On November 30, 2001 you would have been thought a little strange if you suggested accounting firms needed non-executive directors.
The next day, Enron collapsed.
Auditor governance was not a fringe issue anymore, it was front and centre.
On December 2, 2001, America’s most senior number cruncher, Securities and Exchanges Commission chief accountant Lynn Turner, wrote in the New York Times about a need for not just tighter regulation, but cultural change.
“There’s an issue of culture, and that culture is usually ingrained systematically from the tone at the top, down,” she argued. “The profession itself needs to adopt some stronger auditing procedures and get back to serving the public interest rather than worrying about raising consulting revenues.”
More than 5,600 kilometers away, Lesley MacDonagh was celebrating her re-election as managing partner for prominent international legal firm Lovells, and audit governance was the furthest thing from her mind. But corporate collapses cast long shadows. Enron’s demise, in time, would carry MacDonagh to the forefront of audit governance reform.
In an industry not renowned for its openness, she has now become, as she puts it, that presence in the room. A non-executive in an accounting firm – one of only two in the UK. “An extra presence in the room changes the dynamic… If you know you have to persuade someone else, who is not steeped in the history, you go through your arguments in a much more organised way. You have to argue it through and expose yourself to challenges.”
In 2008, MacDonagh was appointed as one of two non-executives for top six accountancy firm BDO. The move would prove to be quite progressive for the firm, but at the time the appointments went unannounced, except for a few paragraphs in the firm’s annual report. By January 2010, however, the firm would be trumpeting MacDonagh’s appointment.
The industry regulator and standard setter, the Financial Reporting Council, had released a world-first audit governance code, effectively forcing the largest eight accountancy firms, including BDO, to appoint non-executives.
But as BDO would announce, they were already ahead of the curve. “Over a year ago we appointed two non-executive directors, Lord David Currie and Lesley MacDonagh, to promote good governance both within our firm and for clients,” Simon Michaels, managing partner at BDO, said at the time. “As a firm we have had practices in place for many years.”
MacDonagh came with an impressive portfolio, including non-executive directorships at SEGRO (formerly Slough Estates) and Bovis Homes Group.
She was the youngest person to be made partner and the first female managing partner of a top ten law firm. She knew what it was like to sit on the other side of the table, not only as a partner but as a managing partner, who saw profits double. Under her leadership, Lovells expanded to 27 locations across the globe, making it the world’s sixth largest law firm.
She was a natural fit for a partnership like BDO. In the sometimes self-serving and insular world of partnerships, MacDonagh knew her stuff. She’d been there before. “I’ve seen it from the other point of view and I know what it is like to be challenged from someone outside the firm and I know that feeling you have, but also the positives that can bring,” she says. “The animal that is a partnership is quite complex and quite different.”
In fact, she believes a non-executive, coming from a background of only advising corporate bodies, may struggle initially, if brought into a partnership. “You can underestimate how different it is,” she says. “If you came in as a chief executive and were used to operating in a certain way… you would have to get your head round the fact partnerships are managed differently.”
Within partnerships, there’s often more “consensus-building” upfront, according to MacDonagh.
When she took the BDO position, she had been retired from Lovells for two years, working almost exclusively with corporates. She looked forward to the opportunity to go back to a partnership. “When I was first approached… I thought that, with my understanding of the nature of partnerships, it would be more stimulating. Things are not as black and white in a partnership.”
Stakeholders not shareholders
A 2003 review of corporate governance by businessman and merchant banker Sir Derek Higgs envisaged non-executive directors as individuals who “set the company’s values and standards and ensure that its obligations to its shareholders and others are understood and met”.
At BDO, MacDonagh doesn’t have shareholders. She doesn’t have investors. Whose interests, then, does she represent in the room? “You think of the clients of the firm as stakeholders, the other partners in the firm… I feel I am a custodian of good practice for other partners, clients and the wider public,” she said.
The audit governance code does not speak of non-executive “directors,” rather, non-executives – a deliberate attempt to create distance with corporate practices.
