Gatekeepers: The Professions and Corporate Governance

Citation

McLeod, J. (2007), "Gatekeepers: The Professions and Corporate Governance", Records Management Journal, Vol. 17 No. 2. https://doi.org/10.1108/rmj.2007.28117bae.007

Gatekeepers: The Professions and Corporate Governance

John C. Coffee JrOxford University Press2006384 pp.ISBN 978-0-19-928809-0 (hardback)£18.99Keywords: Corporate governance, Professions, Information managementReview DOI: 10.1108/09565690710757977

The author is Professor of Law at Columbia University and Director of its Center on Corporate Governance and therefore an expert on the subject of this book, which is part of the Clarendon Lectures in Management Studies series.

The first page of the introduction sets the scene and the aim of the book and, anyone reading just this page in a bookshop will surely want to buy it. The author sets out to ask and answer the question “How have professional agents (primarily auditors, attorneys, securities analysts and credit-rating agencies) who advise boards of directors and shareholders evolved, performed and changed their behaviour over the last century?” His thesis is that “all boards of directors are prisoners of their gatekeepers” (p. 1) where a gatekeeper is defined as “an agent who acts as a reputational intermediary to assure investors as to the quality of the “signal” sent by the corporate issuer” i.e someone who lends their reputational capital to an organisation and enables “investors or the market to rely on the corporation’s own disclosures or assurances where they otherwise might not” (p. 2). Central to the issue is whether or not someone who is employed and therefore paid for by the organisation to be watched can be trusted. In theory, Coffee says, if the value of the gatekeeper’s reputational capital is greater than the profit they might receive from a client the risks arising from any inappropriate certification or advice are too great and the gatekeeper will remain “faithful”. Fascinating stuff indeed.

To do justice to the content of this 376-page book is difficult and therefore what follows is a sense of what it covers and why I found it an absorbing read. It is in three parts: Part I asks the question what happened? Part II explores the development of the gatekeeper and Part III searches for reform.

In Part I the author begins by exploring why, in corporate America between 2001 and 2002, gatekeepers failed “en masse” and why that “major outburst of financial fraud” was not paralleled in Europe. He objectively examines the two most high profile corporate scandals, Enron and Worldcom, and though not exonerating their boards of directors he suggests the failure of their gatekeepers and management misconduct were the reasons behind the failures. Though records are rarely explicitly mentioned here, or elsewhere in the book (no reference in the index), some of the analysis of what went wrong is based on records, and information, lack of it, complexity of it and even falsification of it (Arthur Andersen’s internal memos, p. 29) played a part in the scandals. From these anecdotal examples Coffee seeks to understand “what broader forces cause gatekeepers to fail” (p. 55) concluding that it is due to the decline in legal deterrents, an increase in pressure from management and the effect of the stock market bubble which leads some types of gatekeeper to tell their audience what it wants to hear. And the final chapter of Part I examines the pressures and incentives facing gatekeepers in other legal regimes, in particular Europe, as a comparator. He concludes that share ownership structure probably determines the nature of financial fraud but that whether share ownership is dispersed or concentrated, gatekeeper failure occurs (p. 93).

Part II traces the historical development of gatekeepers from four professions, accounting, law and securities analysis being the main three, with credit-rating agencies creeping in as the fourth. One chapter is devoted to evaluating the role of each gatekeeper.

In the final part of the book, Part III, Coffee begins by stating the contextual, environmental reasons why gatekeepers failed in their role and “acquiesced in a variety of financial irregularities” (p. 317). If, as the author seems to suggest, gatekeepers are apparently willing to sacrifice their reputations, on the bias that they d not need an untarnished record, just one that is less tarnished than their rivals, what can be done to encourage them to improve? Coffee offers four options for reform: harsher laws; disclosure (of conflicts of interest); peer review; and restoration of what he terms the “principal-agent” relationship. It is the last option, which would make gatekeepers directly responsible to investors rather than the corporations that hire them and they are to monitor, that he believes offers the greatest promise of success. But it is not easy to effect.

In reading this book I learned a lot about trading and accounting and have extended by business vocabulary significantly – it now includes short sellers and line costs. It is not a book about recordkeeping but information and records play a part in the role of the gatekeepers it covers. I simply found this a fascinatingly rich, well-researched and very well referenced, authoritative and objective analysis of the legal and financial accounting professions’ roles and responsibilities in corporate governance. It also has a very index. Given the relationship between recordkeeping and corporate governance I believe it is a book that records professionals in senior roles, and anyone conducting research in that area or in the area of risk management, would also find fascinating.

Julie McLeod Northumbria University, Newcastle upon Tyne, UK