- Email: [email protected]
Transformation and reform after the financial crisis
Accounting Forum 36 (2012) 1–4
Contents lists available at SciVerse ScienceDirect
Accounting Forum journal homepage: www.elsevier.com/locate/accfor
Introduction
Transformation and reform after the financial crisis
In this special issue of Accounting Forum, we present a series of papers that address the general issue of economic reform and regulation in the aftermath of the financial crisis. The first three papers in this issue share a common objective: employing ‘accounting’ numbers to construct critically engaged narratives that challenge understandings of national economic success and the transformation of corporate financial performance. The second set of articles focuses on how trust and legitimacy are refracted by the various identities, motivations and calculations of stakeholders and how this often frustrates the capacity to reform corporate governance and generate effective regulatory change. In the first paper, Accounting for national success and failure: rethinking the UK case, Erturk et al. argue that globalization and European integration are being stress tested by ‘fragile’, long chains of debt and trade imbalances that threaten stability. Their argument is that the political classes in the UK are now focused on rebalancing the national business model, that is, reducing the country’s dependence on financial services and encouraging manufacturing capacity. The awarding of the Thameslink carriage-building contract to Siemens reveals the contradictory nature of the political rhetoric and commitment to ‘rebalancing the UK economy’. Erturk et al. use this entry point to ask broader questions about the role of government, public procurement and ‘industrial policy’ in the UK. The discussion of the British case is of broader interest because it raises issues about national success and failure which are relevant to other high income capitalist countries, and also about whether and how the national economy is the relevant unit of analysis. To develop their argument, Erturk et al. focus on the UK’s Gross Domestic Product (GDP) and employment growth and how these measures have been employed to depict ‘a new post-1980s golden age’ and a political arithmetic of relative economic success. Aggregates such as GDP and employment growth used to paint this picture of economic success also conceal ambiguities and contradictions. Thus, it is necessary, the authors argue, to focus on ‘the constituent moving parts such as the different elements of final demand, the composition of investment and the objects of bank lending’ to avoid complacency and to put together different types of political ‘arithmetic’. The paper deconstructs aggregates and reassembles their components of analysis into a bricolage, whereby it is possible to generate a ‘case specific understanding of what drives and limits employment creation in different national cases’. Erturk et al. reveal the significant contribution that housing equity withdrawal has had on UK GDP growth rates as stock (wealth accumulation) leaks into income circuits. The UK’s current account needs a strong manufacturing base if surpluses are to be sustained and a balance of trade constraint avoided. Also, employment growth has been substantially driven by government spending, which inflates state and parastate employment levels as much as private investment in jobs. When it comes to private sector employment growth, the authors reveal not only its relative contribution but also its unequal distribution across regions, with London and the South East capturing a disproportionate share of private sector employment growth. Deconstructing aggregates and reassembling them as a bricolage forms the basis for alternative critical narratives of national economic success. The authors argue that this move presents a significant opportunity for ‘socially minded accountants’ because deconstructing and contextualizing the bottom line provides new and insightful understanding(s) that can be deployed to modify not only the political arithmetic but also the purpose of economic intervention. The second paper, by Lee and Yin, is on outsourcing and off-shoring. The paper is specifically concerned with the increased pressure on the US corporate sector in the aftermath of the financial crisis to extract a higher return on capital for shareholder value and wealth accumulation. The authors identify academic and consulting literature that suggests outsourcing and off-shoring can both sustain competitiveness and deliver shareholder value for wealth accumulation. The consulting firm Accenture observes that firms are:
0155-9982/$ – see front matter © 2012 Elsevier Ltd. All rights reserved. doi:10.1016/j.accfor.2012.01.003
2
Introduction / Accounting Forum 36 (2012) 1–4
Always under intense financial pressure, in recent years executives have turned to off-shoring their IT work in search of immediate relief. Labor arbitrage advantages delivered rapid cost cuts, to the accolades of shareholders and chief financial officers alike. Lee and Yin focus their attention on the US industrial sector, which has a long-established tradition of outsourcing and off-shoring. Using financial data available from the Bureau of Economic Analysis, the authors present this financial data in the context of a nature expenses rather than the function of the expense accounting format. They reveal that US industries, seeking cost reduction, have increased overseas employment relative to US employment, especially in low-wage Asia Pacific countries such as China, where employee costs are, on average, one-sixth those of the US parent. The authors are careful to discriminate between cost reduction for price competiveness and cost structure for a return on capital employed for shareholder