Carillion and on and on…

UK regulators are still awaiting new powers from government to push on with reforming audit. A paper setting out the Financial Reporting Council’s policy plan for increasing competition in a “failing” audit market highlights a shopping list of powers the watchdog needs so it can get on with its job.

The FRC has made progress planning on a number of fronts but to make the measures stick, government needs to legislate.

Exasperatingly, the FRC is twiddling its thumbs waiting for powers so it can carry out market studies; monitor competition in the audit market; impose minimum audit committee standards; impose managed shared audits for FTSE 350 companies (the government has still to define “shared”); enforce operational separation of audit from non-audit services in large audit firms (OK, the Big Four are getting on with that themselves); and powers to intervene should one of the Big Four go belly up. The snarl up is beginning to resemble a Brexit lorry park.

On the FRC’s policy paper, executive director Mark Babington says: “One of the FRC’s strategic objectives, set out in its three-year plan, is to create a more resilient audit market, and these proposals are a road map to achieving that target.”

There are a lot of powers on hold here, in a process that was triggered by the collapse of Carillion back in January 2018. So, only five years ago. Put the kettle on, Mark: you may be in for a bit of a wait. Certainly long enough to study that road map.

The missing link

So, we all like a good CEO story and we definitely like an Elon Musk story. So here’s a combination. Cambridge University psychology prof Bence Nanay tells us the idea that CEOs have transferable leadership skills that enable them to switch from one sector to another with little or no friction is a “myth”. And Musk may be the proof. Moving from lathes to lingerie, from software to sportswear, or from motors to social media is no guarantee of success.

Recent research, writes Nanay in Psychology Today , suggests “insiders” do better than “outsiders” as CEOs. Only those who transfer from an industry “sufficiently similar” to the one they’re joining make a proper go of things.

Therefore, Nanay writes, success at Tesla is no indicator of being good at Twitter. “Just to mention the most salient fact,” writes Nanay, “Tesla sold no advertising, whereas 90% of Twitter’s revenue is from advertising. Being good at running the former has little to do with being good at running the latter.” Boards seeking CEOs take note.

Asos tightens belts

Times are hard and sales are difficult to come by, so it’s worth changing the goalposts for chief executive bonuses, right? That appears to be the line at online retailer Asos where, the Financial Times reports, adjustments have been made to the bonus plan.

According to the FT, revenue growth will now account for only 15% of CEO José Calamonte’s bonus, instead of 30%. The fresh-off-the-presses annual report indicates that executive bonuses have not been paid for the year ending August 2022. A lowered bonus bar may indicate hard times ahead.

An innovation conundrum

A board level “appreciation” is one of the key components of ensuring corporate governance works to support innovation instead of stifle it, according to a new report from the Institute of Directors.

The IoD says essential ingredients for governance to boost innovation include integration of innovation into a company’s “processes and activities” and, as you might expect, having a culture that “encourages” innovation.

But the sting in the tail comes from Roger Barker, director of policy and corporate governance at the IoD, who warns policymakers and watchdogs about the risk of suppressing innovation with too many rules and regs.

“The cumulative effect of regulation on boards has had indirect adverse effects, with some boards spending a disproportionate amount of time dealing with compliance issues at the expense of discussing strategy and innovation,” says Barker.

“It also influences the selection of new board members, favouring those who may be risk averse by nature. This had contributed to the stifling of innovation in the longer term.” Ouch!