While the specifics of Crown’s issues may be unique to the sector, there are lessons from the casino operator’s governance failings for all boards.
We live in an age of increased accountability. We are judged by what we tweet, post and Instagram. We are filmed by video cameras in nearly every person’s pocket and information that was once closely held is now widely dispersed. It is also the age of the public scandal where the conduct of boards and senior executives is held up to public examination and, all too often, censure. Crown is the most recent example, particularly serious as it potentially represents an existential threat to the company.
Given the peculiar nature of the company and the highly regulated sector it operates within, it could be tempting to dismiss the recent findings against Crown in the Commissioner Patricia Bergin’s forensic and excoriating report on its suitability to hold a casino licence in NSW as not containing lessons for others. However, there are takeaways on corporate governance that all boards and directors should take from the report.
Summary of Report
The report made certain findings against Crown, including facilitation of money laundering through its controlled accounts; that it disregarded the welfare of staff and continued to ignore a toxic culture that put them at risk; and that it entered into commercial relationships with so-called Junket operators who had links to Triads and other organised crime groups. This occurred because risk management and corporate governance structures were compromised; Crown’s directors were not informed of very significant matters of which they should have been informed and risks to the safety of staff working in China were not properly appreciated and/or averted.
The report identified failures of corporate governance in the following areas:
- ethical conduct;
- risk management and oversight;
- board composition, primarily, board independence and board tenure; and
- remuneration and incentivisation of directors and senior executives.
Crown had a commitment to ethical behaviours in its code of conduct for both directors and employees and this was reiterated by directors in their witness evidence. However, Commissioner Bergin found clear ethical failings particularly in relation to Crown’s business dealings in China, which led to the arrest of its staff, and to other allegations of money laundering. Despite a professed commitment to a culture of compliance, this was clearly secondary to commercial considerations. This was partly driven by remuneration structures and incentives for staff. When the media reported failings the board closed ranks and issued an ASX release and a media advertisement which questioned the objectivity of a former employee who had acted as a whistle-blower to the media.
Commissioner Bergin was particularly critical of Crown refusing to acknowledge and rectify problems until the conclusion of the public hearings, despite being aware of them prior.
Ethical conduct and corporate culture are difficult subjects to merge but they are essential to boardroom dynamics and organisational success. As the Crown report shows at the heart of many – if not all – of the high-profile governance failures over the past decade have been examples of poor company culture or sub-cultures.
The AICD has sought to assist directors confront these issues with a number of recent publications, Ethics in the Boardroom which we prepared in conjunction with the Ethics Centre, a practical tool to assist directors in governing organisational culture and a report, co-authored by ACSI, into governing company culture containing insights from Australian directors and practical guidance on some of the key issues and questions boards should seek to explore. These reports and tools are practical guides aimed at assisting directors look at their decision making through an ethical lens as well as become an active and curious steward alert to an overly optimistic picture of culture from management.
Risk management and oversight
Commissioner Bergin found that the Crown board had failed in its fundamental responsibility to set, monitor and communicate its risk appetite. This meant that a small group of senior management effectively set Crown’s risk appetite in relation to operations within China. In her words, the board was essentially denied control of the risk appetite of the company. This ultimately led to the arrest and detention of Crown employees. A lack of knowledge on money laundering also led to the underappreciation of risk.
While the failures lay with management and management not passing information up to the board, the report found that the board ultimately had to accept responsibility for risk. Commissioner Bergin is critical of the board’s failure to look into the causes of the issues in China. For example, based on the legal advice in relation to a class action lawsuit underway, the board declined to investigate the failings that led to the arrest of its staff in China. Based on the Commissioner Bergin’s findings, the board had missed the chance to undertake a rigorous and systemic corporate analysis of the multiple failures.
Board composition, independence and board tenure
Within the context of individual director’s duties, the AICD considers boards to be collective bodies characterised by collective decision-making power and therefore collective responsibilities. The Crown case is somewhat different, however, given the nature of the licensing regime which required the Commissioner to form a view on the suitability of each individual director. Each director was called to give evidence and had their individual decision-making process, and their contributions around the board table, questioned. Performance of some of the directors were assessed during the testimony process and were deemed as inappropriate for board members.
Commissioner Bergin concluded that the board needed highly qualified people capable of dealing with the unique casino environment. In the case of failings, such as money laundering, there must be “astute knowledge” at the board level and it is insufficient to leave it to some department within the organisation that never makes its presence felt as the board level. She acknowledged the challenge to this but stated that if a company expected to operate a casino it needed to have that corporate character. The board’s anti-money laundering training was ‘not extensive’, other than, late in the public inquiry, a one hour on-line module on anti-money laundering.
Clearly, not all boards will need the in-depth knowledge of money-laundering risk that Crown’s board did, however all boards can treat this case as lesson learned.. Are there particular risks in our industry or sector that require “astute knowledge”? Do the directors hold that level of knowledge and if not, what steps should we take to see that they do? This does not of course require them to be subject matter experts but rather have a firm grasp of a key risks that commensurates with their role of NED within a specific operating environment. Notably, one recommendation that Commissioner Bergin had was that all casino directors should have completed courses run by the AICD, in order to demonstrate some knowledge of corporate governance.
Crown has a dominant shareholder in Consolidated Press Holdings (CPH) and James Packer. Notwithstanding that CPH had several nominee directors and a number of non-executive independent directors, in practice Mr Packer exercises real power over Crown. Another unusual aspect of Crown’s management, which only changed recently, was to have an Executive Chairman. The Board now has an independent Chair, consistent with broader practice amongst ASX-listed entities.
Independent directors must always be aware =of their behaviour and jealously guard their independence, particularly where there is a controlling shareholder. Directors will need to remind themselves of their obligation to act in good faith and in the best interests of the corporation, rather than that of any single shareholder.
Remuneration and incentivisation of directors and senior executives.
In common with findings of the Banking Royal commission the report found that remuneration and incentive structures helped to drive a culture that placed commercial considerations over compliance. Again, this is a matter for oversight for boards, while boards do not set individual remuneration for all staff they should have oversight of remuneration structures to see whether they are adequately addressing risk, including non-financial risk. This is particularly true of bonuses and incentive payments.
The report makes grim reading for Crown and the Crown board. The fallout can be seen in the exodus of directors and senior managers from the organisation. For all directors there are good general lessons: be aware of conflicts of interest and threats to independence, be proactive in seeking training and education to stay up to date with key issues in your sector and remain inquisitive of management. Be curious wherever there is risk and monitor culture to see how it is expressed in the organisation. Oh – and if you haven’t already – do the AICD’s company director course!