value and wealth accumulation. Their accounting analysis reveals that US overseas affiliates operate with a higher level of outsourcing than their respective US parents, which reduces the value retained after the external purchase costs are deducted. However, a lower employment cost functions to compensate and bring the cash margin back to levels similar to the average US parent. Deconstructing the bottom line cash margin usefully reveals similarities and differences between the US parents and their foreign affiliates. Research by the US Bureau of Economic Analysis observes that ‘A longstanding question about foreign owned U.S. companies is why their rates of return have been consistently below those of other U.S. companies’. In this article, the authors estimate the cash (rather than profit) return on assets for the US parent and their foreign affiliates, revealing little shareholder value advantage from outsourcing and off-shoring. The authors observe that accounting numbers, located within carefully constructed frameworks of analysis, can be employed to challenge claims about the transformative capacity of policy interventions. The paper by Andersson and Haslam focuses on explaining the private equity business model where funding reached a peak of $2.5 trillion in 2009. The private equity business model is financially leveraged, that is, the value of equity funding is significantly lower than debt finance. For example, before the financial crisis, the ratio of debt to equity funding had reached 0.72:0.28. According to the authors, generating the return on equity depends on the private equity partnership transforming the financial performance of acquired portfolio companies. In circumstances where the private equity partnership is able to transform the financials of acquired firms, this may also inflate market valuations and generate substantial returns to equity investors. The general argument is that the presence of private equity disciplines managers toward generating higher returns on capital. Michael Jensen observes: how Private Equity generally implements Strategic Value Accountability (what I have labeled the missing concept in corporate governance) much better than the public corporation, and how Private Equity avoids much of the out-ofintegrity gaming and lying that dominates the relations between public firms and capital markets. The authors reveal that the amount of funds drawn down by private equity partnerships from 2000 to 2008 exceeded the cash distribution back to equity investors by twenty percent. These funds, they argue, are placed in a business model that is fragile because it depends on a low-cost and plentiful supply of debt finance with favorable covenants, the transformation of acquired company financials and inflated stock market valuations. During the financial crisis of 2008–2009, stock market values collapsed by fifty percent. This collapse in turn triggered mark-to-market accounting adjustments, such as goodwill impairments, that forced private equity partnerships to write down the value of assets. In addition, the supply of debt finance with favorable convents dried up. Andersson and Haslam illustrate the volatility of the private equity business model using an illustrative case of Terra Firma’s acquisition of EMI Music for £4.2 bn. From the outset, Terra Firma’s senior executives sold the deal to their equity investors with a narrative about how new and better management would transform EMI’s financials. The authors reveal that EMI’s financials were not transformed under new management and that losses began to accelerate rather than slow, forcing goodwill impairment charges and accumulated losses of £2bn. The reduction in EMI’s fair value was also recorded as a holding loss in the Terra Firma private equity partnership accounts, reducing the market value of its portfolio back to book value. The authors reveal that the business model underpinning private equity investment is fragile and volatile because it depends on the financial transformation of acquisitions and favorable capital market conditions in terms of the supply of debt and stock market appreciation. For investors such as pension funds, it is a business model built on shifting sands, not terra firma. In their paper Differing Perceptions of Non-Executive Directors’ Roles in UK SMEs: Governance Conundrum or Cultural Anomaly?, Boxer et al. present a new model of a working relationship of trust development for managing director (MD) and non-executive director (NED) dyads in small and medium-sized enterprises (SMEs) in the UK with the role of NEDs. The first part of this paper outlines the logics underpinning a proposed NED role trust typology of NED tells, NED advises and NED acts. This choice of typology is influenced by the literature on trust development in working relationships within corporate governance and small business contexts. The authors survey both MDs and NEDs, and they visually map these separate responses/recollections in time and the range of typologies before including both MD and NED responses in one map. This visualization of responses usefully reveals how the NED/MD roles evolve over time across the range of typologies. This paper supports and builds on previous findings that MDs and NEDs do not always share the same view on how NEDs help companies. The MDs did not perceive that they
Introduction / Accounting Forum 36 (2012) 1–4
3
