In fulfilling their fiduciary duties, directors must always act in the best interests of the corporation, writes Professor Pamela Hanrahan.
Directors often look to the decided case law to understand what their duties mean in practice. But sometimes other sources, such as the recent inquiry into the suitability of Crown Resorts Limited to hold a casino licence in NSW, can be an even richer source of guidance for boards.
As with the report on the Commonwealth Bank of Australia conducted for the Australian Prudential Regulation Authority in 2018, and the final report of the banking Royal Commission in 2019, Commissioner Patricia Bergin SCâs report into Crown opens the window on a culture in which a measure of financial success had masked or enabled catastrophic failures to manage non-financial risks, including integrity and compliance risks, and risks of harm to the companyâs broader stakeholders.
Commissioner Bergin found significant failures relating to âCrownâs operations in China and the arrests of the employees in October 2016 â âwith numerous failuresâ to escalate indicators of real risks to the staff to the proper decision-making mechanisms within the company; the probability of money laundering in Crownâs operations, both in the bank accounts of its subsidiaries, Southbank and Riverbank, and in the casino premises (with hundreds of thousands of dollars brought into the casino in cooler bags and shopping bags and exchanged for chips and plaques); and Crownâs failures to ensure it only had commercial associations with junket operators of good reputeâ.
The âstark realityâ, according to the report, was that Crown âfacilitated money laundering⌠unchecked and unchanged in the face of warnings from its bankersâ. It âdisregarded the welfare of its China-based staff putting them at risk of detention by pursuing an aggressive sales policy and failing to escalate risks through the appropriate corporate risk management structuresâ and entered or continued âcommercial relationships with junket operators who had links to Triads and other organised crime groupsâ.
The casino inquiry was not directed at whether Crown or its board and senior management had breached their legal obligations in the past, either under the gaming laws or broader corporate law. While being law-abiding is relevant to the question of whether an entity is suitable to operate a casino, it is not the whole question. In Commissioner Berginâs view, assessing suitability to operate a casino requires âan understanding of the character of the corporationâ, involving âa recognition not only of its strengths, but also of its willingness to: (i) accept the existence of its failures; (ii) to analyse the reasons for such failures; (iii) to remove the cause of its failures; and (iv) to commit to a reformation that will remove the likelihood of a repetition of such failuresâ. The inquiry found Crown failed the suitability test, but left open the possibility of rehabilitation.
Suitability is about character. While noting the âpivotal importance of reliable executives and senior managementâ, Commissioner Bergin recognised that âthe character of the company can in the main be understood through the conduct, attitudes and values of those who set its course. This is the board, including the CEOâ.
What was at the root of the failures at Crown? In her final report, Bergin identified âstructures in place that have contributed to the corporate failuresâ. These included Crownâs relationship with major shareholder Consolidated Press Holdings (CPH) and its owner, James Packer; Crownâs risk management structures and their resourcing; and âthe governance and culture of the organisationâ.
Board changes
After the fallout from the Bergin Inquiry, the Crown Resorts board currently has four directors, including chairman Helen Coonan.
- Ken Barton, CEO & MD â Resigned 15 Feb
- Helen Coonan, Executive Chairman
- Andrew Demetriou â Resigned 11 Feb
- Michael Johnston â Resigned 10 Feb
- Guy Jalland â Resigned 10 Feb
- John Poynton AO FAICD â Resigned 1 March
- Jane Halton AO PSM FAICD
- Harold Mitchell AC â Resigned 22 Feb
- John Horvath AO â Plans to resign
- Antonia Korsanos GAICD
A question of loyalty
It is fundamental to directorsâ roles as fiduciaries that they act at all times in the best interests of the corporation itself. In a solvent business corporation, the corporationâs interests are usually discerned having regard to the interests of the shareholders collectively, over the medium to long term, in investing in a law-abiding and sustainable business. It is not about doing what the largest or loudest shareholder wants. This is particularly true in a highly regulated business where, as Commissioner Bergin noted, there exists an âoverlay of responsibilities to stakeholders well beyond just their shareholdersâ.
For at least some of the Crown directors, according to the report, their relationship with James Packer and CPH seems to have obscured that basic principle, and created âclearly a dysfunctional environmentâ. Commissioner Bergin concluded that âthe corporate needs of Crown were not given precedence over the corporate needs or desires of CPHâ and that âit is obvious that the real power was exercised by Mr Packer, both by reason of his personality and also the somewhat supine attitude adopted by Crownâs operativesâ. The âremote manoeuvringâ by Packer of Crownâs operations âwas enabled by arrangementsâ â including a services agreement and a controlling shareholder protocol, not terminated until October 2020 â which provided Packer with confidential information not available to other shareholders.
Corporate governance principles emphasise the need for independence â and not just from formally âindependentâ directors. This goes beyond structures. A board member who is appointed by or beholden to a substantial shareholder still owes their duty of loyalty to the corporation itself, and must make decisions based on where the corporationâs interests lie. Those interests may coincide with those of a substantial shareholder, but they are not the same.
