rebuilding trust angus armour

On 27 July, public consultations closed on the proposed fourth edition of the ASX Corporate Governance Principles, published by the ASX Corporate Governance Council. The ASX listing rules require listed entities to report on how their corporate governance practices compare to the ASX Principles, under an “if not, why not” model. In this way, the ASX encourages listed companies to follow the ASX Principles without mandating their application. Companies are impelled to comply with the ASX Principles, given they are seen by investors and stakeholders as reflective of good practice.

For the fourth edition, the concept of a company’s “social licence to operate” was introduced in the consultation document, highlighting that issues of stakeholder and community trust have become central to governance considerations.

Trust in Australian institutions has reached unsustainably low levels. Across a range of publications and surveys it is a clear and consistent message. The 2018 Edelman Trust Barometer registered record declines in trust in Australia across all four institutional groups — government, media, business and NGOs.

Trust is essential to the social capital that allows us to prepare for the future.

Misconduct in financial services, significant corporate fines in the past few months, governance failures at not-for-profits and the tone of our political debates, have contributed to a decline in trust. How we use technology to engage and learn about the world has driven significant changes in media business models, and made it easier for people to avoid information that challenges their opinions and world view. Perceptions and emotions are cultivated and influenced to a considerable degree.

Trust underpins the social capital we rely on to have constructive debates about our future. To quote from CEDA’s July 2018 Community Pulse: “for government to have the political capital to implement the right policy settings, the community needs to have trust that the benefits will be shared broadly”. CEDA found that 74 per cent of people believed both large corporations and senior executives have gained a lot from 26 years of uninterrupted economic growth, whereas only five per cent of people believe they, or people like them, have personally gained. People have lost trust in the system because they do not feel the system is working for them.

That sense of disconnect will only increase. Technological changes, particularly automation and AI, have raised concerns with the impact on individuals and society as a whole. While many are optimistic about the opportunities, at the individual level challenges for the unskilled and re-skilled will be considerable, as will the ethical challenges embedded in many new technologies. Compounding those personal concerns, we are living through a once-in-a-century rebalancing of economic and political power in the context of an unpredictable political climate. Uncertainty looms over every generation in our society.

That uncertainty could limit our “room to move”. It is challenging for any government to take important steps — like reducing overly prescriptive regulations or taking risks in innovative service delivery — in a low-trust environment, without the political capital or support for such measures. Operating in a low-trust environment affects the capacity of institutions and businesses to deepen relationships with customers, staff, stakeholders, regulators and government, prompting demands for a more prescriptive regulatory environment.

Boards always balance complex stakeholder interests in fulfilling their duties — engaged staff, satisfied customers and constructive relationships with stakeholders and communities support long-term value creation. The AICD has concerns that the social licence concept is inherently subjective, and its introduction into the ASX Principles could risk contradicting existing duties and responsibilities.

Regardless of whether a “social licence to operate” concept is integrated into the ASX Principles, boards will need to be proactive in deciding the appropriate steps they need to take to navigate the growing sentiment of distrust in the community. Rebuilding trust will be a slow process. It will require individual reflection and institutional commitment to changing our processes, systems and cultures to meet the higher expectations of a 21st-century world. And to meet the challenges we already see in the 21st-century world, it is an essential task across our society.