Poor cultural practices in institutions have become entrenched over decades. Commissioner Hayne’s report is an important catalyst for change, and if our institutions want to regain public trust, they must respond positively.
As the peak organisation focused on building the capability of Australia’s community of directors, the people who must take ultimate responsibility for corporate behaviour in this country, the Australian Institute of Company Directors strongly supports positive change and intends to lead this process.
As I say in my introduction to this issue, we are reviewing our education curriculum, tools program and webinar schedule in light of the Royal Commission’s findings to give directors practical guidance on how to oversee culture. Our Advisory team is also actively working with organisations to evaluate and improve their cultures.
While Commissioner Hayne recognised that the underlying structure of our system of boards and management is sound, he was critical of the approach taken in financial services in three respects:
- A prioritisation of short-term profit over customer and stakeholder interests
- A system of bonuses and rewards that can encourage unethical behaviour
- A lack of insight into corporate culture and challenge of management.
A recurring theme in the Hayne report is that boards and directors need a significant shift in intensity in their oversight of non-financial risk to mitigate the risk of further misconduct. This will require boards to invest more time and energy on the key questions and challenges in their organisation, without involving themselves in the day-to-day management of the organisation.
While the AICD strongly endorses Commissioner Hayne’s view that directors consider the interests of all stakeholders when acting in the best interests of the company, evidence before the Royal Commission rightly has the community questioning whether this occurs in practice.
That requires working with all stakeholders in the pursuit of long-term value creation. Market participants, including institutional investors, need to be prepared to shift their focus from purely short-term financial metrics that have, on occasion, resulted in perverse outcomes. Directors need to convince the community that the interests of shareholders are considered alongside other stakeholders, including employees and customers.
It is not just the general community that expects change. The AICD’s 43,000 membership, who operate across the spectrum of not-for-profits, small to medium businesses, government enterprises and listed companies, have been appalled by the revelations from the Royal Commission. There is a strong and consistent call for action, focused on regaining community trust.
“Just as the community has been outraged by evidence at the Royal Commission, so has the AICD membership.” Angus Armour FAICD
We cannot afford to miss this watershed opportunity for a reset.
Boards must make clear statements about what they are doing to understand the culture and practices of their organisations. Boards are responsible for the oversight of culture in their organisation as much as financial performance. Ethical decision-making must be prioritised and embedded into any institution’s culture. And boards need to swiftly and effectively deal with unethical misconduct. The consequences for ethical breaches must be as evident and immediate as any financial or safety breach.
The job of holding the organisation to account rests primarily with the board and should not be left to regulators or courts. When boards reward senior executives with bonuses after misconduct has surfaced, it sends the wrong signal.
Boards must make it clear to their employees, customers, shareholders and the broader community how they intend to balance stakeholder interests as they build long-term value in the company.
Undoubtedly the demand on directors is increasing. What does that mean?
For a start we need to tackle the issue of “overboarding”. The question needs to evolve from “can I handle the expected workload?” to “can I still be an effective director if any one of my boards is engulfed in a crisis?”.
We must also continue to push ourselves on the issue of board composition. Are our boardrooms sufficiently experienced and diverse in their thinking to respond to the challenges of the future? An honest answer to that question will require appointments that go beyond the existing director gene pool.
It is undeniable that accountability for misconduct lies with the entities concerned and those who managed and controlled those entities: their boards and senior management.
The consequences will be significant. As ASIC’s investigations into potential criminal matters evolve and matters come before the courts, it is possible that individuals involved will be fined, banned, or even go to jail.
Commissioner Hayne’s report represents the beginning and not the end of a conversation about governance reform. While the existing frameworks are fundamentally sound, community trust will not be restored unless we seize the opportunity for lasting impact.
The AICD’s policy team has a one-hour webinar on the governance issues raised by the Royal Commission final report. The webinar is complimentary for members and available throughout 2019. For more information, click here.