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Corporate governance – “It stands to reason”

There is an assumption that accountants will always insist that their heads will rule their hearts when it comes to policy or decisions. The perennial exception to this rule is the failures of the six major UK accounting bodies to manage a merger between themselves. The vast majority of financial directors are trained by the bodies, but the accumulated wisdom and ability of mature financial directors never seems to come to the top when mergers are mooted. There is an inexorable logic to the notion that fewer than six competing bodies would serve the overall profession better. It should be somewhat cheaper as well.

But time and again whenever mergers are proposed they tend to founder and, in the end, it is down to the assumption that the logic of the proposals will be unanswerable. As the unruly hero of the ‘William’ books always used to say when asked to justify his latest escapade: “It stands to reason”. Last year, when I was researching the book celebrating the 150th anniversary of ICAS (Institute of Chartered Accountants of Scotland), I found definitive evidence in the archives. On the 19 January 1900 a past-president of the Scots accountants spoke at the annual London dinner and referred to the illogicality of having separate accounting bodies within Scotland and across the border in England as well as different frameworks to the legal professions. The account of his speech concluded: “The present diversity was an absurdity, which he ventured to say would, before the close of the twentieth century, have passed away”.

Well, here we are, around 105 years later and the diversity and the absurdity has not been resolved. The present efforts to pull together the ICAEW, CIPFA, the public sector accounting body and CIMA, the management accounting body, look to have foundered. Meanwhile, ICAS, the Irish ICA and ACCA, the certified accountants, look on. If anything, the absurdity is getting worse.

The reasons why this is so are many. But fundamentally, it is the heart over the head. In 1965, a comprehensive effort at merger of all six bodies was made. The problems, the then secretary of ICAS Victor McDougall, later said, “were found to be almost awe-inspiring in their complexity”. With hindsight he reported that: “One should not be surprised that the resulting plans were complicated, largely misunderstood by members generally, and a failure.”

His words should probably now be emblazoned above the desks of all chief executives of accounting bodies. Since that effort forty years ago no one has attempted to put all six bodies together, however logical that might seem. But that has not stopped people trying. A sensible framework was established in 1989 for a merger of the English and Scottish ICAs. But that, despite offering the Scots enormous advantages, was voted down by the Scots.

One of the problems with mergers like these is that they do not function like mergers in the rest of the business world. They are often just nasty takeovers dressed up as benign mergers, but they require the approval of the members of the organisations rather than institutions. And there is a paradox at the heart of the way in which the accounting bodies call upon the loyalty of their members.

At points when mergers are not on the horizon they make great play of their strengths and independence as individual bodies. And when a merger plan is hatched they have to argue that they would be better off diluting those strengths and compromising the independence.

The members also tend to take a dim view of their accounting bodies. They may be proud of them, but they want them for occasional amounts of direct help and to maintain the reputation of the profession generally. But professional bodies have a death wish of perpetually pestering their members in an effort to show relevance and increase membership participation. They think this makes members feel warm about their professional bodies. It does not. Members chuck the exhortations in the bin.

Crucially, this increases the likelihood that the majority of members will ignore exhortations to vote. The door is thus opened to allow an ever-present rump of vocal and irritable members to exercise disproportionate power and stymie the usual two-thirds majority required.

Trying to make the UK’s accounting bodies more effective and more efficient through mergers will always founder under present systems. But few learn this lesson. As an old friend put it to me recently: “Every ten years or so the ICAEW simply feels the urge to go out and blow £1 million on a failed merger attempt”.

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