Governance in Small NFPs: Request for Focus Group Participants

dreamstime_s-govResearchers from Macquarie Unversity and the University of Western Australia are seeking Directors and CEOs of small Not-for-profit (NFP) organisations (<$10m revenue) for a study focused on governance issues in practice.

The aim is to develop resources and principles for board performance that support better practice board performance under contemporary funding models and contexts.

Our team is seeking participants for 1.5hr focus groups on Wednesday 15th March, to be held in the Sydney CBD (near Wynyard Station).

Groups will be run at two times:

  • 8am to 9:30am
  • 12:30pm to 2pm

The focus groups will be hosted by Professor David Gilchrist (University of Western Australia), Professor Nonna Martinov-Bennie (Macquarie University) and Dr Dale Tweedie (Macquarie University).

We would like to discuss your experiences working on or with a small NFP board, and your views on what governance principles, measures or guides you use or might find useful. This information will assist in the development of practical governance principles and tools.

All individuals and organisations participating in the study will remain anonymous. Participation is entirely voluntarily. No remuneration will be provided, but summarised findings of the study will also be made available to all participants on request.

If you are interested in participating, please e-mail Dale at dale.tweedie@mq.edu.auwith a brief statement of your role and experience and which focus group time would suit you best.

The ethical aspects of this study have been approved by the Macquarie University Human Research Ethics Committee. If you have any complaints or reservations about any ethical aspect of your participation in this research, you may contact the Committee through the Director, Research Ethics (telephone (02) 9850 7854; email ethics@mq.edu.au). Any complaint you make will be treated in confidence and investigated, and you will be informed of the outcome.

Who Should Be A Director?

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dreamstime_s_51900283Directors are critical to organisations’ long-term success. Regulators and other stakeholders are also increasingly looking to directors to provide ethical corporate leadership as well as strategic oversight. But how do organisations – or potential directors – decide who should fill this role?

A recent report by Mr Patrick Gallagher (FCPA) and Prof. Nonna Martinov-Bennie – Who Should Be A Director? – addresses this question. The report is the first in a new series of thought-leadership papers by IGAP and CPA Australia on contemporary national and international governance issues.

The report is a primarily a guide to, and discussion of, the 3rd edition of the Australian Security Exchange’s (ASX) Corporate Governance Principles and Recommendations (ASXPR) (2014). The report covers three main areas:

  1. The main principles of ASXPR2014, with a comparison to international governance standards;
  2. The skills and characteristics directors and boards need, including character, knowledge and formal ‘independence’ requirements; and,
  3. The benefits of board diversity.

Understanding ASXPR (2014).

ASXPR 2014 applies to all listed entities in Australia. It has eight principles and 29 more specific recommendations, with additional explanation and recommendations in accompanying commentaries.

According to Gallagher and Martinov-Bennie, the most important ‘foundational rules’ about should be a director are contained in ASXPR Principle 2, which emphasises that:

a listed Entity should have a board of an appropriate size, composition, skills and commitment to enable it to discharge its duties effectively.

This principle requires that all directors bring skills, character and insight that enable the board to meet its responsibilities.

Director skills and characteristics

While any person can legally be a Director, Gallagher and Martinov-Bennie emphasise that good corporate governance requires close attention to the skills of both individual directors and the board as a whole.

ASXPR Principle 1 provides further insight into these skills. Gallagher and Martinov-Bennie highlight the value of the commentary to Principle 1, which ‘effectively states a range of expected functions that directors must fulfil’.

This commentary indicates attributes a Director must bring, which include leadership, strategic understanding and financial knowledge, and also the personal skills and character to challenge powerful individuals or interests when required.

Gallagher and Martinov-Bennie also outline important formal requirements for directors to be ‘independent’. However, they stress that – in itself – being independent is not enough to be a good director: Directors must also bring the right mix of skills, knowledge and capabilities.

Benefits of board diversity

ASXPR2014 (1.5) recommends that boards should have a diversity policy, disclose this policy and report on their performance in encouraging diversity.

Gallagher and Martinov-Bennie state that the wording of this recommendation implies that ‘gender diversity is at the heart of ambitions for new corporate governance thinking within Australia’.

While some may view diversity as an imposition, Gallagher and Martinov-Bennie highlight key benefits of greater gender diversity that have emerged from extensive research. These benefits can include:

  • Improved board performance;
  • A better mix of leadership skills; and
  • Access to a wider talent pool.

Final thoughts: Setting the tone

So ‘Who should be a Director?

ASXPR2014 sets out key principles that ASX-listed boards must understand and apply. But Gallagher and Martinov-Bennie also observe that ‘every corporation is different and faces different circumstances from time to time’.

Hence, they argue, the good director not only understands the fundamental principles of good corporate governance, but is also attentive to the ‘needs of the corporation, its shareholders and other stakeholders’.

