The much-awaited Brydon Report was published just before Christmas. It didn’t get much publicity, as the festive season proved more alluring than yet another long report and profusion of recommendations on corporate governance. In a sense, this was a pity as this ambitious report contained over 60 wide-ranging recommendations that would have considerable impact on auditors and boards. It also needs to be seen as part of an avalanche of changes being proposed by numerous bodies, from the BEIS Select Committee, Competition and Markets Authority, Sir John Kingman, to Professor Sikka for the Labour Party.
The instigation for such reviews is almost always a scandal or embarrassing headline. The Brydon report is no exception, coming in the wake of the collapses in Carillion, Patisserie Valerie, Conviviality and Thomas Cook. This is explicitly admitted;
“The origins of the present Review, a successor to various industry proposals, might be best summed up by the following comment in The Guardian in April 2019, in reference to the failures of Carillion and Patisserie Valerie: “[The auditors’] failure to spot the fragility of those businesses resulted in the loss of jobs, savings, pensions, and tax revenues.” (Brydon Report para 3.1.)
So why did the auditors fail to ‘spot the fragility’ in those accounts? But you would look in vain in the Report for a single other mention of Patisserie Valerie and find only two passing references to Carillion. Of other so-called accounting scandals, I can find no mention. Here, in a report set up in the wake of accounting scandals, they are treated as the elephant in the room.
If there were a rail or air accident, how would you try to get to the bottom of what happened, learn lessons for the future and develop new safety rules? Would you send an investigative team of experienced experts to do a comprehensive analysis of how it happened, what safety procedures failed and what new rules should be developed? Or would you get the great and good of the industry together and chat it through? And which resulting regulatory regime would make you feel safer next time you stepped aboard a plane or train?
However, this report, in all its 135 pages, has a singular lack of either facts or evidence. In this respect, it follows a well-trod path for governance regulation. Governments love to set up inquiries that involve ‘the great and the good’ talking to each other, coming up with good ideas that then spark a helpful headline or two (though perhaps not just before Christmas).
It wouldn’t surprise you to hear that ‘high-risk’ industries, such as transport, chemicals or nuclear, always use an evidence-based investigative bottom-up approach. Yet in corporate governance, time and time again, we use the ‘great and the good talking to each other’ top-down approach.
Brydon has done a thoughtful and conscientious job, and responded to the Terms of Reference he was given. It’s just that this isn’t enough.
“Finally, all the views expressed in this Report are mine only…” (Brydon Report para 1.12)
We need evidence-based regulation, not just one man’s personal ideas.
In fact, the Terms of Reference (Appendix 2), show that the government asked Brydon to lead an inquiry, supported by advisory groups, rather than to be its sole author. It also instructed that the process ‘be a thorough examination of the issues and allow for gathering evidence…’
Apparently, none of the 46 ‘projects relevant to the Review’ in appendix 5, are investigations into what happened in any of the accounting scandals. The Brydon Report, which cost over £0.5m, appears to have relied on interested-party submissions, whilst reading other project reports and academic texts (with titles such as “Cognitive objectivity in accounting” and “Objectivity, relativism and truth in external financial reporting” – footnote page 57).
I discuss Brydon’s actual recommendations in another article, but just for now, here’s an example of the dangers of letting one person loose to write a report. Brydon doesn’t approve of best practice:
“26.1.5 An increased celebration of “good” would be both encouraging and educational. However, I part company from Professor Ramanna over the use of the concept of best practice. I believe that this concept has been a pernicious addition to the lexicon and one that allows, indeed even encourages, lazy thinking. It is too seductive for people to retreat behind a best practice defence of their actions. What matters is that the right practice has been followed and that may well be different in different companies and at different times. What matters is what is right for a particular company, with its particular problems and its particular management at this particular moment given its particular circumstances. Best practice concepts drive out innovation as it is always safer to go with the herd and claim that an action is best practice rather than take a bolder and individual step. Best practice defences are based on backward looking analysis. Of course, good practice must be faithful to an enduring set of principles. “
Brydon does not justify his invective with any evidence or support, whilst dismissing others for ‘lazy thinking’. He doesn’t approve of ‘backward-looking analysis’. Most people would call that looking for evidence and using the learning from our mistakes to apply lessons for the future. That’s called evidence-based regulation.
As an Audit Committee Chair, I welcome learning about good ideas and practice elsewhere and find this so much more useful than yet more regulation. I’ve learned far more about risk-management from analysis and thinking about safety in high-risk industries than I have ever learned from the Financial Reporting Council. Regulation frequently appears to start from the assumption that directors need to be told exactly what to do as they are either incompetent or mendacious. Safety thinking starts from the assumption that if things can go wrong they will and that all humans make mistakes.
The Brydon Report is well-meaning and thoughtful. However, it shows the limitations in asking one person to conduct a personal review and not requiring it to be based on hard evidence. It illustrates the fallacy of responding to crises, without analysing those crises to see what we can learn from them. Learning from our mistakes may be dismissed as ‘backward-looking analysis’, but this is how most of us progress. Brydon follows a well-established and well-trod path of not learning from past governance mistakes. This myopia is sadly typical of corporate governance and business regulation today.
- I have looked at some recent failures to try to identify lessons to be learned here.
- Interactions between high-risk systems and human failures are described very clearly in “Normal Accidents. Living with High-Risk Technologies” by Charles Perrow.