needed to be told how to run their business, and according to the authors, the MDs were ‘looking for NED collaboration style soft skills of ‘advising and counseling”. This paper reveals that MDs and NEDs have variable perceptions about the role of the NED in UK SMEs. These findings reinforce other studies that have alluded to this issue across the corporate sector more generally. The authors suggest that the longer the relationship between the NED and the MD, the wider the trust relationship. At the same time, the NED’s role becomes more complacent and less challenging. As the authors state, the paper ‘serves to highlight the potential dangers of interlocking board membership to regulators, investors and other stakeholders – not least the NEDs themselves’. The issue of trust and legitimacy is also the subject of the paper Regulating Audit Quality: Restoring trust and legitimacy, by Holm and Zaman. In the UK, the Financial Reporting Council (FRC) took the step of codifying its Audit Quality Framework (AQF) and requesting the stakeholders respond. The main stakeholders who responded included audit firms, professional bodies, and investors, and the authors use these responses as their evidence. This paper contrasts with previous works that seek to conceptualize the audit process in terms of outputs; instead, it concentrates on how interested stakeholders seek to influence the regulation of audit quality. The authors observe that to legitimize its existence, the auditing profession has a vested interest in convincing users that accountants can be trusted. In pursuit of this goal, the auditing profession engages in modes of impression management that, at the institutional level, enable symbolic displays that pertain to diligent public service for the benefit of outsiders but do not have any serious practical implications for how audit work is actually performed. To restore trust in the audit process, the authors argue that the stakeholders involved are concerned with established trust through legitimacy and image management and that, for the FRC, audit quality and standards are an essential component of reestablishing trust. The authors review stakeholder responses to the FRC’s audit project using codification and textual analysis. In assessing these responses, the authors find that these vary based on the nature of the stakeholder. For example, investors are less concerned about identifying threats to the effectiveness of the audit process, and although stakeholders are concerned with the quality of the audit culture, they are less concerned with identifying exactly what that culture is. The authors reveal how the various stakeholders involved in the audit process are at odds: The investors expressed concern about audit firms’ ability to apply and adapt the audit process to a changing business environment, about harmonisation of international auditing standards with national audit standards, and too much concentration of audits around 31 December. In relation to the latter, one investor suggests research on how the concentration of audits around December year-ends impacts on the effectiveness of the audit process. Investors wanted specific steps that would provide improved accountability to and face-to-face dialogue with institutional investors and relevant information. The authors argue that regulating audit quality is not a mere technical phenomenon; it is subject to a reconciliation of the demands of a variety of stakeholders, all with varying interests. These stakeholders include professional bodies, audit firms and investors, who, in the aftermath of the financial crisis, showed a significant lack of trust in auditing. Whereas the FRC is focused on audit quality, the authors argue that audit firms and professional bodies have mainly focused on issues that do not pose a threat to their commercial interests as stakeholders. The final paper, by Demirag, takes as its starting point the financial crisis in Turkey in 2000–2001 and the fragility of the Turkish banking sector at the time. In an earlier period, the banking system was fragmented, often family owned and lacking robust balance sheets to withstand macroeconomic shocks. In a similar fashion to the current global banking crisis, external regulatory bodies such as the IMF exerted considerable pressure to bring monetary conditions under control. In the short-term, these IMF instigated policy interventions exacerbated Turkey’s economic problems. The possibility of foreign investors not to continue lending money to Turkish companies and banks, even at very attractive local interest rates, unless they improved their ‘corporate governance’ practices and adapted the government’s financial reforms resulted in the creation of a domestic coalition between the state and local businesses in order to strengthen the country’s position on the world economic stage. Demirag observes how the role of the state and its agencies changed from a passive responder to IMF demands to a more proactive and interventionist regulator of banks. . . . there was a policy shift since the financial crisis in 2001 and the evidence presented in this paper points towards a state which has shifted from reactive to proactive as a result. External pressures for regulatory reforms are not enough for a successful transformation of the economy as domestic support of the reforms is also necessary. The author reveals the importance of a domestic coalition of regulatory institutional agents, including the Ministry of Finance, the Capital Markets Board, and The Banking Regulation and Supervision Agency. The author used interview material and textual analysis to capture how external pressure and demands from external agencies are internalized to become part of a more proactive process of reform across stakeholder groups. Without the domestic coalition of actors and support for reform, external forces for change alone may not be sustainable or even enough to drive coherent and integrated reform. However a crisis also increases the power and ability of external actors to exercise domestic change which resulted, as can be seen here, in the creation of mechanisms for sustainable change in the existing status quo of domestic coalitions.