The code envisages these non-executives “initiating feedback” from the owners of an audit firm or acting as an added channel of communication between regulators, clients, companies and other external stakeholders. Indeed, the code even sees a role for non-executives as representing the interests of shareholders of audit clients.
But they are also seen as a circuit breaker – a window to the outside world in times of crisis. A way to protect a firm from itself. “They could be a safety valve that helps prevent a firm from being forced to exit an audit market,” the report states. “In the heat of a crisis it may also be impractical to set up new lines of communication quickly enough and this strengthens the case for firms to make arrangements as a matter of course so that they are prepared for potential adversity. In short, independent non-executives can be a channel for dialogue with stakeholders.”
MacDonagh sees an added stakeholder not mentioned in the code – staff and partners. She believes her presence adds assurance to BDO’s 3,000 partners and staff. “If I were a partner, it would give me a bit of reassurance again,” she says. “I would hope partners feel, by the presence of non-execs, there is an independent scrutiny of the way management are conducting their affairs.”
Under MacDonagh, the audit code that sets out to protect external stakeholders may also protect internal ones as well.
Welcome to the family
Sir Christopher Hogg, chairman of the Financial Reporting Council, announced the release of the governance code on January 18. Within days phones were ringing in the offices of the nations top-eight accounting firms. Headhunters.
The top eight now had less than six months to decide how many non-executives they wanted, and to hire them.
The world’s largest audit firm, PwC, decided to create a whole structural tier to accommodate the non-executives.
KPMG, PwC’s Big Four rival, said it would integrate the non-execs at a Europe-wide level.
If MacDonagh were to offer some advice, it would be for the firms to ask themselves not about how they integrate non-executives, but who they integrate. “If you recruit the right people, then allow them to flourish in an environment and ask them not just to do the minimum, a business will reap the benefits,” she said.
When she began at BDO in 2008, MacDonagh wasn’t quite sure what she was in for. Non-executives can, at different times be treated, as part of the wallpaper or genuine agents of change. And, after all, this was a partnership, and it was anyone’s guess how she would be received. “I have heard from colleagues that sometimes it is difficult to make a difference,” she says.
Today, two years on and her role has expanded. No longer is she just a voice in the boardroom, but sits in on partner interviews with other senior managers and is encouraged to involve herself in key strategic decisions.
“If there is an issue to which I feel extremely strongly and others don’t, there is no problem at re-emphasising it, returning to it. There should be no culture of suppression.”
Which brings her to another piece of advice for audit firms recruiting non-executives. Don’t keep them at arms length. Bring them in from the cold. “If the culture of the firm is such that they want to have strong corporate governance, they won’t see you as testing or pushing in a direction they don’t want to go,” she says.
Name Lesley MacDonagh
Elected partner at Lovells at 29;
Practiced law at Lovells for 20 years
Then elected international managing partner (served 11 years)
First female managing partner of a top 10 law firm;
Chaired Lovells international board
Eight years experience as a non-executive director of FTSE 100 and 250 companies;
Consultant and mentor to independent Brand Agency;
Non-executive director at BDO.
Legal Business Managing Partner of the Year
One of Management Today’s top 30 most powerful women in Britain;
Women in Finance and Banking Award for leadership in her industry
One of The Lawyer’s “Hot 100”.
Public service charitable
Council member for the City on the Law Society of England and Wales;
Audit committee member for the Law Society;
Court member of the City of London Solicitor’s Company;
Board member of the NSPCC Justice for Children campaign.
BDO’s Simon michaels on Macdonagh
I think it is fair to say that Lesley’s understanding with how partnerships worked made a significant difference.
We both found, that for the first few months, it was a bit experimental, and we had to understand how it would work best, and after that we found the right balance.
For other partnerships, my advice would be, you do have to let the relationship evolve and develop, but also select non-executives that understand the culture of the organisation.
Non-executives provide some robust challenge and alternative views. I think it is fair to say that with Lesley’s understanding with how partnerships worked, it made a significant difference.
And because we have embraced having non-executives we have received more benefit from them.
We have taken the view that we will have complete transparency in our relationship and we get the most value from it.
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