in which comparatively little research has been done. They are all matters in which the company secretaries in listed public companies have something to offer from the unique vantage point of their experience. That is why the Institute of Chartered Secretaries and Administrators made 'Corporate Governance and Accountability' the theme for its annual conference in 1979 and published a number of papers in that connection which, with several others, are here brought together under the editorship of Kenneth Midgley, himself a member of the Institute.

They are offered as a contribution to an important and continuing debate.

August 1980 Barry Barker, M.B.E., M.A. (Oxon), F.C.I.S.

Vll

Secretary and Chief Executive, The Instz"tute of Chartered

Secretarz"es and A dm£n£strators

Acknowledgements

The author and publishers wish to thank the following, who have kindly given permission for the use of copyright material: the Business Graduate Association Limited, for the article 'One Board or Two?' by Peter McGregor from Business Graduate, vol. 8., no. 3; the Certified Accountants Educational Trust and Susan Dev, for her paper 'Financial Accounts - What They Do and Don't Reveal'; the confederation of British Industry for the article 'The Independent Director' by Bob Tricker from the CBI Review, winter 1978-79; C.R.J. Foley and the editor of The Accountant's Magazine (the journal of the Institute of Chartered Accountants of Scotland), for the article 'Corporate Objectives: the Key to Financial Reporting', March 1979; Guardian News­papers Limited, for the article 'Too Much Power at the Top?' by Kevin Page in the Guardian, 22 May 1978; Industrz'al Relations Journal, for the article 'A Question of Disclosure' by Arthur Marsh and Roger Rosewell, summer 1976; Journal of Contem­porary Business, University of Washington, for the article 'Analyzing Corporate Social Performance: Methods and Results' by Lee E. Preston, winter 1978; and Charles E. Medawar and the editor of The Accountant's Magazine (the Journal of the Institute of Chartered Accountants of Scotland) for the article 'What is Accountability?', November 1978.

Vlll

Notes on the Contributors

Barry Barker, M.B.E., M.A., F.C.I.S. has been the Secretary of the Institute of Chartered Secretaries and Administrators since 1976. He was educated at Ipswich School and Trinity College, Oxford, and his past appointments have included those of Secretary of The Metal Box Company of India, Secretary of the Shipbuilding Industry Board and Secretary of Pye Holdings Ltd.

Lord Carr of Hadley, M.A., F.I.M., was elected to Parliament as Conservative member for Mitcham in 1950 and held various appointments during his parliamentary career, including Secretary of State for Employment (1970-2), Lord President of the Council and Leader of the House of Commons (1972) and Home Secretary (1972-4). He was created a Life Peer in 1975. He has held various directorships and public appointments and is currently Chairman of the Prudential Assurance Company Ltd.

Professor Susan Dev, M.Sc., F.C.C.A., was appointed in january 1979 to the Chair in Accounting at the London School of Economics and Political Science. She is the first woman to hold such a post in the UK. In 1965 she became a member of both the Association of Certified Accountants and the Institute of Taxation, gaining distinction in the final examinations of both bodies.

C. R. J. Foley, M.A., C.A., A.C.M.A., J.Dip.M.A., is a partner in Binder Hamlyn, Glasgow. He has also held managerial posts in the manufacturing and service industries.

Sir Arthur Knight, B.Com., has held appointments as Director and Chairman of Courtaulds Ltd and non-executive Director of Pye Holdings Ltd, Rolls-Royce Ltd, and Richard Thomas and Baldwin Ltd. He has served as Member of Council of Manchester Business School and on the Court of Governors of the London

IX

X Notes on the Contributors

School of Economics and has held many other public appoint­ments. Recently, he was Chairman of the National Enterprise Board.

John B. H. Jackson, B.A. LL.B., was called to the Bar in Inner Temple after having obtained B.A. and LL.B. (Cantab.) degrees. He has spent most of his working life with the Philips Industries Group and was appointed Secretary of the Company in 1966 and Director in 1970.

Peter McGregor, B.Sc. (Econ.), C.Eng., F.I.E.E., M.B.I.M., M. Inst. M., Companion of the Institute of Production Engineers, has held various appointments with Ferranti Ltd, during the period 1950-74, including General Manager, Power Division and Director Industrie Elettriche di Legnano (Italy), and is currently Secretary General of the Anglo-German Foundation for the Study of Industrial Society.

Arthur Marsh and Roger Rosewell are Fellows of St Edmund Hall, Oxford. Arthur Marsh is Senior Research Fellow in Industrial Relations and is the author of various publications in his field. He is a Member of the British Sociological Association and was British Steel Corporation Fellow (1971-3).

Charles E. Medawar, worked for five years as a Research Officer at the Consumers' Association, and, having worked for a further year at Ralph Nader's Centre for the Study of Responsive Law, he returned to Britain to set up Social Audit and the Public Interest Research Centre. His publications include The Social Audit Consumer Handbook (1978).

