What is Accountability? Definition and Case Studies

As with business ethics, coming up with a simple accountability definition is not as simple as it sounds. What do we mean by accountability? Does it relate to the owner-agent relationship? Does it indicate suppliers’ responsibilities to their customers for providing goods and services fit for use? Do employers feel accountable to their employees to maintain the financial health of the business? Does it cover the doctor-patient responsibility for honest diagnosis and admission of a wrong diagnosis or faulty execution of curative care? What about politicians’ accountability to their voters and constituents for carrying out the role they described in the prospectus that got them elected, and not indulging in covert extravagance at the taxpayers’ expense?

This article explores various aspects of accountability through a series of mini case studies which we hope will encourage you come to your own conclusions, though we do, of course, present our own conclusions and you'll find our accountability definition at the end of the article.

Examples of good and bad accountability

Accountability doesn’t mean deluging shareholders with quarterly information – even worse if the information is theoretical (eg mark to imaginary market for banks). In addition to potentially misleading shareholders, if bonuses are paid on these figures, it can lead to misguided payments to staff. All in the name of better accountability!

How do you assure accountability? Does it mean having lots of the great and good on the board, like RBS (a major UK bank), to ensure this respected institution stayed on the rails – it didn’t work out that way. Group think let them accept Fred Goodwin’s highly optimistic opinions on the deal with ABN Amro (2007) and led to a lack of proper due diligence on a catastrophic transaction, ultimately contributing to its nationalisation after the credit crunch.

The 2010 UK Code on Corporate Governance requires chairmen to report personally on how the principles have been applied. But a Grant Thornton Review of accounts of FTSE 350 companies produced to March 2011, published in late 2011 showed only 10% did so. How serious a breach of accountability was that? Probably, in practice, each case would need to be looked at on its merits to see whether the chairmen were actually as cavalier over their shareholders’ interest as is indicated.

Governance indices produced by Resources Global Professional showed that standards were higher for FTSE 100 companies than for the Eurostoxx 50. Except that the survey showed that the Euro companies performed better on ethical, social and sustainable issues. So which companies were more accountable? Or was it just down to better box ticking?

We are adamantly against box-ticking and believe such an approach should not be included in any accountability definition. On the other hand, adherence to our Golden Rules of Corporate Governance, of which the fifth and final rule concerns Accountability and the importance of communication, will ensure much easier compliance to the various codes of good practice, thus satisfying the box-tickers.

Use of mobile apps with iPads and other tablets is giving potential access to Business Information (BI) to company employees and to customers in an unprecedented way. Is this mobile BI the way to provide a new level of accountability to two of the key stakeholder groups and if so, why not to the third group – owners? Our accountability definition would certainly include using new technology to aid communication of important information and indeed one of our other business interests is in board communication using these technologies.

Consider the culture in Japan regarding accountability and trust. On the one hand there have been many stories after the tsunami about suppliers helping devastated businesses set up again purely on credit. Trusting in long-standing relationships, suppliers have provided goods on the understanding that the credit will be paid off and helped communities get back on their feet. On the other hand, in large company situations like Olympus, the boards have kept owners in the dark about business difficulties and minority shareholders don’t come into the equation at all.

Accountability seems to have been a problem at HP. As chief executive, Mark Hurd built up profitability and was turning HP into a safe generator of modest but reliable earnings. Value investors came on board. Hurd got fired for personal misdemeanours and was replaced by Leo Apotheker. He changed direction rapidly, stating he wanted to get out of PCs (a big cash generator) and paid over the top for Autonomy to get into new, high growth markets. The value investors’ views seem to have been ignored. So he was fired and his successor Meg Whitman reversed his policies re PCs – presumably she listened to investor views. Was she more accountable or just more savvy?

The Fair Labour Association (FLA) issued a long awaited report on Foxconn, the Chinese company which was a big supplier to Apple, but had been hit in recent years by well-publicised suicides among staff. The FLA report found lots of non-compliances with Apple’s own codes and Chinese labour laws and simultaneously, many labour rights organisation round the world made representations to Apple about rates of pay for their Chinese workers. Apple responded immediately with acceptance of the recommendations and initiated improvements in pay and working conditions. Costs increases were accepted by Foxconn (and ultimately Apple) and protests were quelled. Surely this is accountability par excellence, even setting an example which will reverberate around China industry generally.

Banking is an area where accountability is a particularly thorny issue, as we have already discussed in relation to RBS and warrants particular attention when considering an accountability definition.

