Only months ago, the key sentiment among many boards was that regulators were becoming increasingly aggressive, with greater scrutiny, harsher penalties and increasing compliance and reporting requirements. In short, businesses were bracing for a period of “regulatory purgatory”.
Graham Bradley AM FAICD explored this sentiment in the 2019 Essential Director Update. He expressed a concern that in the wake of various Royal Commissions and other inquiries into corporate misconduct, “regulators all over the country and across industry sectors — environmental, energy, health and safety, and building regulators — will feel pressure to litigate first, and negotiate second.”
Then COVID-19 happened. With a health and economic disaster looming, our policymakers and regulators moved fast. The scale and speed at which previously untouchable regulations have been changing has led many to wonder whether the anticipated “purgatory” may, in fact, give way to a regulatory “heaven”.
Across the board, we are seeing regulations suspended or modified. Some top-of-mind examples include the Australian Competition and Consumer Commission’s exemptions against collusion, the Australian Prudential Regulation Authority’s relaxed reporting standards, the insolvency safe harbour and, more recently, the changes to continuous disclosure requirements. But there are more examples.
Regulators at all levels of government will be receiving clear instructions from their ministers to improve their speed, streamline their processes and increase their flexibility in order to support an economic recovery. A practical example of this is the current emphasis on fast-tracking approval processes for “shovel-ready” construction projects, which is occurring in many jurisdictions. So regulators will be trying to facilitate timely relief and support for recovery, without incurring any major risks. They will also be keen to ensure the full force of the law is applied to anyone taking advantage of temporary or permanent regulatory changes.
The ACNC articulated this well when it said, “they would act swiftly and firmly in situations where vulnerable people are at risk, where there is a material risk of harm, where there is evidence of severe mismanagement or misappropriation, or if there is a serious or deliberate breach of the Act”.
Look at almost any recent regulatory announcement and they will all have a version of that particular sting in the tail. Even the recent changes to continuous disclosure requirements do not protect directors who act with “knowledge, recklessness or negligence” in relation to inaccurate information disclosures.
In short, there is absolutely nothing in any of the changes that relieve directors or corporate executives from the need to act ethically. So what does this weird hybrid — purgatory/heaven — actually mean for the way corporations deal with regulators in a post-COVID-19 era?
Dealing with regulators
Regulations, at their simplest, are designed to carry out the stated intent of legislation — these intents are captured in the object/s of the Act. But the challenge, for legislation and supporting regulation, is to strike a reasonable balance between often competing, environmental, social and economic outcomes.
Take the NSW Mining Act 1992 as an example (I’m shortening it here) — “to encourage and facilitate the discovery and development of mineral resources in NSW, with regard to the need to encourage ecologically sustainable development…” Regulators must encourage, indeed facilitate, both the discovery and the development of NSW resources for the benefit of the state, but also ensure it is done in as ecologically sustainable a manner as possible.
This challenge is made more difficult by the need for regulations to support the integrity and performance of an industry. Regulators must guide, serve and discipline their regulated communities. This requires not only a deep understanding of their covering legislation and regulatory processes, but also of the immediate 360-degree impacts of actions taken, the possible impact of precedent in future scenarios, and the priorities of governments and relevant ministers.
No regulator has it easy. In addition to their day-to-day work, regulators are always thinking about their legislative obligations, the priority areas of risk, the state of their licensing regimes, the adequacy of current inspections, audits and reporting requirements, as well as their penalty regimes and the overall performance of their regulated communities. This will be no different in an era focusing on economic stimulus. You will see a focus on speed and a genuine desire to identify potential policy and process improvements, especially where the potential downside risk of any change is minimal.
It is in this space of urgent common interest, that corporations have the best chance to move their relationships from one of mutual “tolerance” to a force for mutual good.
Regulators don’t have all the ideas or answers. They know their processes are complex and cumbersome and there is room for improvement. However, they may not know what changes might make the most positive impact or how to prioritise the many options on the table.
Regulators also know that tapping into the expertise of industry and community is vitally important to guiding their reform work. But it’s hard to engage with someone you don’t have a relationship with or don’t trust. Corporations need to earn their regulator’s respect and build up trust and opportunity for open dialogue. The six principles listed below should help:
- Listen, question and try to understand each other’s drivers Regulators are expert in the machinery of government, legislation/regulation; businesses are expert in their operations and industry — not too many people are expert in both. But both, as well as community engagement, are needed for advice to government and/or regulatory decision-making.
- Remember the objects of the Act/s that apply The objects outline, in plain English, the overall intent and guiding principles for particular Acts. They outline the issues regulators must take into consider in decision-making, and the expectations of those covered by the Act. As such, objects should create a common, clear starting point for both parties.
- No-one likes surprises Try to provide as much forewarning on emerging problems, as possible. Depending on the nature of the issue, coming to discussions with two or three options to address the problem/issue is also helpful.
- It is OK not to have all the answers There is no way you can know everything. If you are unsure about something, ask for advice. In the case of regulators, remember they are there to guide their regulated community. If you are new to a process or don’t understand a licence condition, regulation or legislative clause, ask for help. If the regulator can provide you with assistance, it will. After all, you’re probably not the first person to have asked
a similar question.
- Evidence is crucial If you and the regulator have a difference of opinion, legal or otherwise, both sides are likely to need evidence to justify their positions. Depending on the issue, this could be evidence of the local impacts (on the business or local community), industry-wide impacts, downstream industry impacts and/or wider economy, and environment or community impacts. This is important, as you can only hope to find acceptance of a situation and/or alternative solutions, if you first understand what worldview each other is using.
- Make suggestions for improvements/alternative approaches Good ideas for improving an industry’s environmental, societal and economic performance can come from anywhere. If you see a better way to do things, speak up. No, the ideas may not get accepted. Depending on the nature of the idea, multiple departments, lawyers, even public consultation, may mean the idea never gets implemented. But if you don’t speak up, then the opportunity will absolutely and immediately, be lost.
As a society we clearly all lose when businesses do the wrong thing. But we also lose when businesses doing the right thing, with good ideas for reform, remain silent or unheard because they distrust or avoid regulators. Most regulators should want to support a post-COVID-19 recovery, but without incurring unacceptable environmental or societal harm. Most corporations should want the same outcome. Both parties will come at the problem from different angles and that diversity is incredibly valuable.
To drive effective policy reform, to stimulate government and business innovation, to attract new investment, we need to foster a respectful and healthy dialogue between corporations and regulators.
Kylie Hargreaves GAICD is chair of Australian Ocean Energy Group and a former deputy secretary of the NSW Department of Planning and Environment.