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Corporate governance and board accounts: exploring a neglected interface between boards of directors and management

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Abstract

There is an absence of research about what information boards of directors have access to and how they use that information. The purpose of this paper is to explore and theorize about the content and use of information to boards of directors. The paper introduces and elaborates on the concept of ‘board accounts’, which is defined as the information supplied to boards of directors by top-management. The paper locates the board accounts in the Swedish institutional setting and demonstrates how the concept can be operationalized in an empirical setting. On the basis of a unique material of archived board records in a Swedish company, the paper explores the board accounts over a period of 10 years (1989–1998). It is found that while use of the board accounts in the case study company changes considerably over time, the content of the board accounts remains largely unchanged. This raises questions about where and when directors receive information, the reliability of the information in the board accounts, and recent attempts to integrate corporate governance and management accounting (CIMA, Performance reporting to boards: a guide to good practice, 2003; CIMA strategic scorecard: boards engaging in strategy, 2005; Seal, Management Accounting Research 17(4):389–408, 2006). Finally, the paper discusses the merits of historical archive-based approaches in this field and possibilities for future research.

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Notes

  1. In this paper, a conventional definition of management as consisting of a company’s senior officers is followed (Mizruchi 1983). Management is used to refer to members of the company’s executive team.

  2. Because the information concept is almost always preferred in both accounting and management research, there is also a practical reason for referring to the board accounts as information.

  3. The use of shares with multiple voting rights serves to further increase concentration of control.

  4. Thus, in the stricter sense of independence stressed by the more recent literature and codes of corporate governance (Keasey et al. 2005), Swedish boards are far from independent.

  5. Archival research is commonly used to refer to the collection of a range of data types. Here, archival research is confined to the study of genuine historical documents obtained in for example company archives. This is the meaning that historians usually attach to archival research (Tosh 2002).

  6. Whether or not the identity of the company can be found out by an attentive reader is irrelevant to the contract. Thus, the publication of this paper does not violate the contract.

  7. This part of the board records corresponds to what is referred to as the ‘board pack’ in the CIMA (2003) guide to performance reporting to boards.

  8. According to the company secretary such requests were rare, but were occasionally made by board members.

  9. Although the CFO attended most board meetings to present the statement of accounts, he was not a member of the board and had no right to vote.

  10. This is an important reason for preferring the more inclusive concept of ‘board accounts’ to alternative concepts, such as ‘board accounting information’.

  11. In Sects. 4.7 and 4.8, it will become clear that trust and the board members’ reliance on subjective non-financial information varied considerably over time in Company Z.

  12. The large increase in operating income in 1993 with respect to ‘Services’ was explained by an acquisition.

  13. This finding relates strongly to conceptualizations of strategies as emergent (Mintzberg 1987).

  14. Contrary to the suggestions by the board members, Company Z entered the Eastern European market but did not diversify into chemicals.

  15. It is worth noting that a board highly involved in strategy may interfere with the responsibilities normally ascribed to management. Tricker (1984) has stated that “while management is about running the business, governance is about seeing that it is run properly”. Crossing the line between governance and management could have adverse consequences if the board lacks knowledge of the company’s business operations.

  16. This was particularly the case with respect to the board representative of the new shareholder.

  17. Appendix A actually underestimates the quantity of this information. Because these information items usually had a standardized format, they were only illustrated once. However, this information was usually continuous and reappeared at most board meetings.

  18. Although management is clearly the sender of this information, this is not normally the type of information referred to as management accounts. Somewhat intriguingly, if this information is not defined as management accounts, it becomes another type of accounts specific to the BA. In terms of figure 1, it would constitute the upper part of the BA circle that neither overlaps with the FA nor MA.

  19. Thus, in the presence of trust relationships, traditional scope information (financial accounts and budgets) combined with subjective non-financial information and possibly some broad scope information may be sufficient for the board.

  20. Thus, even in the Swedish context with a tradition of active owners on boards, there were obstacles to board involvement in strategy.

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Authors and Affiliations

  1. Department of Accounting, Auditing and Law, Norwegian School of Economics and Business Administration (NHH), Bergen, Norway

    Daniel Johanson

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Appendix A

Appendix A

Information items in Company Z

 

Descriptive objecta

Quantification

Measure(s)

Focusb

Time horizon

Lifetimec

Item 1

Organization

Financial

Income measures, EPS

Internal

Ex post

Continuous

Item 2

Products (1)

Financial

Operating income, operating margins

Internal

Ex post

Continuous

Item 3

Organization and products (1)

Financial

Operating income, income after financial items.