Kenneth Midgley, B.A., B.Sc. (Econ.), Ph.D., F.C.I.S., is Principal Lecturer in Finance at Brighton Polytechnic. He is a partner in Carter, Midgley and Company, a small firm of publishers, and his early career was in banking and catering management. He is the author of many articles and books, including Business Finance and the Capz"tal Market (with R. G. Burns) (1979), and his book Companies and their Shareholders: the Uneasy Relationship, based on his thesis for his London University doctorate, was published by the Institute of Chartered Secretaries and Administrators.

Notes on the Contributors Xl

Kevin Page, B.Sc. (Econ.), M.A .. , is Financial journalist with the Guardian. He read International Politics at the London School of Economics and took his Master's degree at the American University, Washington, DC. Prior to joining the Guardian, he worked as financial journalist with the Glasgow Herald.

Michael J. Page, M.A., F.C.A., read mathematics at King's College, Cambridge and trained to qualify as a Chartered Accountant with Coopers and Lybrand. He won the Walter Clifford Northcott Prize at Part I of the Institute's examinations. At present he is Lecturer in Accountancy at the University of Southampton.

T. J. Palmer, M.A., who was educated at King's School, Bruton, and Trinity College, Cambridge, joined Legal and General in 1955. In 1964 he became Assistant Company Secretary and, in 1969, Assistant General Manager (Planning). He was appointed General Manager (Administration) in 1972 and is now General Manager (International) and a director of Legal and General Group. He is past Chairman of the British Insurance Association's University Liaison Panel.

Lee E. Preston, is Melvin H. Baker Professor of American Enterprise and Director of the Centre for Policy Studies, State University of New York at Buffalo.

Bob Tricker, M.A.,J. Dip.M.A., F.C.A., F.C.M.A., is Director of the Corporate Policy Group, Oxford and was previously Director of the Oxford Centre for Management Studies. He is a graduate of the Harvard Business School, and his publications include The Accountant in Management and The Independent Director. His industrial experience includes five years as financial controller with Unbrako Ltd.

Harold M. Williams is Chairman of the United States Securities Exchange Commission. His past appointments have been Member of the Advisory Committee on Corporate Disclosure (1976/77), President and Director of Investments and Securities Inc (1961-6), Director of ARA Services Corporation, Trustee of the Aerospace Corporation and Member of the Committee for Economic Development for the State of California. From 1973 until1977 he was Energy co-ordinator of the City of Los Angeles.

Introduction

Accountability is a difficult word to define. Like an alpine view, it takes on a different appearance when seen from different angles and in different lights. This mutability does not, however, inhibit the efforts of the authors in this book of readings in their attempts to achieve a satisfactory definition. Each author in this series does look at the subject from a different angle, though the 'views' are grouped under broad headings according to the different aspects of accountability under consideration.

The first group of essays (Part I) is concerned with the objectives of corporate bodies, their responsibilities to the various participants, and board structures which would operate in the best interests of participants as a whole. The second group (Part II) focuses on the problem of accountability to shareholders. As institutional investors have gradually increased their equity holdings to the point where they now hold over half the ordinary shares of British quoted companies, the problem becomes quite complex. On the one hand it becomes even more difficult and impractical for the still very numerous individual shareholders to exert any degree of control via the voting mechanisms (though if facilities were made available for them to elect their own representatives things might be different) and, on the other hand, institutional shareholders, being few in number and largely concentrated within the City of London in this country, have considerable power within their grasp so that they are now potentially narrowing the gap between ownership and control. There is thus not only a problem of accountability of the board to different types of shareholder, but also the problem of the accountability of institutional shareholders, with considerable influence and potential control, to all other participants.

An important aspect of accountability discussed in the third, fourth and fifth parts of the book is that of conveying information concerning the company from the board of management to those to whom the company is to be held accountable. At first sight the

xiii

xiv Introduction

quite detailed contents of the modern company report and accounts appear to provide a very adequate amount of informa­tion for shareholders. The limitations of such information and the kind of information which would be more useful, both to shareholders and to executives, who may wish to draw on it for decision-making purposes, are matters discussed under the heading, 'Company Reporting and Accountability' (Part III). To the extent that a company should be held socially accountable for its activities and that it should be accountable to employees, different forms of reporting may be necessary, and these and related issues are discussed in the fourth and fifth group of essays (Parts IV and V). The concluding essay of the series considers problems of accountability peculiar to the small company. Here the accent is on relaxation of accountability to the shareholders but a tightening-up of obligations to creditors.

Consumers are not accorded a special place in this book because the very survival of a company is dependent on its being accountable to consumers and this reduces the need for special protection provisions. Moreover, a full discussion of accounta­bility to consumers leads to economic and legal areas of study which are well covered elsewhere.

