What does the Royal Commission tell us?

Only a few weeks into the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the business community has been rocked by serious allegations of misconduct within the financial services sector. What questions can directors ask in light of the fallout?

So far, the Commission has led to the resignation of both the Chair and CEO of one of Australia’s largest and oldest institutions, AMP, while Counsel Assisting the Royal Commission has levelled accusations of criminal conduct. Other banks have also faced stinging criticism for failures in their respective financial advice businesses.

Meanwhile, the Prime Minister has emphasised that boards are ultimately accountable for what goes on in their companies, while the Treasurer has made similar comments and stated his expectation that the Royal Commission will focus on the role and conduct of boards in the coming months. There is a clear expectation from government and politicians that directors be held responsible for the companies they govern.

With the Royal Commission’s terms of reference being broad – including culture and governance practices, risk management, recruitment, and remuneration – it is undoubted that an intense spotlight will continue to be shone on the corporate governance of the financial services sector in the weeks and months ahead. Of course, public scrutiny is likely to extend to the broader business sector, as questions are asked about what is the proper role of boards, and whether it needs to change.

So what questions should directors be asking themselves in the wake of the Royal Commission? And how can boards give themselves the best opportunity to prevent the serious reputational damage and risk to shareholder value that can come from a public scandal?

Some important issues for directors to consider are as follows:

1. Functioning of the board

How questioning is the board of senior management? Is there a diversity of skill-set, experience and perspective around the table? When the last time an external board review took place? Do board dynamics lend themselves to a robust debate or do a few voices hold sway? Are directors sufficiently across the detail of legal and risk reports to make an informed judgment?

2. Reporting of misconduct

What are the internal thresholds for reporting misconduct to the board? What is the approach of your organisation to “breach reporting” to ASIC? When was the last time these policies were reviewed? How are staff disciplined for serious misconduct or fraud? Are there whistleblowing policies in place?

3. Relationships with key regulators and other stakeholders

What visibility and oversight does the board have of engagement with key regulators such as ASIC and the Australian Tax Office? When was the last time the chair or other members of the board met with them? Are all meetings with the regulator in the company of management? Does a stakeholder management plan exist that involves meaningful engagement with customers, consumer groups, government representatives and other stakeholders?

4. Ethical conduct

Is ethics training embedded in staff induction and ongoing training? Is ethical conduct rewarded? Are there mechanisms for staff to raise concerns about “sharp” practices which may be legal, but potentially unethical or not in keeping with consumer or public expectations? Do staff surveys ask probing questions about ethics and culture in the organisation?

5. Staff remuneration practices

Do remuneration practices, especially sales-based incentives, send the right message to staff? When was the last time they were reviewed and/or benchmarked inside and outside the industry? Are claw-back provisions in place to penalise subsequent poor conduct? What risk oversight is there of “high performing” sales staff?

6. Relationships with key compliance, risk and legal staff

Do board members have relationships with key compliance, risk and legal staff, separate from the CEO? When was the last time there was an independent, external review of the company’s risk management and compliance culture? How often are key external advisers (e.g. lawyers, auditors) changed and/or rotated?

Insight series

Over the months ahead, the AICD will be producing a series of articles that seek to distil the key learnings from the Royal Commission for the director community. We appreciate the importance of the Royal Commission and the need for corporate governance practices to change as a result of the practices that are being uncovered.

Background

The Commission must submit its report to Government by 1 February 2019, with an interim report by 30 September 2018. The Government has stated that it will extend the timeframe for reporting, if needed. The full terms of reference can be found here.