Internal

Ex post

Continuous

Item 4

Organization and products (1)

Financial

Sum of investments

Internal

Ex post

Continuous

Item 5

Organization

Financial

ROE, ROCE, ROC

Internal

Ex post

Continuous

Item 6

Investment project

Financial

IRR, net cash flow, capacity

Internal

Ex ante

Temporary

Item 7

Organization

Financial and non-financial

Investment amount granted and expected

Internal

Ex post

Continuous

Item 8

Organization

Financial

Sales, operating income, net income, interest coverage ratio

Internal

Ex ante

Temporary

Item 9

Organization and products (1)

Financial

Budgeted operating income

Internal

Ex ante

Continuous

Item 10

Country or group of countries

Financial

Operating income, capital costs, exchange rate adjustments

Internal

Ex post

Continuous

Item 11

Companies

Non-financial

Market share

External

Ex post

Temporary

Item 12

Investment project

Financial

Income after financial items, loan balance

Internal

Ex ante

Temporary

Item 13

Investment project

Financial

IRR, NPV, impact on income after financial items, payback

Internal and external

Ex ante

Temporary

Item 14

Companies

Financial

Market value, EPS, dividend yield, sales, investments, ROCE, P/E

External

Ex post

Temporary

Item 15

Organization

Financial

ROE

Internal

Ex ante

Temporary

Item 16

Investment project

Financial

Sales

Internal

Ex ante

Temporary

Item 17

Organization

Financial

Change in income after tax

Internal

Ex ante

Temporary

Item 18

Organization

Financial

Equity/assets, debt/equity(gross), debt/equity (net)

Internal

Ex post

Temporary

Item 19

Product (3)

Non-financial

Sales volume per country, change in sales volume (%)

Internal

Ex post

Continuous

Item 20

Organization

Financial

Net income with and without hedge

Internal

Ex ante

Temporary

Item 21

Product (1)

Financial

Operating income, share of group’s operating income

Internal

Ex ante and ex post

Temporary

Item 22

Investment project

Financial

Sum of investments

Internal

Ex ante

Temporary

Item 23

Investment project

Financial

Sales for two scenarios

External

Ex ante

Temporary

Item 24

Investment project

Non-financial

n/a

External

Ex ante

Temporary

Item 25

Companies

Financial

Distribution of sales in terms of sales amount and markets

External

Ex post

Temporary

Item 26

Organization and countries

Financial

Budgeted operating income

Internal

Ex ante

Continuous

Item 27

Products (2)

Financial

Sales

Internal

Ex post

Continuous

Item 28

Investment project

Financial

Sales, costs, various income measures, margins

Internal

Ex ante

Temporary

Item 29

Competitors

Financial

Sales, operating income, operating margins,

Investment / sales

External

Ex post

Temporary

Item 30

Business areas

Financial

Sales, operating income, operating margins, operating value added (OVA)

Internal

Ex post

Continuous

Item 31

Countries

Financial

Change in revenues (%) subdivided into price, volume and exchange rate effect

Internal

Ex post

Continuous

Item 32

Organization

Financial

Change in revenues (%) subdivided into price, volume and exchange rate effect

Internal

Ex post

Continuous

Item 33

Organization

Financial

Impact on net income of restructuring program

Internal

Ex ante

Temporary

Item 34

Organization

Financial

Type and amount of synergies resulting from merger

Internal

Ex ante

Temporary

  1. aProducts’ comprises three different aggregation levels. ‘Products (1)’ refers to the main operations or products of a diversified company with operations in many industries. ‘Products (2)’ refers to product groups within one main operation or product. ‘Products (3)’ refers to individual products within each product group
  2. bHere, an item is classified as external if it explicitly focuses on factors outside the company, such as competitors and customers. Items that refer to the entity of the company or parts of the company such as income statements are classified as internal
  3. cIt should be noted that Bjørnenak and Olson (1999) discussed lifetime in terms of information systems. Here, the lifetime characteristic is applied to single items of information

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Johanson, D. Corporate governance and board accounts: exploring a neglected interface between boards of directors and management. J Manage Gov 12, 343–380 (2008). https://doi.org/10.1007/s10997-008-9065-6

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