4
Introduction / Accounting Forum 36 (2012) 1–4
The outcome of the ‘proactive’ reform process was to strengthen the financial condition of Turkish banks in terms of balance sheet structure. By 2009, the capital adequacy ratio averaged 21 percent and non-performing loans 0.9 percent of all loans in 2009. Demirag argues that external pressures exerted on a nation state by international agencies may not be enough for sustainable and effective reforms. He reveals how trust and support of domestic stakeholders are essential ingredients of the state’s capacity to reform corporate governance and generate effective regulatory change. Glen Lehman School of Commerce, University of South Australia, Australia Colin Haslam ∗ Finance Accounting Research Group, University of Hertfordshire, Hatfield, Herts AL10 9AB, United Kingdom ∗ Corresponding author. E-mail addresses: [email protected] (G. Lehman), [email protected] (C. Haslam)
18 October 2011
Contents lists available at SciVerse ScienceDirect
Accounting Forum journal homepage: www.elsevier.com/locate/accfor
Introduction
Transformation and reform after the financial crisis
In this special issue of Accounting Forum, we present a series of papers that address the general issue of economic reform and regulation in the aftermath of the financial crisis. The first three papers in this issue share a common objective: employing ‘accounting’ numbers to construct critically engaged narratives that challenge understandings of national economic success and the transformation of corporate financial performance. The second set of articles focuses on how trust and legitimacy are refracted by the various identities, motivations and calculations of stakeholders and how this often frustrates the capacity to reform corporate governance and generate effective regulatory change. In the first paper, Accounting for national success and failure: rethinking the UK case, Erturk et al. argue that globalization and European integration are being stress tested by ‘fragile’, long chains of debt and trade imbalances that threaten stability. Their argument is that the political classes in the UK are now focused on rebalancing the national business model, that is, reducing the country’s dependence on financial services and encouraging manufacturing capacity. The awarding of the Thameslink carriage-building contract to Siemens reveals the contradictory nature of the political rhetoric and commitment to ‘rebalancing the UK economy’. Erturk et al. use this entry point to ask broader questions about the role of government, public procurement and ‘industrial policy’ in the UK. The discussion of the British case is of broader interest because it raises issues about national success and failure which are relevant to other high income capitalist countries, and also about whether and how the national economy is the relevant unit of analysis. To develop their argument, Erturk et al. focus on the UK’s Gross Domestic Product (GDP) and employment growth and how these measures have been employed to depict ‘a new post-1980s golden age’ and a political arithmetic of relative economic success. Aggregates such as GDP and employment growth used to paint this picture of economic success also conceal ambiguities and contradictions. Thus, it is necessary, the authors argue, to focus on ‘the constituent moving parts such as the different elements of final demand, the composition of investment and the objects of bank lending’ to avoid complacency and to put together different types of political ‘arithmetic’. The paper deconstructs aggregates and reassembles their components of analysis into a bricolage, whereby it is possible to generate a ‘case specific understanding of what drives and limits employment creation in different national cases’. Erturk et al. reveal the significant contribution that housing equity withdrawal has had on UK GDP growth rates as stock (wealth accumulation) leaks into income circuits. The UK’s current account needs a strong manufacturing base if surpluses are to be sustained and a balance of trade constraint avoided. Also, employment growth has been substantially driven by government spending, which inflates state and parastate employment levels as much as private investment in jobs. When it comes to private sector employment growth, the authors reveal not only its relative contribution but also its unequal distribution across regions, with London and the South East capturing a disproportionate share of private sector employment growth. Deconstructing aggregates and reassembling them as a bricolage forms the basis for alternative critical narratives of national economic success. The authors argue that this move presents a significant opportunity for ‘socially minded accountants’ because deconstructing and contextualizing the bottom line provides new and insightful understanding(s) that can be deployed to modify not only the political arithmetic but also the purpose of economic intervention. The second paper, by Lee and Yin, is on outsourcing and off-shoring. The paper is specifically concerned with the increased pressure on the US corporate sector in the aftermath of the financial crisis to extract a higher return on capital for shareholder value and wealth accumulation. The authors identify academic and consulting literature that suggests outsourcing and off-shoring can both sustain competitiveness and deliver shareholder value for wealth accumulation. The consulting firm Accenture observes that firms are:
