Tough questions were asked of ASIC Chair James Shipton in relation to ASIC’s approach to enforcement and the need for change, while NAB Chair Ken Henry raised fundamentally important issues in relation to directors’ duties and board accountability.
For an earlier article on separate issues that have been addressed during this round of hearings, click here.
The role of ASIC, and its approach to enforcement
Mr Shipton was questioned extensively regarding ASIC’s role and its relationships with entities it regulates.
Questions were asked about the nature of ASIC’s relationships with senior industry leaders; its failure to ‘name and shame’ entities in specific ASIC reports; and a perceived lack of candour and transparency in entities’ dealings with ASIC.
In a similar vein to observations made by Commissioner Hayne in his interim report, we continue to see a push by Counsel Assisting for stronger and quicker enforcement action by ASIC to deal with misconduct, including through litigation (which was presented as the chief tool of any regulator). Both Commissioner Hayne and Counsel Assisting criticised ASIC for failing to take legal proceedings against large entities.
In AICD’s submission in response to the interim report, we agreed that the evidence presented during the hearings held by the Royal Commission demonstrates that ASIC’s enforcement practices have not been sufficient to achieve deterrence. The AICD supports strong and proactive enforcement by regulators and agrees that strategically important litigation can be important.
However, we also hold a firm view that negotiated outcomes have a number of potential advantages. In particular, enforceable undertakings can:
- achieve a significantly more efficient outcome, including in relation to customer remediation or compensation;
- result in improved compliance systems and processes; and
- be a more cost-effective alternative to litigation.
Further, it is important to recognise that ASIC is required to balance ever increasing demands within a limited budget. It is critical that ASIC is appropriately resourced if it is to fulfil its mandate. This was reflected in Mr Shipton’s evidence, which highlighted resourcing concerns and constraints.
During the hearings, there was also discussion about internal ASIC governance, including questions about ASIC’s lack of non-executive oversight.
The AICD has previously advocated for a change in ASIC’s governance structure to improve accountability and culture, and suggested that having a board with a majority of non-executive directors would provide greater oversight, objectivity and external perspectives to ASIC. While it may prove a challenge to find individuals with the requisite knowledge and experience to provide effective oversight while avoiding any material conflicts of interest arising from other board positions, there are international precedents for such a model (including in the UK and New Zealand).
In his evidence, Mr Shipton accepted the need for governance changes at ASIC, while defending the recent creation of executive director positions which would allow Commissioners to be more strategic (without needing a separate board comprised of non-executive directors).
It seems likely that ASIC governance and accountability will feature in Commissioner Hayne’s final report.
Directors’ duties and board accountability
The hearings have also included a discussion of board accountability, and the legal framework for directors’ duties.
Under Australian law, a key legal duty of directors is to act in good faith in the best interests of the corporation, and for a proper purpose. Courts have tended to equate the interests of the corporation with the interests of shareholders as a whole (a shareholder primacy approach), although case law on this interpretation continues to evolve.
During his evidence, NAB Chair Ken Henry called the principle of shareholder primacy into question, and suggested that the notion that directors are only accountable to shareholders has been an important contributor to the loss of public trust and confidence in business.
This is a critical debate. It has become clear in recent years, at least in practical terms, that the legal duty to act in the best interests of the corporation cannot be regarded in isolation to the interests of stakeholder groups. In practice, acting in a responsible and ethical manner towards stakeholders (such as employees, the community and the environment) is usually consistent with, and can often be necessary for, the promotion of the interests of the company and its sustainability.
In our experience, directors are well aware that, in order to build long-term value and reputation, it is important to take into account the legitimate needs and expectations of a range of interest groups in decision making processes, rather than focusing on short-term returns to shareholders. It is accepted that this is permitted under the current formulation of the law.
However, the AICD has been confronted by evidence of misconduct heard during the Royal Commission and is committed to finding a way forward and listening to stakeholder views. Continuing this debate, and providing clarity on the role of boards and directors, will serve to strengthen governance and help to restore community trust in business.
That said, any attempt to reformulate the law (including a core duty of directors) would need to be done carefully, in close consultation with legal experts, and with the knowledge that any legislative change is unlikely to be a panacea for poor corporate conduct.