The Audit Committee as an Interactive Process: Insights on the AC Chairperson’s Power

Abstract

The audit committee (AC) chairperson is considered a key actor in the AC process, yet little is known about the role of AC chairpersons and how they exert power in a constraining institutional environment. Considering the AC as an inhabited institution – an institution actively inhabited by agentic and creative actors, this paper provides insights into the dynamics of the AC process with respect to the contribution, power and influence of the AC chairperson. The analysis draws on 53 interviews with experienced AC members, chief financial officers and auditors of 23 publicly listed companies. The results show that AC chairpersons are neither totally constrained by the institutional environment nor fully strategic actors, but carve out individual corridors of action and exert power within the AC process. In particular, our findings bring out three styles of leadership: managing ongoing trust relationships to act as marginal-secant able to play with the various local ecologies of knowledge and power, using in-depth knowledge of the institutional rules to manage them purposefully, serving as an expert in a timely and targeted manner. The analysis points to the ways AC chairpersons inhabit their role, deal with institutional scripts and give meaning to their oversight duties.

Acknowledgements

The support of these institutions and foundations is gratefully acknowledged. We would also to express our appreciation to Bernard Colasse for his academic support throughout this study. We would like to thank particularly Andrea Mennicken and the two anonymous reviewers for advice and guidance throughout the revision process. Further, we thank Jean Bédard, Yves Gendron, Aziza Laguecir, Bernard Leca, Michael Power and Mahbub Zaman for helpful comments on earlier drafts of this paper. Finally, thanks are due to those audit committee members, CFOs and auditors who participated in this research and allowed us to interview them.

Notes

1 Reuters (2013, November 1) ‘JPMorgan Has Even More Problems Than We Thought’.

2 Reuters (2013, September 26) ‘On stage in Chicago, JPM director Jackson offers his apologies’.

3 Laban Jackson’s interview at the NACD conference (2013, October 13) is available on the NACD website: http://blog.nacdonline.org/2013/10/in-conversation-with-laban-jackson/".

4 Power means pursuing the AC chairperson’s own interests (e.g. limiting his/her own exposure to critique and liability), with respect to AC effectiveness.

5 The CAC 40 is a benchmark French stock market index representing a capitalization-weighted measure of the 40 most significant stocks among the 100 highest market caps on the Paris Bourse (CAC stands for Cotation Assistée en Continu or Continuous Assisted Quotation).

6 Beattie et al. (2011) stress that their results on the filter role played by the AC chairperson may be specific to the UK context. In the UK, a large range of actors including the chief executive officer, the chair of the board of directors and directors who are not members of the AC attend the AC meetings. This large attendance may influence the dynamics of interactions during meetings.

7 The Latin system of governance is network-oriented: companies are linked to each other through cross-shareholdings and cross-directorships. The financial markets are moderately important in the national economy but not very active in corporate control, since ownership concentration is relatively high.

8 According to the World Bank, the market capitalization of listed companies rose from 26% of GDP in 1990 to 103% in 2001 (Goyer, 2006).

9 29 of the total 40 companies making up the CAC 40 index declared they had an AC in 1995 and 36 in 1998.

10 French ACs are not subject to particularly restrictive independence requirements. Nevertheless, French laws limit the proportion of executive directors on the board of directors to one third, which reduces the probability of the presence of executive directors on the AC. In practice, AC members are almost always non-executive directors. A similar situation is observed in Australia – an Anglo-American country – which requires only a majority of independent directors on the AC, with no further specification (Lary & Taylor, 2012).