0155-9982/$ – see front matter © 2012 Elsevier Ltd. All rights reserved. doi:10.1016/j.accfor.2012.01.003
2
Introduction / Accounting Forum 36 (2012) 1–4
Always under intense financial pressure, in recent years executives have turned to off-shoring their IT work in search of immediate relief. Labor arbitrage advantages delivered rapid cost cuts, to the accolades of shareholders and chief financial officers alike. Lee and Yin focus their attention on the US industrial sector, which has a long-established tradition of outsourcing and off-shoring. Using financial data available from the Bureau of Economic Analysis, the authors present this financial data in the context of a nature expenses rather than the function of the expense accounting format. They reveal that US industries, seeking cost reduction, have increased overseas employment relative to US employment, especially in low-wage Asia Pacific countries such as China, where employee costs are, on average, one-sixth those of the US parent. The authors are careful to discriminate between cost reduction for price competiveness and cost structure for a return on capital employed for shareholder value and wealth accumulation. Their accounting analysis reveals that US overseas affiliates operate with a higher level of outsourcing than their respective US parents, which reduces the value retained after the external purchase costs are deducted. However, a lower employment cost functions to compensate and bring the cash margin back to levels similar to the average US parent. Deconstructing the bottom line cash margin usefully reveals similarities and differences between the US parents and their foreign affiliates. Research by the US Bureau of Economic Analysis observes that ‘A longstanding question about foreign owned U.S. companies is why their rates of return have been consistently below those of other U.S. companies’. In this article, the authors estimate the cash (rather than profit) return on assets for the US parent and their foreign affiliates, revealing little shareholder value advantage from outsourcing and off-shoring. The authors observe that accounting numbers, located within carefully constructed frameworks of analysis, can be employed to challenge claims about the transformative capacity of policy interventions. The paper by Andersson and Haslam focuses on explaining the private equity business model where funding reached a peak of $2.5 trillion in 2009. The private equity business model is financially leveraged, that is, the value of equity funding is significantly lower than debt finance. For example, before the financial crisis, the ratio of debt to equity funding had reached 0.72:0.28. According to the authors, generating the return on equity depends on the private equity partnership transforming the financial performance of acquired portfolio companies. In circumstances where the private equity partnership is able to transform the financials of acquired firms, this may also inflate market valuations and generate substantial returns to equity investors. The general argument is that the presence of private equity disciplines managers toward generating higher returns on capital. Michael Jensen observes: how Private Equity generally implements Strategic Value Accountability (what I have labeled the missing concept in corporate governance) much better than the public corporation, and how Private Equity avoids much of the out-ofintegrity gaming and lying that dominates the relations between public firms and capital markets. The authors reveal that the amount of funds drawn down by private equity partnerships from 2000 to 2008 exceeded the cash distribution back to equity investors by twenty percent. These funds, they argue, are placed in a business model that is fragile because it depends on a low-cost and plentiful supply of debt finance with favorable covenants, the transformation of acquired company financials and inflated stock market valuations. During the financial crisis of 2008–2009, stock market values collapsed by fifty percent. This collapse in turn triggered mark-to-market accounting adjustments, such