TRANSCRIPT
Matt Voiceover
Welcome back to Sound-Up Governance. This week's episode features my inspiring friend Aida Sijamic Wahid, who's an Associate Professor of Accounting at the University of Toronto. That might not sound very corporate governance-y, until you check out Aida's research including papers titled, "Professional directors and governance quality," or "The effects and mechanisms of board gender diversity: evidence from financial manipulation," or "Director tenure and board monitoring mistakes." I remember the very first time I met Aida, probably right around when she started at the Rotman School of Management back in 2012. And how clear it was from the start that she's one of those really fun academics who cares a lot about the practical value of her work. She was gracious enough to come by my office to chat about her work and have a fun and deeply nerdy conversation about governance research, and whether auditors might be a secret weapon for boards. Incidentally, Aida was an auditor in a previous life. How did she get from there to academia and corporate governance?
Aida Sijamic Wahid
I always wanted to research I just didn't know, I was thinking that I want to do a PhD in economics that was kind of like what I did for my undergrad. But after working in audit, I said, Okay, you know it'd be really interesting to do actually PhD in accounting, because a lot of things that I see here in auditing are making me question how these markets work, and what's happening. And I would like to know answers to these questions. And so when I applied to PhD programs, my idea was to actually study auditing for the most part. But when I was at Harvard, Harvard is known not for auditing at all. So I went there, and really, there was nobody actually actually doing auditing research at that time. But what Harvard is really known for is corporate governance, a lot of other stuff, there are some amazing faculty in different areas. And, you know, a lot of these questions about board failures kept coming up. And diversity kept coming up as one of the things, you know, the groups thinking alike, and the group think and all these things. And so I started thinking about doing thesis in this area, exploring whether there's any connection between diversity and corporate governance outcomes. So I didn't look at the financial performance outcome, but I was looking at whether diverse boards are more likely to replace a CEO when things are not going well. And also, the compensation side of things. And you know whether firms are more likely, less likely to have fraud if they are less diverse and more diverse. So I was looking at this, and I was looking at diversity through multiple lenses. And so I did that. And the funny thing is that other than my advisor, who's a great guy, you know, a lot of people really didn't believe this research and a sense that they said, well, first, first thing that I kept hearing is, this is really not accounting, you shouldn't be an accounting researcher, because this is corporate governance, and corporate governance is not accounting. And diversity is definitely not accounting. I mean, luckily, I had a great advisor who said, you just do whatever interests you, it doesn't really matter where it belongs.
Matt Voiceover
So I'm sure you can already tell that Aida's got a bit of a funky approach to the governance stuff here. Notice that her focus on diversity isn't just that same old nonsense of looking for a connection to financial performance? Let's hear more about that.
Aida Sijamic Wahid
Well, people want to, they want to think about diversity as something that's no pun intended black or white, and you either diversify or you don't, and you're on the right track, if you diversify, and you're really doing a bad thing if you don't. But things are a little bit more complex than that, right? So there is a group of people that just want to think of diversity as something that's good for the business, and they try to make a business case for it. And when you do that, then you have to show all the proof and burden is on you to show to prove that that's really the case. And so then you have to go a step further and find a good way to measure, you know, what is good for business? And we don't really know how to measure these things, right? Is diversity on a board good if we see performance going up? Or if the investors appreciated to voting directors in? Or is it good if we see that in long term we're not seeing as many scandals and big issues? Or is it good because we're seeing less turnover in a long term because employees are happy and the company's doing well? We haven't really figured out how to measure it well, because when we look at these things, what happens is we want to look at performance, and we want to look at diversity and we want to see clear kind of causation. And a lot of the times studies do not do a very good job at that. So if we don't do a great job at this, then the question becomes, is diversity then bad or is it, you know, not useful? And the answer is not necessarily! Just because we didn't prove one thing, it doesn't mean that the other one is true either. Sometimes it's about looking at things and outcomes in a more broader way, and what is the outcome that you're trying to achieve? If the outcome is not short term financial gain, if it's something else, then maybe we can think of diversity as potentially helping the firms on these other dimensions that we're not even measuring, or we're not sure how to measure. And then the onus doesn't really become on these diverse candidates to prove that they're better than the rest of the board that's not diverse.
