“…… because they still do the same thing: they primarily serve shareholders”

Dame Vivian Hunt (McKinsey)
Dame Vivian Hunt (McKinsey)

Dame Vivien Hunt, until this year managing partner of McKinsey’s offices in the UK and Ireland, has written in today’s Financial Times on workplace diversity and equality under the heading “Change how boards work to achieve to true diversity”.

She asks why, when one third of the seats on the boards of FTSE 100 companies are now occupied by women, “those boards still look similar……still filled with people who have the same skills carved out of similar professions, networks and university degrees.”  Her explanation is that it is “because they still do the same thing: they primarily serve shareholders.”

I am pleased that one of the current leaders of the organisation where I started my professional career takes such an unambiguous and very public position strong position on both the composition of boards and their purpose.  Back in the 1980s, most of my colleagues were beholden to the orthodoxy of “shareholder value” and, although there were a small number of senior non-white consultants (including Keniche Ohmae, who led the Tokyo office, and Rajat Gupta, who became an office managing partner shortly after I left and subsequently global managing partner), the firm was anything but diverse.

Dame Vivien argues that “we need to find people who represent not only our investors but everyone else – from buyers to suppliers, to local communities, to our natural environment”.  Her use of language and her argument is not entirely clear here: her article could easily be interpreted as making a case for a board of representatives of stakeholders as opposed to a board that understands the broader mandate of the company and the need to take all stakeholders’ interests into account.

I have argued elsewhere against boards being composed of representatives of stakeholders.  As is implicit in Dame Vivien’s article, directors should have a duty to all stakeholders, because their wellbeing of all groups is critical to the wellbeing of the company.  Furthermore, in UK unitary boards composed of executives and non-executives, at the board may be the executive directors responsible for sales and marketing who should be the effective advocates for interests of consumers if they are fulfilling their role understanding and satisfying consumer needs.  Similarly, executive directors of workforce and of operations should be able to represent to colleagues, who may place a primacy on the interests of shareholders and customers, the interests of the people they recruit, support, and manage. Whether or not they are full board members, most large companies employ directors of communications and public affairs (or similar) whose primary role may be to advocate externally for the company but also represent to the board the case for taking into account the interests of local communities, the environment, politicians and lobbyists.

Her underlying argument for diversity on boards is compelling, not for the purposes of representation but because a genuinely diverse board “brings diversity of thought, skills and experience that will lead to better decision making”.  However, better decision making also depends on boards understanding their purpose of their companies, which is the sustainable creation of value for all those the company engages with, by producing goods or services more efficiently than would be possible in the absence of the company.  The purpose of the company is not the creation of shareholder value: shareholder value is the necessary return provided to shareholders in return for their investment and the sustainable creation of shareholder value is the result of serving the interests of all stakeholders.

I was thrilled to read Dame Vivien’s piece and pleased to see her continued work championing diversity in business.  But, notwithstanding my concern about some of the logical flow and detail in her argument, I was even more encouraged to see her set out the case that genuine diversity on boards will not be achieved until shareholder primacy is consigned to the waste bin.

So, auditors can say “boo to a goose”

With their decision to resign as auditors to Boohoo after seven years, PwC’s partners have at last shown that they are willing to say boo to a goose.  Ditto those at Deloitte, who quit as auditors to EG, the petrol station operator that has agreed to relieve Walmart of Asda (albeit with a big slug of vendor finance).  And their colleagues at Grant Thornton who, prompted by a probe by the Belgian tax authority, decided that they had had enough of dealing with Mike Ashley at Fraser Group (better known as Sports Direct). And those at EY, who quit from auditing Finablr in May over weaknesses in corporate governance and links to troubled NMC Health.

This is welcome news, given that the Financial Reporting Council observed in November last year in its annual “Developments in Audit” publication:

“Audits are not consistently reaching the necessary, high standards required to provide confidence in financial reporting.

“A series of high-profile corporate failures has dented trust in the profession and highlighted the need for improvement……

“Our 2018/19 AQR inspections show auditors still struggle to challenge management sufficiently.”

The final point is nothing new.  I worked alongside one of the big firms in the early 1990s, undertaking a review of branch level financial controls (which were not as good as they should have been) in the largest chain in a quoted retail group.  I recall attending a meeting alongside the audit partner with the chief executive, a “strong personality”, and observed him forcefully objecting to proposals for qualifying the accounts.  I understand his reasons for doing so, and have in the past made a similar argument to an auditor to persuaded them that my organisation passed the “going concern” test.  However, the shocking aspect of this case was observing the chief executive drawing the commercial value of the advisory business attention of his company to the audit firm to the attention of the audit partner, that the subsequent audit opinion was not qualified, and that the company collapsed within six months.

Kate Burgess, writing in the FT today, suggests that the decision by PwC is a calculated commercial decision rather than motivated by principle.  She suggests that as the revelations about Boohoo’s employment practices emerged the reputational risk from being its auditor exceeded the value of the £389,000 annual fee income.  This may be harsh, but few in the audit profession can forget what the relationship to Enron (although it may have amounted to more than guilt by association) did to Arthur Anderson, and noting that EY’s partners must remain anxious about potential impact on the company of its involvement with Wirecard.

Irrespective of the motivation, the decision of audit firms to step back from working with clients who do not have adequate controls and who may well operate unethically can only be welcomed.  And even if progress can seem glacially slow, the action of regulators in trying raise standards must be welcomed too.