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Corporate Governance – Lots of activity, no action

Process is the bindweed, the giant Japanese hogweed, of corporate governance.
Relax your vigilance for a moment and it will strangle your whole business. The
bright intelligent things that can be done within a business will cease. Forget
judgement. You will be lucky to have a coffee machine that remains working.

Take Unilever. Look at its most recent corporate governance disclosures. On
page 53 of its annual report, it states: “The board level changes lead to a
reduction in the number of executive directors. Further information is given in
board changes on page 70.” So turn to page 70. “The changes to our board
structure described on pages 8 and 53 result in a smaller board,” it says.
Unilever is not being wilfully obstructive or obtuse, but someone has filled out
the forms for that bit of corporate governance compliance without engaging brain
with process.

It is all around us. I had arranged a briefing with the technical chief of
one of the Big Four firms the other day. We chatted over the phone at 8.30 in
the morning. Yes, we were still on for the mid-morning meeting. But come the
time he was still stuck in a car somewhere and we spoke by phone. “We could have
done this at 8.30 this morning,” he said ruefully. One of the reasons he is so
frantic is that, with the threat of so much regulatory consequence weighing
heavy on the firms’ clients, every decision on any accounting policy is being
referred up to him for formal agreement. There are only so many hours in the

At the same time the feedback from the first year of Sarbanes-Oxley in the US
is that the time it takes to get a response from an auditor on any specific
question has grown enormously. CFOs in the US are complaining massively over the
fact that once upon a time you phoned the relevant partner and a decision was
more or less instantaneous, whereas now it can take weeks. And CFOs don’t have
weeks when the legislation can potentially lead to a CEO or CFO getting a longer
jail sentence than if they had committed second-degree murder.

It is process which is causing this. If the best minds in the company are
preoccupied with dealing with process, there is no chance of a swift and
valuable piece of judgement or advice being available. The equivalent of the
forms will still be in the process of being filled out. It is not just within
business. Society does seem, at times, to be slowing to a halt as the paperwork
is dealt with.

And the pressures continue to build. In late June, the audit inspection unit
of the UK regulator – the Professional Oversight Board for Accountancy (POBA) –
reported on its first review of audit quality at the Big Four firms. In its
section dealing with documentation it refers to, among other things: “A failure
to include certain important documentation, on which reliance has been placed,
on the audit files so that it is necessary to collate information from other
sources within the firm to demonstrate that appropriate work was undertaken.”

The unit will be going back to the firms to investigate whether such lapses
have been dealt with. And how do you deal with it? You create more process to
make sure the documentation is up to snuff next time around. No one denies that
better documentation is required in such circumstances, but the result can only
be more process.

Unless this shift in the way that business works starts to move back to a
more effective system, there are going to have to be changes. And increasingly
we are going to see the audit and advisory firms involved less and less with
their clients. Companies are going to build up their own resources if they
cannot get timely and useful advice from outside. Financial reporting will no
longer be a partnership between external auditors and internal finance function.
Instead, it will be something which will be consigned to a process function
within the company.

Now it is the holiday season and all good financial directors will be heading
off to recline beneath the palm trees of the Maldives or hack their way around
the golf courses of Florida. It is time to think the unthinkable and free
yourself from the tentacles of process.

Sarbanes-Oxley and IFRS are here to stay. The important thing is to make year
two of both those monsters a time when you use them to achieve useful things for
the company. The fight back against process has to start now. Just keep your
mind focused on American lawyers. They refer to Sarbanes-Oxley as the ‘Send My
Children To Harvard Act’. Bastards.

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