advocacy a line in the sand

Governance practices and shortcomings are very much in the spotlight, with the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry continuing its hearings on financial services, and the Australian Prudential Regulation Authority (APRA) releasing the report of its Prudential Review of the Commonwealth Bank of Australia (CBA).

The Royal Commission process has much further to run, and early insights for directors are covered elsewhere in this edition. One of the AICD’s obligations will be to translate the findings and recommendations that flow from the Royal Commission to our advocacy, educational programs and resources. The AICD will also carefully consider and contribute to proposals for law and policy reform that may follow. Meanwhile, APRA’s review of CBA’s governance, culture and accountability offers an immediate opportunity for boards and directors to challenge themselves on governance effectiveness.

The issues discussed in the CBA report could be relevant to many organisations. The AICD encourages all members to carefully consider APRA’s report in light of their own organisations, with a view to assessing whether change or improvement is needed. APRA considers that complacency from financial success “dulled the senses” of the CBA, making the customer and non-financial risk “voice” hard to hear. Key audit and risk committees — and the board itself — did not apply sufficient rigour and urgency. APRA’s findings and recommendations offer a useful point to challenge how your board is managing non-financial risk. In particular, directors should consider:

ASX Corporate Governance Council releases Principles and Recommendations

The ASX Corporate Governance Council, of which the AICD is a member, has released a consultation draft of a major revision to the Council’s Corporate Governance Principles and Recommendations.

The changes proposed are extensive — nine new recommendations are added against which listed entities will be required to report, new expectations on disclosure and a substantial rewrite of Principle 3 (currently to “act ethically and responsibly”) to bring in the concept of social licence.

While many of the issues canvassed for inclusion in the revised Corporate Governance Principles and Recommendations are important, the AICD is looking closely at the increased level of detail in commentary and some of the broader concepts proposed for inclusion. Corporate Governance Principles and Recommendations set a benchmark for governance and warrant serious consideration.

The AICD will be making a submission during the three-month consultation process now open. Members with a view on the proposals are invited to contact AICD Head of Policy Christian Gergis at cgergis@aicd.com.au

Risk governance

Are you regularly updating agendas to capture risk issues? Do you rely on management summaries on risk issues? Do you regularly review customer complaints, not just satisfaction? Does the board actively discuss these and seek to identify systemic issues? Are committee mandates clear?

Holding management to account

Is your board embracing the “show, don’t tell” approach with management? Is there clear executive accountability for risk issues, with visibility to the board? Does executive remuneration include collective accountability for adverse risk and compliance outcomes?

Culture

Is your board promoting a culture where ethics are applied to decisions about customers? Not just “can we?” as a compliance issue, but “should we?”. Is a reliance on good intent creating potential blind spots? Is your board visible to the organisation’s employees, with a clear “tone from the top”? Is your board bringing a sense of “chronic unease” to its oversight of risk?

Penalties for corporate wrongdoing

The AICD supports increased criminal and civil penalties for corporate wrongdoing. The federal government has announced it will look to significantly increase penalties in the Corporations Act 2001 (Cth), following recommendations from the ASIC Enforcement Taskforce Review.

Maximum civil penalties for individuals are set to increase more than fivefold. The current penalty of $200,000 per contravention will be increased to $1.05 million or three times the benefit obtained or loss avoided — whatever is the greater.

Corporations currently face a maximum civil penalty of $1m per contravention under the Corporations Act 2001 (Cth). This is set to significantly increase to the greater of: $10.5m, three times the benefit obtained or loss avoided, or 10 per cent of the company’s annual turnover. The maximum fine will be capped at $210m.

Criminal fines and penalties are also set to increase for individuals, with a proposal to increase imprisonment terms for a range of offences from five to 10 years, and increasing maximum fines to the greater of $945,000 or three times the benefit gained or loss avoided. Corporations will face the larger of: $9.45m, three times the benefit gained or loss avoided, or 10 per cent of the company’s annual turnover.

While these are significant increases, penalties for corporate misconduct must be higher to adequately deter misconduct.

There will also be an expansion of ASIC enforcement powers, including greater scope to ban individuals found to be unfit, improper or incompetent from performing any role in financial services; and a strengthening of its investigative tools. The government will remove imprisonment as a possible sanction for strict liability and absolute liability offences, a move the AICD strongly supports. Legislation to implement the changes is expected later this year.

WHS Review

The AICD has made a submission to the 2018 review of the model work health and safety (WHS) laws, paying particular attention to aspects on the availability of insurance products which cover the cost of work health and safety penalties.

The AICD has welcomed the review by Safe Work Australia and supports strong penalties for officers who fail to exercise their duties under WHS laws. The AICD’s experience is that the overwhelming majority of company directors take health and safety matters very seriously.

Aside from legal obligations and ethical expectations, good corporate governance demands that directors and officers pay particular attention to the health and safety of employees and others within the workplace. The AICD strongly supports robust and effective laws that ensure the health and safety of employees in the workplace. Laws in this area must be fair, balanced and consistent.

The AICD’s position is that Directors and Officers liability insurance (D&O) plays a fundamental role in workplace health and safety matters — any proposed changes to the availability of insurance should be approached with an abundance of caution.

In the case of WHS, there is the possibility that an individual can be held liable because of their role with a company, for example directorship, without the need for some culpability to be established — this makes the availability of insurance crucial.

The common law already adopts a carefully balanced approach to cases involving an insured party seeking to claim under a policy with respect to their alleged criminal liability.