Matt
Okay, so there's a bunch of things in here, there's a bunch of threads that I want to pull on. And I'll probably forget some of them before before I actually get to them. And I think it's really important to just sort of de emphasize the business case piece, because, and I think that's gotten a lot better. I don't get as many people just straight up saying, "what's the business case for diversity?" And I got to the point where I would say to them, "what's the business case for you?"
Aida Sijamic Wahid
Well, that's exactly right. So business case for diversity means that you're trying to prove that these people are better than you, essentially. So what are you saying about yourself, if you're not diverse? That it's okay for you to be mediocre? And somebody else who's diverse needs to be better than you to have that seat? Right? So it doesn't make sense. The whole business case doesn't make sense. Unless diversity leads to worse outcome. And we don't really have any evidence on that, then we really don't need to be talking about business case, we like at least not the way we think about business case.
Matt
Right. Okay. So the other underlying piece here is one that it took a really long time for me to understand, but would be more obvious to you, because this is a world you live in as an academic, but I, it seems to me almost like it's impossible to do a real study on corporate governance. Like, by real study, I'm being mean. For instance, how could you do a corporate governance experiment?
Aida Sijamic Wahid
Well, you cannot do experiments. So it's interesting, you ask that question, because, you know, on one hand, on the one hand, you're right, like we can't do things that medical sciences can do, we can't put firms in little experiments and kind of randomly assign them to groups and treat them. It'd be great if it could. But it's not problem that's unique to corporate governance, like all the social sciences have same problems, right? So what we do is hopefully, we have a setting where we can apply some statistical methods, that allows us to get slightly more comfortable with defining, so it's not purely just a correlation we're finding, but we can at least partially infer that there is some causation. Now, it's complicated in lot of instances because a lot of things happen at the same time, usually, especially in corporate governance. Usually firms don't change one thing, they change a lot of different things at the same time. So how do you attribute the impact of one versus the other change on the outcome? That's always difficult. But corporate governance is not unique in that sense. All social sciences have the same problem. So you'll never be necessarily 100% in terms of finding a perfect setting to test it. But with some statistical methods, we can get a little bit more comfortable with some of our findings.
Matt Voiceover
At this point, I somewhat annoyingly kept harping on my distaste for the quest to connect governance with financial performance. Aida, being less annoying than me has a more nuanced perspective.
Aida Sijamic Wahid
In terms of the studies that look purely at financial performance, I think the idea behind some of these studies - and I'm with you, I think it's not always easy to see the connection - is that at the end of the day, if you do all of these things, right: you get the right CEO, and you compensate them right, you motivate them, and you make sure they're not doing anything fishy, that should show up in performance and the bottom line, eventually. The key word here being "eventually." And a lot of the studies are looking at performance that may be shorter term in nature than that eventually is. So if you're looking at corporate governance now and eventually in a year, well then may not show up. That may show up five years from now or 10 years from now in performance. So even if performance is the right measure, financial performance, how long ahead do we have to look? What complicates this even further is that, you know, boards turn over. Corporate governance things change. And do you attribute that financial performance to the board that was there in place seven years ago? Five years ago? Three years ago? Who's responsible for that? Right? So this is where it becomes a lot more difficult, even if you look at long term to kind of disentangle you know, who actually contributed to that good performance. So I'm with you that financial performance becomes kind of the most noisy measure. To actually see impact of governance in my opinion.
Matt
Yeah, I'm gonna add one more flavor to this too, which is, yeah, I think the time horizon there's no way for you to know. What about, you never know what the financial performance would have been if they'd done some other thing. So, even if the financial performance performance stays flat for all we know they would have done a nosedive.
Aida Sijamic Wahid
There's no counterfactual so you only observe what you observe. And you're absolutely right.
Matt
If we think about even the question of a potential impact of the change of, let's say, a board member. What would you want to look for? Right? If you were going to if we wanted to do some kind of study that tried to assess the potential difference that a board member could make, what would you even look for?