as goodwill impairments, that forced private equity partnerships to write down the value of assets. In addition, the supply of debt finance with favorable convents dried up. Andersson and Haslam illustrate the volatility of the private equity business model using an illustrative case of Terra Firma’s acquisition of EMI Music for £4.2 bn. From the outset, Terra Firma’s senior executives sold the deal to their equity investors with a narrative about how new and better management would transform EMI’s financials. The authors reveal that EMI’s financials were not transformed under new management and that losses began to accelerate rather than slow, forcing goodwill impairment charges and accumulated losses of £2bn. The reduction in EMI’s fair value was also recorded as a holding loss in the Terra Firma private equity partnership accounts, reducing the market value of its portfolio back to book value. The authors reveal that the business model underpinning private equity investment is fragile and volatile because it depends on the financial transformation of acquisitions and favorable capital market conditions in terms of the supply of debt and stock market appreciation. For investors such as pension funds, it is a business model built on shifting sands, not terra firma. In their paper Differing Perceptions of Non-Executive Directors’ Roles in UK SMEs: Governance Conundrum or Cultural Anomaly?, Boxer et al. present a new model of a working relationship of trust development for managing director (MD) and non-executive director (NED) dyads in small and medium-sized enterprises (SMEs) in the UK with the role of NEDs. The first part of this paper outlines the logics underpinning a proposed NED role trust typology of NED tells, NED advises and NED acts. This choice of typology is influenced by the literature on trust development in working relationships within corporate governance and small business contexts. The authors survey both MDs and NEDs, and they visually map these separate responses/recollections in time and the range of typologies before including both MD and NED responses in one map. This visualization of responses usefully reveals how the NED/MD roles evolve over time across the range of typologies. This paper supports and builds on previous findings that MDs and NEDs do not always share the same view on how NEDs help companies. The MDs did not perceive that they
Introduction / Accounting Forum 36 (2012) 1–4
3
needed to be told how to run their business, and according to the authors, the MDs were ‘looking for NED collaboration style soft skills of ‘advising and counseling”. This paper reveals that MDs and NEDs have variable perceptions about the role of the NED in UK SMEs. These findings reinforce other studies that have alluded to this issue across the corporate sector more generally. The authors suggest that the longer the relationship between the NED and the MD, the wider the trust relationship. At the same time, the NED’s role becomes more complacent and less challenging. As the authors state, the paper ‘serves to highlight the potential dangers of interlocking board membership to regulators, investors and other stakeholders – not least the NEDs themselves’. The issue of trust and legitimacy is also the subject of the paper Regulating Audit Quality: Restoring trust and legitimacy, by Holm and Zaman. In the UK, the Financial Reporting Council (FRC) took the step of codifying its Audit Quality Framework (AQF) and requesting the stakeholders respond. The main stakeholders who responded included audit firms, professional bodies, and investors, and the authors use these responses as their evidence. This paper contrasts with previous works that seek to conceptualize the audit process in terms of outputs; instead, it concentrates on how interested stakeholders seek to influence the regulation of audit quality. The authors observe that to legitimize its existence, the auditing profession has a vested interest in convincing users that accountants can be trusted. In pursuit of this goal, the auditing profession engages in modes of impression management that, at the institutional level, enable symbolic displays that pertain to diligent public service for the benefit of outsiders but do not have any serious practical implications for how audit work is actually performed. To restore trust in the audit process, the authors argue that the stakeholders involved are concerned with established trust through legitimacy and image management and that, for the FRC, audit quality and standards are an essential component of reestablishing trust. The authors review stakeholder responses to the FRC’s audit project using codification and textual analysis. In assessing these responses, the authors find that these vary based on the nature of the stakeholder. For