The inability of some directors to act independently of what they perceived to be Packerâs interests or wishes was obvious on the evidence, including in director Andrew Demetriouâs assurance to Packer â âI remain committed to serving the best interests of Crown, and most importantly, youâ. Unsurprisingly, the Commissioner concluded, âit is imperative that this remote manoeuvring must cease for the health of the corporationâ.
Risk management
The failures identified by the inquiry â the China arrests, the accusations about money laundering and the junket arrangements â also point to significant failures in Crownâs risk management structures and resourcing.
Commissioner Bergin identified risk management as âa core pillar of corporate governanceâ, involving a âcritical, reciprocal relationship between board and managementâ. Consistent with the concept of setting the tone from the top, she concluded âthe fundamental roles of the board comprise: setting the entityâs strategic objectives; setting the entityâs risk appetite; and overseeing managementâs performance, including the execution of the entityâs strategic objectivesâ. The role of management, under the supervision of the board, âis to design and implement the risk management framework and ensure that the entity operates within the risk appetite. Management must also provide the board with sufficiently accurate and timely information for the board to perform its supervisory dutiesâ.
What does this mean in practice? The risk appetite statement âcannot merely express aspirations of total compliance, but must articulate the boardâs expectations in specific instances of non-compliance, such as consequences for breaches as well as escalation and rectification processes. A successful risk appetite statement includes organisation-wide engagement in designing the risk appetite statement, risk escalation and reporting protocols and the linking of remuneration and performance processes with risk management.â
What clearly emerges from the report is the failure of the Crown board to engage adequately with the real risks in the business. When a corporation â as Crown did for years â operates outside its stated risk appetite, âthe board must exercise âactive stewardshipâ and hold management to account⌠A failure to do so suggests the boardâs âtacit acceptanceâ of operating outside risk appetiteâ. If information is not communicated to the board, or the board fails to appreciate the significance of the information, that is a failure by the board either directly or through the risk committee. A risk committee âshould be equipped with sufficient size, independence, technical and industry knowledge and powers under its charter to fulfil its function. These powers include obtaining information, interviewing management, interviewing internal and external auditors and obtaining specialist advice.â
The response to the allegations about money laundering was a case in point. As Commissioner Bergin observed, âit was not until the denouement of the public hearings that Crown apparently formulated an idea that it would be a good idea to give some instruction to the Crown directors on the AML/CTF legislation and landscapeâ â training that former director Harold Mitchell boasted of having finished in half an hour. This was â13 months after the allegations were exposed in the print media, 10 months after Counsel Assisting opened the public hearings referring to the problems in the accounts and after months of what may reasonably be described as devastating evidence of the obvious indicia of money laundering within the accountsâ.
Governance and culture
The third factor identified was failures of governance and culture, which the Commissioner described as âinextricably linkedâ. If governance describes the more formal structures and pillars by which accountability in the organisation is allocated, then culture is the informal norms and behaviours that determine how it plays out on the ground. As the Commissioner observed, many of the problems at Crown âstem[med] from poor corporate governance, deficient risk management structures and processes and a poor corporate cultureâ. Given the failures that occurred, the conclusion seems obvious. But how to fix it?
Culture cannot be ordered up, or measured, on demand. It is no answer for a board to adopt another document full of meaningless jargon. Commissioner Bergin challenged what she called âmanagement speakâ. Finding that âsome of the proposed mechanisms for defining Crown Boardâs appetite for its tolerance for risk events are impenetrableâ, she observed that the fact that the Crown board âhad not at the date of the conclusion of the public hearings of this inquiry on 20 November 2020, proffered evidence that it had attended to these problems is a real and deep impediment to the proper management and proposed cultural changes of the organisationâ.
Culture includes process, but cannot be left to it. It is not a matter for consultants or metrics.
Road to rehabilitation?
Many have asked whether the purging of the whole Crown board would be required before the authority in NSW could regard Crown as suitable to hold the casino licence at Barangaroo. The same question may arise in the inquiries recently announced in Western Australia and Victoria. However, Commissioner Bergin concluded that âsuch an approach would be inappropriate if there is an available realistic alternative to accommodate due regard to the commercial imperative of the viability of a public company whilst achieving such conversionâ. Context is everything.
Six directors left the board after the release of the inquiryâs report. A seventh has announced plans to step down. It is hard to resist the conclusion that the same blindness to the problems that led to the failures was evident in that response, in light of the excoriation several directors received in the report. Ultimately, the composition of the board is a matter for shareholders and it is difficult to see how an institutional investor properly discharging its stewardship obligations could favour the continued involvement of individuals who imperil the corporationâs very licence to operate.
For those who remain, and for directors in other corporations where significant failures have occurred, what happens next? The matters going to suitability identified by Commissioner Bergin â a willingness to accept the existence of failures, to analyse the reasons for failures, to remove the cause of failures and to commit to a reformation that will remove the likelihood of a repetition of such failures â must be the starting point.
Ongoing education helps. Legal liability, commercial accountability and ethical responsibility are all relevant considerations. Events at Crown suggest that critical reflection, integrity, humility, diligence and true independence of mind on the part of directors are more important than ever.
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