For Gallagher and Martinov-Bennie, two key principles encapsulate the approach that directors and boards should be able to enact:

  1. The board must set the tone for the whole corporation; and
  2. The tone needs to ensure an ethical and responsible organisation.

Prospective directors need to ensure they have the skills and knowledge to meet these challenges.

Will Integrated Reporting improve sustainability? Part III – Integrated Thinking

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dreamstime_s_33567037Dr Dale Tweedie and Prof. Nonna Martinov-Bennie.

This is the third of five blogs on whether and how Integrated Reporting might contribute to sustainability.

In this blog, we consider the International Integrated Reporting’s Council’s (IIRC) objective of promoting ‘integrated thinking’.

In a sense, integrated thinking is more fundamental to Integrated Reporting than the final report itself, because the IIRC has defined Integrated Reporting as ‘a process founded on integrated thinking’.

In other word, the primary function of the Integrated Report is to communicate the changes in outlook and organisational practice that Integrated Reporting processes should have generated.

What is integrated thinking?

The IIRC defines integrated thinking as ‘the active consideration by an organisation of the relationships between its various operating units’.

As we explore in a recent article, integrated thinking has two main parts:

  1. Understanding and dialogue that stretches across an organisation’s operating units. For example, reporting and assurance on carbon emissions in mining operations might facilitate integrated thinking by requiring the accounting team to collaborate with scientific experts to measure and document carbon output.
  2. A more holistic understanding of how the organisation interacts with internal and external stakeholders. In particular, the IIRC claims that integrated thinking involves a ‘fuller consideration of stakeholders’ legitimate needs and interests’.

This suggests that integrated thinking should change both how managers see their organisation and how their organisation functions. Indeed, these two types of changes are inextricably linked: Integrated reporting should help managers better understand their organisations precisely because it stimulates more open dialogue across its constituent parts (or ‘silos’) and external stakeholders.

What are the implications for sustainability?

Early research has questioned whether integrated reporting is so far creating the type of changes the IIRC envisages. For instance, Stubbs and Higgin’s (2014) study of early adopters found incremental changes to sustainability reporting practices, rather than the more extensive and transformative organisational changes that integrated thinking seems to imply. A recent IIRC report also finds incremental changes in many organisations, but emphasizes the potential for integrated thinking to emerge over time. One of the IIRC’s participants suggests that – in practical terms – integrated thinking typically develops through producing multiple integrated reports.  

Nonetheless, it is possible to identify both positive and negative aspects of the IIRC’s approach to integrated thinking for sustainability.

POSTIVE: The IIRC’s emphasis on Integrated thinking is entirely consistent with its focus on improving how organisations communicate. Since a key part of integrated thinking is understanding other stakeholders’ views and interests, integrated thinking might improve organisations’ awareness – and the awareness of managers in particular – of sustainability issues.

NEGATIVE: Integrated thinking is a relatively weak accountability mechanism, because whether integrated thinking is occurring, and how well, cannot be directly disclosed, measured or audited (despite the IIRC’s growing focus on assurance). For example, integrated thinking may prompt management to better understand the ‘legitimate needs and interests’ of their organisations’ workers. However, it is difficult to measure or enforce this understanding, especially compared to the Global Reporting Initiatives requirement for organisations to report against International Labour Organisation benchmarks.

Moreover, and as previously discussed, the IIRC is yet to clarify what concrete processes organisations should use to engage their stakeholders. Hence, more could be done to explain what management can do to gain the broader understanding of stakeholders’ views and interests that integrated thinking entails.

In our next blog, we will consider in more detail to what extent Integrated Reporting might improve sustainability by capturing stakeholders’ ‘legitimate interests and needs’ better than alternative reporting frameworks.

As always, any comments or thoughts most welcome. If you wish to be e-mailed future blogs, please subscribe to this blog.

Economic Inequality: Where are the accountants?

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dreamstime_s_53174060Dr Dale Tweedie and Dr James Hazelton

Rising inequality in income and wealth is one of the biggest contemporary social and economic concerns, but accountants have been surprisingly quiet on this issue.

Concerns over economic inequality

The growth of economic inequality is increasingly a topic of public debate in countries like the United Kingdom, the United States and Australia.

Numerous influential – and typically conservative – economic institutions have now identified growing income inequality as a critical economic and social issue. The World Economic Forum listed deepening income inequality as number one on its top ten trends of 2015, and describes growing inequality as a threat to global economic growth, social cohesion and sustainability. The International Monetary Fund has reported that inequality in developed nations is at its highest level in decades, with ‘significant implications for growth and macroeconomic stability.’ There is also growing evidence of serious and widespread social harms from economic inequality, with economic inequality being linked to social ills ranging from poor physical and mental health to drug addiction to rates of violent crime.