Aida Sijamic Wahid
It's a great question, I can tell you what I would look for and what the studies right now do. And what I've done my studies as well, because we don't have a good way of looking at it. Ideally, what we would be able to do is observe what happens when a new board member joins in terms of the change in board dynamics. So to be able to observe that we would actually need to have either access to the boardroom itself and observe the interactions and how much that particular board member contributes to discussions. Or we would have to have at least the minutes of the meetings, and those are not really available. There's one exception, there was a study that was done in Israel few years ago, it's really cool. And they had access to board minutes of corporations and North American setting, we really don't have access to anything like that. So what do we do in research a lot of times is that we can't look at it. So we presume that markets are fully efficient. And I know you're laughing at this, but we do. And so we kind of look at how the market reacts to appointment of a new board member. If the market is pretty positive, then we say it must be that this board member is thought to bring something good to the table or has some good reputation or goodwill. And so the market is reacting to that. And perhaps they are going to have good impact on the firm. At the end of the day, if you observe a good impact, it may or may not be due to that board member. It could be that he or she actually added something to the boardroom. It could also be that, you know, maybe whoever left that spot before was a really difficult person. And that person leaving is what's causing those positive things. Or it could be that it changed dynamics, and anybody joining new person would have made things better. Or could it be that has nothing to do with any of these things? Right? It's just coincidence. That's all we have right now, unfortunately, given the data.
Matt Voiceover
Okay, this might seem like a bit of a left turn, but I promise it goes somewhere. I remember Aida telling me a story about having to literally count rats when she was an auditor. I asked her to share that story here.
Aida Sijamic Wahid
Yeah, well, I knew that I didn't want to stay in auditing. So I started in auditing. I was kind of open minded about being in auditing. But what happens a lot of times when you join audit firms, you have put on the easiest tasks, right? It's considered it kind of like a learning experience. And then as you get more senior, you get more complex accounts to kind of validate. And so what's considered one of the easiest accounts to validate is inventory. Because it's easy to count inventory. And you can the company says this is how much they have an inventory value you go, you kind of do some samples, take some samples count. And you see that it matches what company is saying, and it's validated. Well, I had a client where they had rats as part of the inventory, because they were doing some testing. And so I remember being part of that. And that's when I knew that I would not be auditor for the rest of my life, because it's not what I kind of saw myself doing.
Matt
So here's where I want to connect the dots. Because, first of all, it's a hilarious story. Second of all, I want to make the... put out the hypothesis that auditors are a deeply underutilized corporate governance resource. So if we take your rat counting story as a really extreme example of how much knowledge your auditor has about what's happening in your organization, right? And sure, that doesn't mean the board can't know how many rats there are, or what's in inventory. But the auditor is actually tangibly figuring this out, you know, they're living it. And they're also, they've got relationships with the executive team and with the audit committee and so on. And, and they mostly, I'm going to generalize, mostly get used by boards and executives as just that. Okay, well, let's prepare and validate the financial statements and make sure that everybody understands them and buys into them and get the approval. And that's that. My hypothesis is that they could be a lot more valuable than that. To everybody involved.
Aida Sijamic Wahid
Yeah, I mean, auditors can certainly be part of the governance process, right? I think at the minimum, you know, boards have access to auditors. So you're right auditors probably have a lot more information about what goes on in the business, at least at the ground level than a lot of directors. We know that directors spend what, you know, maybe 200 hours at board meetings, but none of these hours are spent on the ground actually looking at what happens with operations and what happens you know, in certain processes, business processes. All they do is they say, in the boardroom, and they talk to people and they get filtered information, right? Auditors actually go much to a much lower level transactional level information. And they talk to people in all levels of organization. So, I would actually argue that, that auditors have probably much better pulse on the corporate culture, too. And how employees and others within the firm feel about what's happening than the boardroom has, because boardroom gets filtered information. And so I think that, you know, where boards can do a better job is probably actually talk to the auditors more outside of just the audit process, outside of just having them be part of, you know, a meeting once once a year where they kind of report on their information and get out. But think of your auditors as a additional resource that you can actually tap into whenever you have questions, or maybe complex problems. And you know, they're already there, they're already getting paid. So you might as well ask them, you know, they can actually help you with some of these things and help you understand things that maybe you yourself cannot see. And the management may not be willing to share or may not even think to share with you. Right? And so, I think it's just that a lot of boards don't really see it as their job to connect with auditor outside of that, you know, one time one one time a year audit process.
Matt
Yeah. Okay. I'm gonna make two comments about this one, one being, obviously, when you were counting rats, that was not you were not the person who is getting in front of the board, right?
Aida Sijamic Wahid
Definitely not. Definitely not. Althought, I did go to a couple of board meetings. I was brought in.