example, investors are less concerned about identifying threats to the effectiveness of the audit process, and although stakeholders are concerned with the quality of the audit culture, they are less concerned with identifying exactly what that culture is. The authors reveal how the various stakeholders involved in the audit process are at odds: The investors expressed concern about audit firms’ ability to apply and adapt the audit process to a changing business environment, about harmonisation of international auditing standards with national audit standards, and too much concentration of audits around 31 December. In relation to the latter, one investor suggests research on how the concentration of audits around December year-ends impacts on the effectiveness of the audit process. Investors wanted specific steps that would provide improved accountability to and face-to-face dialogue with institutional investors and relevant information. The authors argue that regulating audit quality is not a mere technical phenomenon; it is subject to a reconciliation of the demands of a variety of stakeholders, all with varying interests. These stakeholders include professional bodies, audit firms and investors, who, in the aftermath of the financial crisis, showed a significant lack of trust in auditing. Whereas the FRC is focused on audit quality, the authors argue that audit firms and professional bodies have mainly focused on issues that do not pose a threat to their commercial interests as stakeholders. The final paper, by Demirag, takes as its starting point the financial crisis in Turkey in 2000–2001 and the fragility of the Turkish banking sector at the time. In an earlier period, the banking system was fragmented, often family owned and lacking robust balance sheets to withstand macroeconomic shocks. In a similar fashion to the current global banking crisis, external regulatory bodies such as the IMF exerted considerable pressure to bring monetary conditions under control. In the short-term, these IMF instigated policy interventions exacerbated Turkey’s economic problems. The possibility of foreign investors not to continue lending money to Turkish companies and banks, even at very attractive local interest rates, unless they improved their ‘corporate governance’ practices and adapted the government’s financial reforms resulted in the creation of a domestic coalition between the state and local businesses in order to strengthen the country’s position on the world economic stage. Demirag observes how the role of the state and its agencies changed from a passive responder to IMF demands to a more proactive and interventionist regulator of banks. . . . there was a policy shift since the financial crisis in 2001 and the evidence presented in this paper points towards a state which has shifted from reactive to proactive as a result. External pressures for regulatory reforms are not enough for a successful transformation of the economy as domestic support of the reforms is also necessary. The author reveals the importance of a domestic coalition of regulatory institutional agents, including the Ministry of Finance, the Capital Markets Board, and The Banking Regulation and Supervision Agency. The author used interview material and textual analysis to capture how external pressure and demands from external agencies are internalized to become part of a more proactive process of reform across stakeholder groups. Without the domestic coalition of actors and support for reform, external forces for change alone may not be sustainable or even enough to drive coherent and integrated reform. However a crisis also increases the power and ability of external actors to exercise domestic change which resulted, as can be seen here, in the creation of mechanisms for sustainable change in the existing status quo of domestic coalitions.
4
Introduction / Accounting Forum 36 (2012) 1–4
The outcome of the ‘proactive’ reform process was to strengthen the financial condition of Turkish banks in terms of balance sheet structure. By 2009, the capital adequacy ratio averaged 21 percent and non-performing loans 0.9 percent of all loans in 2009. Demirag argues that external pressures exerted on a nation state by international agencies may not be enough for sustainable and effective reforms. He reveals how trust and support of domestic stakeholders are essential ingredients of the state’s capacity to reform corporate governance and generate effective regulatory change. Glen Lehman School of Commerce, University of South Australia, Australia Colin Haslam ∗ Finance Accounting Research Group, University of Hertfordshire, Hatfield, Herts AL10 9AB, United Kingdom ∗ Corresponding author. E-mail addresses: [email protected] (G. Lehman), [email protected] (C. Haslam)
18 October 2011