Lloyds Bank is currently required to dispose of 630 branches as a penalty for accepting state financial support. It wanted to sell them in a package to Cooperative Group. Cooperative Group prides itself on its accountability as a mutual, but, having looked at its structure, the FSA as the regulatory body overseeing the disposal, was concerned about the amateurish nature of the Cooperative Board. This derives from its tiered voting structure which some have likened to that of the old Soviet Union. Consequently the FSA decided it would have to oversee the entire business, resulting in what would probably be a completely unacceptable capital requirement. But what does this judgement say about the accountability of the Cooperative Group to its members?

Banks have long been required to be accountable to the supervisory bodies like the FSA. But what about the shadow banks? The FSA would like to bring them under its purview if they conduct “banking” type activities, but what about activities not so describable? To whom are these firms accountable for safe practice other than their owners and does it matter? Or should they only be accountable to the free markets and allowed to go bust if they fail? These are the sort of complex questions that make a simple accountability definition challenging, to say the least!

The accounting bodies have tried to produce their own accountability definition, setting up reporting principles covering banks, in the International Financial Reporting Standards (IFRS) which have been criticised as being dangerously pro-cyclical. They have also led to paying of bonuses out of paper profits which were never realised (see above). What about the accountability here? Should the accounting bodies be taken to task - or the regulatory authorities for accepting these IFRS principles – in the light of the damage they arguably caused to the world economy?

And if the newly created Financial Policy Committee (FPC) in the UK is as interventionist in its approach to banks’ capital requirements as has been feared, what if it generates a 1970s style growth of state regulation which puts the UK banking sector at risk and with it the supply of adequate credit facilities. Who or what will power the hoped for growth of the economy out of recession. Who will be held accountable in the ranks of senior civil servants for the gross policy errors and botched execution?

If a bank (or any other institution deemed too big to fail) gets rescued by Government, ie the taxpayer, who is held accountable? Is it the managers of the bank – not if they haven’t broken the law. Perhaps the civil servants in the regulatory body for not spotting the dangers earlier – not likely, the key information was withheld from them! Possibly the minister responsible – no, it’s the fault of the previous incumbent for initiating the flawed regulations, and they’re gone now. There is a big problem of accountability here, leading to increasing lack of trust in the establishment and possibly even concern about the rule of law.

In the commercial world, accountability at giant vehicle maker VW is interesting. Supervisory chairman Ferdinand Piëch has been criticised for the progressive disappearance from the supervisory board of heavyweight independent directors such as Gerhard Cromme, chairman of the supervisory board at Siemens, who left in 2006 after being unhappy at VW’s governance. Now Mr Piëch has his wife join him on the supervisory board - making 5 family members out of 20 from the Piëch and Porsche families. Fine as long as the company is doing well, but if its fortunes start to slip, how well will the accountability hold?

The issue of family holdings in large enterprise (still commonplace in some countries, especially in Southern Europe) is an interesting one in its own right. Apart from demanding consideration when developing an accountability definition, it will no doubt form the basis of a future article on this website.

What about remuneration committees which are supposed to govern directors’ pay and guarantee sensible packages. To whom are they accountable? From the beginning they have been criticised for leading to a ramping up of pay. How often do their chairmen get removed for setting up soft or ill-conceived pay packages? And what of the criticism that their members are all drawn from the same pool and can never be seen to be paying below the upper quartile! Similarly there is an argument that institutional investors are reluctant to challenge high pay because they benefit in their own pay by dealing with highly paid directors of their investee companies. Moreover, in badly designed packages which focus on short term profit rather than long term investment and survival, do the remuneration committees feel accountable to the interests of employees, never mind shareholders?

Finally, in a recent attempt to bring more accountability into the field of oil and commodities trading, the Extractive Industries Transparency Initiative aims to implement new disclosure rules to cover prices and volumes of trades. This is an attempt to reduce corruption notorious in the extractive industries. More disclosure is hoped to bring more accountability and less corruption. The way for the future?

Our Accountability definition

The lessons we draw from the above examples are that actions should be clearly related to objectives and the objectives should be initiated and agreed by a significant group of responsible stakeholders. There should then be regular and transparent reporting back by those executing the actions to the stakeholders to whom they are accountable. In the absence of such clear lines and regular, transparent reporting there can be no effective accountability.

This accountability definition is explored more in our Corporate Governance ebook course, a six-day course delivered direct to your email inbox, which sets out our approach and definition of corporate governance and business ethics and how to implement corporate governance and accountability.

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