Matt
So, let's imagine for a moment that, that the board knew that you were the person that was working on inventory, and they knew their inventory included rats. I mean, it might have occurred to them, or it could occur to them, if they think of the auditors as a different thing than they do, to ask, tell me what the lab is like, or tell me what those conditions are like, you know? I know you were counting them. But you also were a human being in that environment. What was that like for you? I mean, these these types of questions, it doesn't, I've never experienced a board that it would never occur to them that that's a conversation that could have.
Aida Sijamic Wahid
So for the most part, the junior people in audit teams are not brought on board meetings, right? So you never really have access to people who are fully on the ground. You talk to the partner and senior manager on the engagement. So that's who the board has access to. But you know, most of the managers, if they're good managers, they will actually know what their staff is doing when they actually go to these warehouses, or they go to actually the sites. And to the extent that they don't know that maybe your auditor is not doing the right job if they don't know what their staff is doing. But asking these questions, it's fair, right? To ask your auditor "Hey, you observed this. So tell me a little bit more, how was it when you went there?" You know, or if it wasn't you, it was your staff? What did your staff report? How did you think of these things? You can ask any of these questions as a board to your auditor, and they should be able to give you some insights. Hopefully...
Matt Voiceover
Aida shared one of the boardroom hacks that she uses to help shake up the status quo a bit. I think you'll like it too. And it also opened a door to the idea of corporate governance field research, which, as you might imagine, would be tough to conduct. But still, follow us down the rabbit hole, and then I have a request for you.
Aida Sijamic Wahid
One of the tricks or tips may be that you know, one way to dealing with I guess both sides of things boardrooms that are maybe a little bit too quiet. And they're not enough people asking questions that are provocative, because sometimes you need that. And maybe also to deal with directors who are feeling that they always have to be the one to challenge and - even on small things, when they don't matter - is to actually establish a bit of a guideline, so to speak, and say, "Okay, well, you know, maybe today, every meeting, we're going to have a different person who is a devil's advocate, right? And that person is going to be in charge of asking the difficult questions." And by doing that, what you're saying, is that, okay, everybody can actually contribute and have discussion. But I want today, Matt, to be that person so that Sally is not always the one asking 100 questions, because it's Matt's job today. And so what that does is two things. It kind of, you know, take some of that speak time away from Sally so that other people can also have a floor and raise their questions and have a discussion. But also, it essentially normalizes this culture of asking questions, and puts everybody in a position where they have to think of things that possibly are counterintuitive, or things that you wouldn't think of asking a normal setting, right? So not necessarily the only way to do things. There are a lot of different ways, but that could be like a one one way to kind of, you know, spread the question asking joy among board members as opposed to having one person dominate the floor, so to speak.
Matt
Yeah, and this is one of the things that I wish we you know, if I if I'm thinking about what you just described, I kind of wish it was easier to study that kind of thing to be like, Okay, look. You know, I think if I haven't said this out loud, it won't surprise you that one of my great pet peeves around governance is how everyone does most things the same for no reason. Right? That most of the corporate governance conventions aren't, no one's ever tested whether they're any good or not. We're just... we do it because that's what everybody does. And this kind of thing, wouldn't it be great to be able to see, not whether it's better or worse, but understand what does it actually do to the boardroom when we have this type of rotating devil's advocate? What changes? So that we can know when is the right time to deploy this? Or how do we use it to the best effect? And this is the kind of thing that I, well, maybe you can if you have an understanding of like, how could we explore these types of things? In a way where we could prove that it actually does something?
Aida Sijamic Wahid
Well, I think it's difficult, right? Because, again, we don't have access to... we don't we can just take firms, put them in experiment and say, "Okay, you are the group that's going to try this method and this tool, and there's another group that's going to try different tool and see what works out."
Matt
And even random assignment is kind of nonsense in groups where you've got, you know, the board members aren't randomly assigned to...
