ceo letter

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has reported. Over the past year testimony has revealed cultures at some of the country’s largest and most important institutions that fall well below community expectations, raising challenging questions for the governance community.

There is a clear message in the final report that directors and senior executives are accountable, and the regulators have been directed to apply themselves. “There can be no doubt that the primary responsibility for misconduct in the financial services industry lies with the entities concerned and those who managed and controlled those entities: their boards and senior management,” wrote Commissioner Kenneth Hayne AC QC in his introduction to the final report.

One of the main problems across the industry was poor governance, Hayne found. Unethical practices endured and remediation lacked focus and intent. In the Commissioner’s words: “When management is acting in a way that is delaying remediation to customers, and damaging the bank’s relationship with regulators, it is appropriate for the board to intervene and say, ‘Enough is enough. Fix this, and fix it now’.”

Commissioner Hayne’s final report also is a reminder that the Australian governance framework remains intact, though confidence in its application has been shaken. The report reinforced some of the most fundamental principles of organisational governance: the tone is set from the top, there must be accountability for wrongdoing, adherence to the law is a basic expectation, and shareholder returns are not the only consideration for directors in fulfilling their duties.

Commissioner Hayne’s views on the role of the board were accurate and nuanced. “The task of the board is overall superintendence of the company, not its day-to-day management,” he wrote. “But an integral part of that task is being able and willing to challenge management on key issues, and doing that whenever necessary.”

This is a point we have been prosecuting over the past year as policy makers and commentators discussed moves that could have blurred the distinction between board and management. The AICD’s then chair Elizabeth Proust AO FAICD wrote in the Australian Financial Review in October, “In order to align to a perspective where directors can prevent any instance of wrongdoing (if such a thing were possible), they would have to become, in effect, prescient full-time employees. This would fundamentally undermine the non-executive director’s ability to act as an independent and inquiring mind.”

Hayne’s final report also is a reminder that the Australian governance framework remains intact, though confidence in its application has been shaken.

That independence is fundamental to the work of fixing the culture of the financial services industry. This is ongoing and will start with boards. Commissioner Hayne’s recommendations include implementing an iterative process for governing corporate culture. Organisations should as often as possible assess their culture, identify and deal with problems, and monitor whether changes have been effective. It is a sound methodology.

In April and May, the AICD will hold events around Australia on the implications of the Royal Commission for governance broadly. Panels of experienced directors will share how as a director community we strengthen oversight of culture, establish stronger ethical decision-making systems, set the right incentives throughout our organisations, and live up to our duties and responsibilities. There will be opportunities at these events for members to give feedback on how the Royal Commission should shape AICD curriculum and policy in the future.

We are reviewing our education curriculum, tools program and webinar schedule in light of the Royal Commission’s findings to ensure we provide directors with practical guidance on how to oversee culture. Our advisory team is actively working with organisations to evaluate and improve their cultures.

As the Royal Commission closes, the Aged Care Royal Commission begins. While Commissioner Lynelle Briggs has said there are many positive examples of quality aged care, the commission will feature more confronting testimony. We will, no doubt, struggle to fathom how boards and management at some institutions could have allowed the problems identified to fester. We will wonder how organisations tasked to care for the most vulnerable could have breached the trust of patients and their loved ones.

The Aged Care Commissioners have emphasised that a key part of their mandate is to ensure “a world-class care system in which those receiving aged care, and their loved ones, can have confidence”.

This is a mandate we can all embrace and the AICD will invest as much effort in this commission as we have in financial services. To strengthen society through world-class governance, we need to step up to the challenge.