An Exploration of Governance and Accountability Issues Within Mutual Organisations: the Case of UK Building Societies
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An exploration of governance and accountability issues within mutual organisations: The case of UK Building Societies Ooi Sue Chern A thesis submitted for the degree of Doctor of Philosophy in Accounting Essex Business School University of Essex May 2017 II Dedication This thesis is dedicated to: My father Ooi Swee Hin and my mother Yong Chiew Peng, for your love, encouragement, prayers and sacrifices throughout my life; My sisters Sue Lynn, Sue Imm and Wendy Ooi for your constant positivity, support and love; My nieces and nephew, I hope you will value the power of education and continue to work hard in achieving your dreams; and My late grandmother, Ng Chiew Yong, who I always remember in my prayers. I hope you are proud of me, grandma! III Acknowledgement I would like to express my gratitude to a number of individuals who have helped me through my PhD. First, a very special dedication and thanks is extended to my father, mother and sisters for their love, support, encouragement and prayers throughout my life. Second, I would like to extend my sincere gratitude to my supervisors, Dr Pik Kun Liew and Dr Pawan Adhikari, for their patience, guidance and support throughout this academic journey. I sincerely appreciate their intellectual advice, friendship, encouragement, motivation, supervision and emotional support, which have led to the completion of this thesis. My appreciation and gratitude are also extended to the academic and administrative staff and my colleagues at the University of Essex. More specifically, special thanks are directed to Dr Maha Alsayegh, Dr Aminah Abdullah, Dr Adura Ahmad, Dr Khairul Saidah, Dr Angeliki Balantani and Christina Neokleous. My acknowledgement also goes to all individuals who have participated in this research and Mr Simon Rex from the Building Societies Association for arranging my visits to the BSA library and providing me with documents related to my research. Without their generous contributions and participation, this research would never have been completed. I am also truly grateful to Malaysia’s Ministry of Higher Education and Universiti Utara Malaysia for their financial support. Finally, my appreciation is extended to Churches Together in Britain and Ireland (CTBI) for the hardship fund that I received after the end of my scholarship. I thank you all for making this journey possible for me! IV Abstract This study examines the governance and accountability practices and reforms in UK building societies following the 2008 financial crisis. Theoretically, this study explores the notion of mutual accountability and governance systems in delineating the (re)structuring of UK building societies’ governance and accountability practices, in response to the crisis. Data for the study are derived from thirty-eight in-depth interviews with key stakeholders in building societies, including executives, non-executives, ex-directors, an auditor, a regulator and customers, as well as publicly available documents and non-participant observation of a number of members’ meetings. The findings of the study demonstrate that the industry’s internal, intermediate and external governance structures have significantly altered in the post-crisis era with a positive impact on the mutual accountability. Coercive pressure from regulators has led to improvements on building societies’ internal governance structures, including but not limited to board composition, internal control and risk management frameworks. Intermediate governance structure, unique to mutual organisations, is embedded within UK building societies as the fundamental mechanism in achieving democracy and mutual accountability. However, the political and economic uncertainty and regulatory reforms in the financial services sector have continued to pose challenges in the governance and long-term performance of regional building societies. Intensifying regulations have increased the costs and workload for building societies and led many of these societies to emphasize the “form” rather than true “substance” of good governance practices. There is the need for regulators and policy makers to realise the difference among building societies and to develop appropriate codes of governance and regulations which are not one-size-fits-all. V List of Abbreviations AGM - Annual General Meeting ABS - Asset Backed Security BCBS - Basel Committee on Banking Supervision BSA - Building Society Association BSC - Building Societies Commission BSOCS - Building Societies Sourcebook CAQDAS - Computer Assisted Qualitative Data Analysis Software CCDS - Core Capital Deferred Shares CDO - Collateralised Debt Obligations CEO - Chief Executive Officer CRD - Capital Requirement Directive ED - Executive Director FCA - Financial Conduct Authority FRC – Financial Reporting Council FSA - Financial Service Authority FSCS - Financial Service Compensation Scheme FSMA - Financial Services and Markets Act 2000 IMF - International Monetary Fund ILO - International Labor Organisation LSE – London Stock Exchange MRT - Middle Range Thinking NED - Non-Executive Director PIBS - Permanent Interest Bearing Shares PPDS - Profit Participating Deferred Shares PLC - Public Listed Company PCOBS - Parliamentary Commission on Banking Standards PRA - Prudential Regulatory Authority SM&CR - Senior Manager and Certification Regime Table of contents VI Table of Contents Dedication ................................................................................................................................ 2 Acknowledgement ................................................................................................................... 3 Table of Contents .................................................................................................................... 6 Table of Tables ...................................................................................................................... 11 Table of Figures ..................................................................................................................... 13 CHAPTER 1: INTRODUCTION ........................................................................ 1 1.1 Background ............................................................................................................ 1 1.2 The Motivation for Studying Governance and Accountability in UK Building Societies ................................................................................................................. 4 1.3 Research Design................................................................................................... 10 1.4 Structure of the Thesis ......................................................................................... 13 CHAPTER 2: MUTUALITY AND GOVERNANCE IN MUTUAL ORGANISATIONS ................................................................................................20 2.1 Introduction .......................................................................................................... 20 2.2 Conceptualisation of Mutuality in Mutual Organisations .................................... 20 2.3 Governance in Mutual Organisations .................................................................. 24 2.4 Development of Corporate Governance in the UK.............................................. 26 2.5 Distinctive Features of Mutual Organisations’ Governance ................................ 29 2.6 Theories on Mutual Organisations’ Governance Practices .................................. 33 2.6.1 Democratic Theory .............................................................................................. 34 2.6.2 Agency Theory..................................................................................................... 35 2.6.3 Stewardship Theory ............................................................................................. 37 2.7 The Importance of Studying Governance and Accountability in UK Mutual Organisations ....................................................................................................... 39 2.8 Summary of the Chapter ...................................................................................... 41 CHAPTER 3: CONCEPTUAL FRAMEWORK ..............................................42 3.1 Introduction .......................................................................................................... 42 3.2 Nature of Accountability...................................................................................... 42 Table of contents VII 3.2.1 Accountability as a Relational Concept ............................................................... 43 3.3 Synthesis of Accountability in Literature ............................................................ 45 3.3.1.1 Formal External Accountability ........................................................................... 46 3.3.2 Formal Internal Accountability ............................................................................ 47 3.3.3 Informal External Accountability ........................................................................ 59 3.3.4 Informal Internal Accountability ......................................................................... 61 3.4 Conceptualising Governance and Accountability in Mutual Organisations ........ 63 3.5 Summary of the Chapter ...................................................................................... 69 CHAPTER 4: INTRODUCTION TO CASE CONTEXT: THE UK BUILDING SOCIETIES .......................................................................................70