Aida Sijamic Wahid
Well they're not, right? So yeah, and even if you could, some kind of like, you know, randomize the firms hoping that you're gonna get some balance of board members, among them. It's just practically fairly hard to to actually do. But you know, some of this stuff can be done better. And not in kind of rigorous academic setting, but more kind of using anecdotal exploration or field studies. And even maybe doing more field studies research in governance, which is not very common, right? So in other areas of business, we have a lot of field studies. And even in accounting, we do field studies, when it comes to, you know, employee retention, compensation, incentives. So we go into firm, and we talk to a firm and say, "Okay, let's try these different things and see how they work out." And you know, what we get out of it as a study and what you get out of it is something new to try, right? And maybe it's gonna work out really well. Now, if we could actually go do some of these field studies in governance space and go into boardrooms and say, "Hey, let's try this, this thing and see how your board meetings work out when we do it this way and and record it. And then let's try some different methods and see how that works out". Even that's actually research. It's just a type of research that we don't really do much in corporate governance, the field studies, I think it'd be great actually to do some of that.
Matt
Me too....like I really do. In fact, this is I don't gather data, because I think it freaks people out. But this is kind of what I'm doing.
Aida Sijamic Wahid
So this is exactly what's difficult, right? Is that a lot of times the conversations that go on in the boardroom are confidential. And if you approach companies, they're very, very cautious when it comes to actually having anybody be part of the boardroom who might be observing or listening, because they're worried about the privacy, I think this kind of stuff would be actually better implemented in a not for profit setting, or where people actually a little bit less worried and more eager to learn best practices, without worrying about that confidentiality of information. And actually a lot of not for profits, I'm more often open to be honest to some of these things. It doesn't mean that if we do non for profit, and we find certain things, that those things are not applicable to other firms, too. I mean, if it works in one group of people, why wouldn't it work another group of people? So maybe we just need to be a little bit more innovative as to, you know, what kind of organizations we approach with this stuff. I mean, you almost kind of need organizations that are dysfunctional in a way. But trying to learn how to be better functional and try different things different kind of, you know, treatments, different interventions, and see which intervention works.
Matt
Right. Although that this is one of the things that I get worried about is that we look at governance as a solution to crises or whatever, right? And I'm, I'm far more interested in knowing the, what are the different variants of normal, right? Like, not how do we solve a problem, but how many different ways could we approach the normal course of business? And what what are the advantages to each of these different, different approaches?
Aida Sijamic Wahid
This is such a tricky thing, because I'm totally with you, I think, you know, we only look at governance when there's a failure of some sort. And we ask ourselves, where were the directors? What they were doing? Were they paying attention? Were they present? Were they informed? What didn't they see? What didn't they do? Of course, perfectly easy to do with the benefit of hindsight, right? But we never look at firms that do it right. And part of it is because, one, when you see something is right, you're not likely to attribute that to a director. You're going to attribute that to, "oh, executive team is doing great job and you know, CEO." So you don't see board as being there to provide value, I think we've been conditioned to kind of think of board, as you'd mentioned earlier as an oversight body that's there to ensure that management doesn't really screw it up. And the reality is that boards do much more than that, or they shouldn't be doing much more than that. They should be actually providing strategic valuable guidance to the management and taking the organization to a better place. And if you really think of boards that way, then we probably will be focused a little bit less on the crises and failures, and more on that 80% or 90% of the time when things are going right. And, you know, within that, what are the best practices of the good things or non crisis situations? Which outcomes were the best? And what differentiated the way that these boards worked, as opposed to somebody else? Was it really the board was or the CEO and which instances does board provide value? You know, a little bit harder to again, observe because, you know, when we look at the data, it's much easier to see crisis and failures. It's much harder to identify events that are successes, right? And so we, we kind of, you know, in research, we tend to gravitate towards things that are easy to measure, but that doesn't mean that they give us a full picture of what's happening.
Matt Voiceover
I think you can see where Aida's going with all this. And upon reflection, the challenges of field research in boardrooms might actually be less challenging in good times than bad. Just maybe. So here's my call to action: Any listeners who are even vaguely interested in the idea of your board being a subject of some cool research, not to find anything wrong, but instead to find what's right. Even if you're not exactly sure how to make it work or are a little bit worried about the confidentiality stuff, shoot me a note at soundup@groundupgovernance.com. I have a feeling that, with Aida's help, you might just be able to play a role in improving corporate governance for everyone. Thanks, Aida for being a governance hero. I learned so much from her in this conversation, as I have so many times in the years we've been friends. And thanks to all of you for tuning in and listening. Until next time.
Sound-Up Governance (ep.38) - Could auditors be governance superheroes? (feat. Professor Aida Sijamic Wahid)