One of the biggest bombshells of the Royal Commission to date was Counsel Assisting’s assertion that the AMP had misled the corporate regulator, ASIC, on a number of occasions in relation to breach reporting on issues in its financial advice business.
Clearly, misleading ASIC is never a good idea and the AMP has set out its self-reporting of the breaches in question as well as follow up activity in separate submissions.
This does, though, raise the question of what approach companies should take to their dealings with regulators. Most importantly, has a board consciously determined the company’s approach?
1. Dealing with regulators – what’s our approach?
A trusted, constructive relationship with key regulators is crucial to the short, medium and long term interests of all organisations.
The reputational damage and loss of member and shareholder value that can arise from regulatory action being taken can be enormous, and hard to recover from. In a booming Australian class action market, it can also mean that companies, and directors, could be adding to the risk of resource-sapping litigation for years.
The task of managing regulator relationships is no small one – it should not just be delegated to legal, compliance and risk staff, with non-compliance periodically perused at risk or audit committees.
Instead it should also attract the regular, ongoing attention of senior management, as well as the board.
All directors should ensure that they have a firm grasp of the nature and quality of their relationships with key regulators – whether it be ASIC, the ATO, the ACCC, or other sector-specific regulators.
Directors should ask themselves, “If a regulator were to pick up the phone and call me about an issue, would I be able to confidently answer the question?”
But, more than demonstrating due care and diligence, directors must set the ‘tone from the top’ in clear expectations of transparent and constructive regulatory engagement.
These questions will come to the fore over the coming year as the banking sector grapples with the Banking Executive Accountability Regime (BEAR) obligation to deal with APRA in “an open, constructive and cooperative way”.
This explicit obligation (effective 1 July 2018 for the major banks) suggests that a change of approach from the industry is expected, while the ongoing Royal Commission will only serve to heighten government and community demands for greater transparency.
More broadly, directors from all sectors should be looking at their business and asking how they deal with their regulators.
2. Dealing with other stakeholders – who are they and do we have a strategy?
But what about other stakeholders, beyond the regulators?
As we know, directors are subject to strict fiduciary and statutory duties. In the Corporations Act 2001, duties are owed specifically ‘to the company’. Generally, Australian courts have defined this as acting in the best interests of the company as a whole, being the interests of current, and in some cases future, shareholders. This contrasts with the UK, for example, where the Companies Act 2006 requires directors to have regard to a range of matters in discharging their duty to promote the success of their company, including: the interests of employees; the impact on the community and the environment; and relationships with suppliers, customers and others.
However, case law and statute in Australia does set a range of stakeholder interests for boards to manage, from strict liability offences for corporate breaches (such as in WHS and environmental laws), to protecting the company’s reputation by promoting a culture of compliance with the law (see ASIC vs Cassimatis, and the Commonwealth Criminal Code regarding a ‘culture of compliance’). This balancing of stakeholder interests becomes more acute in the ‘zone of insolvency’ where creditor interests are elevated.
It is worth pointing out that two Australian Government reviews have considered, and recommended against, the law in Australia being changed to reflect a “stakeholder” approach to directors’ duties. In each case, the view was taken that in considering what is in the best interests of shareholders, directors will consider broader interests (e.g. employees, creditors) in so far as they are relevant to shareholders’ interests. The AICD has taken a similar position in such policy debates, and therefore not supported reform.
This notwithstanding, in practical terms, effective boards will be constantly evaluating stakeholder impacts: satisfied customers treated fairly, an engaged workforce, and a sound reputation for corporate conduct will all be relevant to strategy and long-term performance.
Just as companies will typically have sophisticated investor relations programs, the same approach should be taken for engaging with other stakeholders. This is all the more important in a world where anyone can broadcast through Twitter or Facebook, and media has 24 hours of news to fill on a daily basis. Evolving community expectations are in turn shaping investor behaviour, with ESG risks increasingly featuring in shareholder conversations.
Depending on the complexity of the business and its industry, key stakeholders to engage with may include:
- Employees and their representatives (e.g. unions);
- Customers and consumer representatives (e.g. CHOICE);
- Suppliers and their representative bodies;
- Media and public commentators;
- Activist and community groups.
Each one of these relationships, if handled poorly, can contribute to reputational damage, the erosion of shareholder value, and, in some cases, legal liability for the company -- and in the worst instances, liability for directors.
This challenge should not be seen as necessitating a contrived “charm” offensive, but rather viewed as an opportunity to listen to other perspectives and learn about potential vulnerabilities and risks.
To give three examples and some of the questions you might ask:
- Employees – are you physically talking to employees, or waiting for a periodic, filtered staff survey to tell you what they think? Front line staff should be the earliest warning signal to a business. If morale is low and turnover is great, what does that say about the business?
- Suppliers – if company profit margins are high, but suppliers are struggling to stay afloat, what does that mean for the long term sustainability of your business? What visibility do you have into suppliers’ business practices?
- Customers – when customers are legitimately aggrieved, is your company listening to them, and quickly fixing systems and policies? What engagement do you have with consumer representatives? If enough customers face the same problem, and they are not effectively remediated, you might be staring down the barrel of a class action.
3. Stakeholder insights – how can they help me better understand the business?
Directors should approach stakeholder engagement as an opportunity to better understand and navigate the company’s operational environment. The views and experiences of stakeholders are critically important data points that can be harnessed to a company’s advantage or ignored at great peril.
A well thought-out stakeholder management plan requires patience, perseverance, and an open-mind.
If you don’t feel you can learn anything from stakeholders, ask yourself, “If a journalist asked them what they thought of my company, what would they say?”