Public debates over inequality have created an all too-rare cross-over between academic research and public concerns. French economist Thomas Piketty’s 685 page treatise on economic inequality was a surprise hit of 2014, reaching the top of the New York Times’ best-seller list. While Piketty’s analysis of the causes of economic inequality is hotly disputed, there is little challenge to his finding that income inequality has sharply risen in most developed nations since the 1970s. For example, in the United States, Piketty reports that the top decile’s share of national income grew from just under 35% in 1970 to almost half by 2010.

A role for accountants?

Despite growing evidence of the economic and social costs of inequality, accountants have had little involvement in either public or academic debates. However, as we observe in a recent article (50 free e-copies here), there are key contributions that accountants could make to public discussions

First, as Piketty and others have argued, both public deliberation and informed public policy about economic inequality requires greater global transparency about who owns economic wealth and receives economic income. Whatever else it may be, accounting is a vehicle – albeit imperfect – for understanding and promoting transparency. Accountants might therefore add their voice to calls to improve public access to economic information, such as in the recent debate over whether taxes paid by resource companies to governments should be disclosed.

Second, key debates about the equity of income distribution, such as ongoing critiques of the pay of executives (especially CEOs), are closely connected to corporate governance. While economists have proposed macro level policies like a progressive tax on capital (Piketty) and a minimum basic income, seriously addressing inequality will invariably need to address how resources are managed and distributed within corporations. Accountants have the expertise to evaluate existing corporate accountability mechanisms and propose workable alternatives. These proposals could complement the broader macroeconomic agenda that economists like Piketty put forward.

What do you think?

Is there is a role for accountants on economic inequality? And if so, what do accountants – or accounting – have to say?

Accounting for inequality will be the subject of a special session of the Australasian Centre for Social and Environmental Accounting Research (CSEAR) Conference, which will be held at Macquarie University, Sydney in 2015, and also a special section of the Accounting, Auditing and Accountability Journal.

Safety at Work: Policy meets performance

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???????????????????????????????????????????????????????????????????????????????????????????????????????????????????????discussion of Dr Sharron O’Neill’s research with Safe Work Australia in late 2014 – by WHS consultant Kevin Jones – highlighted how better WHS accounting might improve both work, health and safety (WHS) policy and performance.

Jones reported on the 2014 annual Australian Council of Trade Unions (ACTU) conference on occupational health and safety, which was held in Melbourne last October. The conference was addressed by the ALP Shadow Minister for Employment Relations: Brendan O’Connor MP.

According to Mr O’Conner, the Royal Commission into the Home Insulation Scheme risks distracting attention from broader deficiencies in the WHS laws that should ‘protect the interests of working people, particularly young workers’.

Whether legal reform can improve WHS outcomes is a matter of debate. Jones’s view is that the needed changes are:

unlikely to come through laws, particularly as OHS/WHS laws remain a State responsibility. Change will need to be attempted through modifying the public services’ processes of consultation and collaboration of safety-related matters.

However, the Shadow Minister also discussed the economic argument for improving WHS policy and performance, which suggests that WHS accounting has a critical role to play:

If you look at the costs that are borne by a community because of bad health and safety laws, on economic grounds you win the argument, leave aside the fact that you’ve torn a family or community apart because of injury or death.

If the economic grounds of WHS are indeed central to the public policy argument, then accounting needs to be able to bring the costs of WHS into both public policy discussions and organisations’ reports in a clear and comparable way.

As Dr O’Neill’s presentations on WHS reporting have shown, both financial and non-financial accounting has some way to go to adequately recognise either the community or organisational costs of WHS practices, or to effectively communicate good WHS practices to stakeholders.

But if the current standard of WHS reporting is part of the problem, then new WHS reporting mechanisms, which Dr O’Neill’s research is helping to develop, have the capacity to be an important part of the solution.

For more information on this research, or on improving WHS performance in your organisation, contact Dr O’Neill at: sharron.oneill@mq.edu.au.

Learning the Lessons: Alan Cameron on Audit Committees at the joint IGAP & CPA Australia Annual Forum.

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Camerron photoAlan Cameron AO used his address to the IGAP and CPA Australia Annual Forum in 2014 on ‘The evolving role of audit committees’ to draw lessons from the HIH and Centro cases for contemporary audit committees.

Cameron is current Chair of the ASX Corporate Governance Council and several large public companies, and also a former Deputy Chancellor of the University of Sydney.

He addressed the IGAP and CPA Australia Annual Forum in his personal capacity, drawing on his extensive experience to provide insights into what the Centro and HIH judgements reveal about good audit committee practice.

Cameron’s keynote address emphasised directors’ role in addressing governance issues early, rather than becoming ‘gatekeepers’ after the fact:

‘To me gatekeepers are auditors and regulators and other people who look at the results afterwards. I think directors are rather earlier in the line than gatekeepers’.

