For many years, royal commissions and similar inquiries have provided unique insights into the internal governance of entities ranging from major banks to churches. Some, such as the Royal Commission into the collapse of HIH Insurance two decades ago, have resulted in significant changes in corporate attitudes and practices. Others, not so much. It remains to be seen which category the ongoing inquiry into Crown Resorts Limited will fall into when it reports early in 2021.
The inquiry, called in August 2019 by the NSW Independent Liquor & Gaming Authority, is to determine whether Crown is suitable to hold its licence to operate the new casino at Barangaroo on the western edge of Sydney Harbour, due to open on 14 December. The inquiry is being conducted by former Supreme Court judge Patricia Bergin SC under the Casino Control Act 1992 (NSW) (CCA) with all the powers of a royal commission.
The CCA inquiry was prompted by allegations raised in the media in July 2019 about the conduct of Crown and its associates, including that they engaged in money laundering and breached gambling laws, and also partnered with junket operators with links to drug traffickers, money launderers, human traffickers and organised crime groups. Tied up with the third allegation are questions about whether Crown staff or agents were acting illegally in China in promoting and facilitating its high-roller business there, leading to their detention in 2016. Also in the mix is a confidential agreement, terminated in October 2020, giving the Packer interests in Crown special access to corporate information.
The live stream of the inquiry hearings has made gripping viewing, especially for anyone who is interested in the workings of boards and management. Witnesses giving evidence before the inquiry in October include major shareholder and former executive chair James Packer and current chair Helen Coonan.
The inquiry raises squarely the board’s responsibility for managing risk, particularly non-financial risk, in the business. The way in which it is playing out also poses important questions about the stewardship obligations of shareholders in listed entities and the usefulness of the ASX Corporate Governance Council’s principles and recommendations on corporate governance, with which Crown purported to comply.
Gaming and casino businesses are tightly regulated precisely because of their heightened vulnerability to criminal influence and exploitation. Operating in foreign countries, including China, compounds that vulnerability. Crown’s 2020 corporate governance statement provides that “the board (in conjunction with management) is responsible for identifying areas of significant business risk and ensuring arrangements are in place to adequately manage those risks”. Yet the inquiry’s work to date suggests its efforts were inadequate, at least in relation to money laundering controls and keeping its China-based staff safe.
A familiar range of excuses was on display at the inquiry, with the perennial “management kept it from us” getting its usual outing. This ignores the fundamental truth that risk management systems — for which a board of a listed company is ultimately responsible — are inadequate if they allow for that to occur. A board that is at the mercy of an executive team that controls which risks it sees has a defective system and, if information is deliberately withheld, the wrong executive team. These matters are clearly within the board’s control.
The evidence before the inquiry suggests other attitudinal problems were present at Crown. One is the view — evident in director Andrew Demetriou’s back-channel correspondence with Packer — that time and effort spent on compliance and regulatory matters comes at the expense of performance.
“A board that is at the mercy of an executive team that controls which risks [the board] sees has a defective system and, if information is deliberately withheld, the wrong executive team.”
For example, Demetriou reported to Packer that he told the board, “we would become the most compliant regulated business in Australia but we’re at risk of being like the Australian cricket team: timid, reactionary, not bold or aggressive”. This suggests a fundamental misunderstanding of the legal responsibility of directors to manage, or direct the management of, a law-abiding business.
Boards are not guarantors of corporate compliance and nor should they be. But they have a clear responsibility to reflect on the material risks and satisfy themselves that those risks — including conduct, compliance and operational risk — are being appropriately identified and addressed.
Another problem is individual directors’ over-reliance on cant phrases such as “culture of compliance” and formulaic governance structures and practices as a substitute for real and sceptical engagement with the business and its management. The corporate governance industry, including the ASX Corporate Governance Council, is not in the magic spells business. Talking about “tone from the top” is meaningless if non-executive directors see themselves as well-intentioned neophytes who can learn on the job and wait for consultants to inform them of the fundamental legal settings within which the business operates.
Directors owe their company a duty of care, which extends to mastering these matters
in the same way as they are expected to master the financial reporting requirements to meet
the threshold standard set in the Centro decision in 2011.
These kinds of attitudes can lead directors to either misunderstand, or fail to perform, key parts of their role. During his evidence before the inquiry, Packer was asked by Counsel Assisting to account for the “ethical failures, failures of risk management processes and failures of corporate governance” that occurred while he was executive chair of Crown.
He disagreed that they could be attributed to “a corporate culture which focused excessively on profits”, but when pushed as to why they occurred, he answered: “I just don’t know”.
Regulators and minority shareholders will be hoping the current chair has greater insight.
In her prepared statement to the Crown annual general meeting on 22 October, Coonan said the inquiry had “heard evidence of certain governance and risk management failings which do not reflect our values and expectations. Let me say clearly that I unreservedly apologise for these failings. As a board we will take all the steps necessary to make sure we learn from these mistakes.” This includes promised board renewal at some future time — though not of the chair, who was a board member for the whole period under examination by the inquiry.
Predictably, perhaps, Crown shareholders registered a protest vote by recording a first strike on the remuneration report at the AGM. This is unlikely to be the end of the matter, but it seems any further action waits on the inquiry’s findings.
It is a truism of corporate law that shareholders get the directors they deserve. A private investor who chooses to invest in a business that is screened out of ethical investment portfolios, and run by an entity whose major shareholders have asymmetric access to information and influence over the board, is free to do so.
But institutional investors need to consider their stewardship responsibilities and accountability to the people whose money they manage.
For the regulators, cases like Crown show there’s still significant work to be done. The failure of the Australian Securities and Investments Commission to draw — through litigation — a clear line in the sand about the extent and nature of boards’ collective responsibility for the management of non-financial risk, allows these poor practices to fester. For the gaming authorities in NSW and elsewhere, the inquiry’s findings will be critical.
While Crown may think the nuclear option of pulling the Barangaroo licence or delaying the opening are off the table, others may consider such assumptions premature.
Edit: On November 18, the NSW Independent Liquor and Gaming Authority formally requested Crown Resorts to delay opening of its gaming operations at Barangaroo in light of ongoing concerns over the company’s suitability to run the casino.