An oblique approach to accountability is to consider different forms of wrong-doing by companies and those who control them, perhaps in descending order of iniquity. We could then assess which forms of irresponsibility are the most dire in their consequences and thereby the relative need for accountability of different sorts. This approach is superficially attractive in its logic, but difficulties arise because of the different sizes and structures of companies and their various objectives, in terms of the goods and services they produce. Thus, accountability to consumers assumes an importance beyond the survival of the company when the company is producing, say, drugs which could kill or maim. Accountability to the public at large is most serious where the company's activities conflict with the public interest, as, say, when an air travel company inflicts an unacceptable level of noise on a community. In contrast, a company whose main purpose is the hiring out of formal and academic attire may be thought to be potentially innocuous, and, indeed, a great many companies operate with little cause or opportunity to commit mayhem, defraud or injure consumers, or create a public nuisance.

Introduction XV

One form of irresponsibility which could be perpetrated by any type of company, large or small, ·is a failure of duty towards the participants of the company. The legal implications of this statement - concerning the exact scope and meaning of duty, what amounts to breach of duty, who exactly are the participants, and what are their rights - could be developed at length. What is implied here though is simply that the company, particularly those who immediately control it, may behave dishonestly and/or inefficiently to the detriment of any or all of the creditors, shareholders and employees who may, as a result, respectively remain unpaid, be inadequately rewarded and lose capital, or lose their jobs.

It is the need for an adequate form of accountability to protect some or all of the participants from inefficiency and dishonesty which exercises the minds of most of the contributors of these essays. The conclusions reached by these authors range from a general tightening-up of existing procedures, with greater reliance on non-executive directors on the board, to the still fairly radical concept of the supervisory board on which sit representa­tives of shareholders, employees, and, possibly, other interests.

Perhaps, though, it will be the questions raised as much as the conclusions reached which will excite the interest of the reader. A fundamental issue is that of the extent to which a company should be accountable, in the sense of rendering a report to somebody, rather than merely behaving in a responsible manner. Once accepted that in certain matters companies should be accountable, then the manner in which they are accountable and the matter of to whom they should be accountable become key issues. Some questions here are: How useful are reports and annual accounting statements? Can they be misleading? Is reporting to a general meeting a discipline or a semblance of accountability? Does the presence of non-executive directors on the board enforce an appropriate degree of accountability? Is that presence divisive or non -divisive and if the latter can that presence amount to accountability? Alternatively, if the manage­ment board is made directly responsible to shareholders, whether institutional shareholders or not, can anyone not on the management board know enough about the internal and technical affairs of the company to ask appropriately penetrating questions and enforce effective ultimate control? If not, could a body of management experts be set up to undertake such a task?

XVl Jntroduc#on

Some of the foregoing questions lead on to issues of motivation of those who are to enforce accountability. There are widely diverging views among the authors on this. Would an external agency acting on behalf of shareholders generally, and available to bring pressure on any company in justifiable cases, do more for shareholders than they could do for themselves if provided with appropriate machinery? In particular, could such an agency do more than institutional shareholders, if they use their full strength? What are the merits of Harold Williams' preference that those exercising ultimate control should be completely independent of management, to the extent that they may not even be connected with bankers to the company? As for those who think that shareholders have the strongest motivation to promote profitability and thereby efficiency, there is some difference of opinion as to whether the investment manager nominees of institutional investors, who are not personally investors in their own right, can be left to enforce accountability on behalf of other participants. Indeed, if ultimate control does fall completely into the hands of institutional shareholders, would there then be a danger that the State would step in to control the controllers, thereby stifling private enterprise?

These and many other questions are discussed in this book. There is no unanimity as to solutions among the authors, though the connection between the objectives of profitability, company survival and efficiency provides a binding theme for many of the arguments. There is unanimity as to the need to find means of ensuring that companies are properly accountable in the pursuance of such objectives. Indeed, the competitiveness and prosperity of industry, the willingness of individuals and institu­tions to finance industry, the co-operation of workers at all levels, and the support of the public generally, may be closely dependent on the degree to which companies are appropriately accountable in the different spheres. That more can and should be done to achieve the right level of accountability - no more and no less - is the central theme of this book. It is hoped that these essays will stimulate both thought and action in this vital area.

Finally, a few words of grateful thanks are due to the authors and original publishers of these essays. Much of the value of a book of readings is to be found in the diversity of thought which flows from authors with different backgrounds of learning and

Introduction XVII

experience. The combined experience and scholarship which is represented in these essays is formidable indeed, for in addition to the academics who have undertaken research in this field, the authors include company chairmen, directors and executives, the Secretary of a professional body deeply concerned with company administration, a financial journalist, the Chairman of the US Securities and Exchange Commission, a former member of Government and the recent Chairman of the National Enter­prise Board. If this smacks of name-dropping, it should perhaps be added, bearing in mind the subject-matter of the book, that all authors may be assumed to be, or have been, investors, employees, consumers and members of the public.

KENNETH MIDGLEY