Looking back over the Centro and HIH cases, Cameron highlighted three key lessons for how boards and audit committees can best execute their functions.

  1. Keeping the board and audit committee separate

The HIH judgement underscored how audit committees need to meet separately from the board if the accounts are to be examined rigorously. In Cameron’s words:

‘If the whole board is involved in the work of the audit committee, the audit committee is not doing its job. Its job is to have a first detailed look and if the whole board is there all the time as a matter of routine that isn’t going to happen’.

‘To me a troubling aspect of the processes of the HIH audit committee was its practice of meeting before and effectively in the presence of the board. As a result of that practice it operated as little more than an extension of the board… I see that now all over the place’.

  1. Making time to review financial reports properly

Another impediment to rigorously examining the accounts is not allowing the audit committee and the board time to consider the financials properly. Among other issues, the HIH judgement criticised ‘the practice of the six monthly financial reports being considered by the audit committee, approved by the board and announced all on the same day’.

Not only do directors need time between meetings to adequately review the financial reports, they also need time to access the right people:

‘The audit committee should meet auditors in the absence of management before or in the course of each meeting or at least from time to time. The material should be distributed well in advance of a committee meeting’

  1. A clear audit committee charter

Cameron’s analysis of the HIH judgement also highlighted the absence of a clear role for the audit committee in that company. By contrast, a clear and detailed charter can help define and clarify the audit committee’s role:

‘The [HIH] charter is short and the terms of reference are couched in general language. They do not clearly define and establish the role and responsibilities of the committee and its relationship to the board. There is no evidence that the terms were reviewed annually to see that the committee in its role remained relevant to the needs of HIH. So I think the clear message from that is short might be dangerous. You do need to review it every year’.

Learning the Lessons

Although Cameron’s address focused on audit-committee practice, he also reminded participants of the whole board’s responsibilities under law:

‘Whilst an audit committee has an important role of monitoring oversight that is not to the exclusion of the role of a director to consider the financial accounts for him or herself’.

Cameron concluded by highlighting several practices that directors might adopt, including:

  • Insisting on reviewing paper copies of the reports;
  • Checking organisations’ systems for dealing with whistle-blowers; and
  • Paying attention to internal audit.

Ultimately though, Cameron stressed that there is no substitute for directors using their limited time to investigate the right issues:

‘We can set up all these structures, but if people don’t ask the right questions, and be appropriately sceptical, then you will still have these problems’

What does the market expect of audit committees? Michael Coleman at the joint IGAP & CPA Australia Annual Forum.

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MC picWhat does the market expect of audit committees? Increasingly, ‘everything’, Michael Coleman told the Annual Forum, held in October, 2014.

The joint IGAP and CPA Australia Annual Forum gathers leaders from industry, the accounting profession and academia to address key issues in contemporary governance and performance.

This year’s topic – ‘The  evolving role of audit committees’ – explored how audit committees are responding to rapidly evolving risks, liability, technological advancements and complexity in reporting, among a myriad of other challenges.

Coleman was Chair of the Financial Reporting Council (FRC), sits on a number of prestigious boards and has also had 30 years as an audit partner. He used his keynote address to highlight a potential expectations gap between what markets expect of audit committees and what directors can reasonably deliver.

Coleman highlighted several key challenges that audit committees are facing:

  • Changing expectations of regulators and the market; for example, that audit committees should be satisfied that auditors are doing their job or commenting on financial reviews;
  • A greater focus on risk; and
  • The proliferation of reports (e.g. Integrated Reporting).

A particular difficulty Coleman highlighted is the expectations for audit committees to form a judgement on audit quality:

“So whether it’s a good audit or not a good audit is a tough one and this is something that as audit committees we’re probably going to have to take a reasonable amount of time to consider.”

“We need to question amongst other things whether or not the auditor has been sufficiently sceptical. Now, how does an auditor demonstrate to the board that they’ve been sceptical?”

Coleman also highlighted how Australia has to some extent followed the United States trend of increasing the responsibilities of audit committees:

“In particular in my experience it’s become common for audit committees to approve fees over a certain level in relation to non-audit services provided by the auditor and audit committees have taken on a far more extensive role in relation to overseeing the financials.”

However, unlike in the United States, Australia still sees the audit committee as a sub-committee of the board:

“It’s not a separate creature, it’s not a separate animal and so therefore, and especially following Centro, we have the situation where boards, very, very rigorously in my experience, are actually as a whole considering the financials.

“The audit committee might look at the detail, but then the board as a whole still wishes to satisfy itself that it’s actually doing the right thing.”

Finally, Coleman observed how the expectations on audit committees would continue to evolve in the future with the release of a new auditing reporting standard in June 2016, which “will require the auditor’s report to include commentary on their key audit matters”. The new standards are likely to some interesting discussions, and to some changes to the dynamic of the relationship between the auditor and audit committee.