Directors who spoke to us included Ken Dean FAICD, Chair of Mission Australia; Kevin McCann AO FAICDLife, Chairman of Telix Pharmaceuticals Limited and member of Male Champions of Change; Susan Pascoe AM FAICD, Chair of Australian Council for International Development and Director of Mercy Health Australia; Diane Smith-Gander AO FAICD, director of Wesfarmers and AGL Energy, and Chair of CEDA and Safe Work Australia; Nicola Wakefield-Evans FAICD, Chair of 30% Club Australia and director of AICD.
Some quotes have been lightly edited for length and clarity.
What do the cases of Rio and AMP generally say about the importance of accountability for boards, and the pressure from shareholders and other stakeholders to be more accountable?
I don’t know that the expectations themselves have increased all that much – but in an age of social media where negative sentiments spread globally at lightning speed, there isn’t anywhere to hide from the bad news – nor should there be. In fact, in both cases that seems to be at least part of the issue – on the facts that are available neither organisation really seems to have recognised the seriousness of the issues at stake. Neither do I think that accountability has changed. These kinds of consequences have been seen in the past, and will no doubt be seen in future.
The key implication for boards in terms of accountability as a result of the issues at Rio and AMP is not to ignore the potential for an adverse impact on the reputation of the company by corporate decisions. Boards are increasingly required to take account of reputational risk, which is the potential for negative publicity, public perception or events having an adverse impact on a company's reputation, affecting its revenue and shareholder value.
The consequences do not rest solely with individual careers and management, they also draw in boards, as Rio and AMP have found. Institutional investors, mum and dad investors, ethical investors and local communities will not tolerate institutionalised sexism or destruction of the country’s heritage – nor should they. There are profound lessons for board members, who need a contemporary mindset that they operate within local stakeholder communities, and it not sufficient to deliver a short-term profit to their shareholders. Along with attention to matters such as cybersecurity, shifting geopolitical alliances, and occupational health and safety, they need to take account of their environmental, cultural and social impact.
I think these cases tell us that waiting until conduct leads to failure then taking action is not a good strategy for any company or a board of directors. It is important the board understands the conduct management system in the company’s and has appropriate hindsight and audit of that system. This ensures the board is receiving appropriate disclosures around management of breaches.
Shareholders, staff and social commentators objected to the AMP’s board’s unanimous decision and the media provided a platform for their views to be widely known. Over a period of time the ongoing criticism of the board decision led some major shareholders to become concerned about the impact the decision was having for the reputation of AMP and the distraction to management. It seems to me that once the media embraces the views of stakeholders in the company and social commentators and gives wide publicity to criticism of a decision, it becomes extremely difficult to maintain it and, in addition, inevitably a scapegoat is also required which is usually the Chairman together with other key directors.
In your opinion, do these cases show there needs to be a stronger focus on culture to prevent issues like this happening in the future?
Yes, and not just the need for a stronger focus on culture, but for a stronger culture. When organisations act in ways that are contrary to what they say about their culture – which is certainly the case with Rio’s environmental and indigenous engagement, and AMP’s people management practices – the real issue isn’t whether culture has been given enough’ focus’. That tends to look like spin. Culture isn’t created by writing policy statements, important though they are. If the leadership isn’t living the culture, the organisation is at risk of having its cultural veneer peeled away.
Both the AMP and Rio issues are, at heart, the same. They put the spotlight onto whether culture (or values) really direct the way things are done, or whether they take a back seat when the consequences of following them becomes too costly. That really exposes the price people and organisations put on the values they espouse. If you say you have a policy that sexual harassment will not be tolerated, but then tolerate it in the behavior of someone who makes lots of money for you, then you don’t really have a ‘zero tolerance’ policy at all.
I think the real challenge in this is having the right response over the right time frame. It isn’t right to tag people with past mistakes forever, although that is exactly what some current ‘shaming’ movements are doing. There must be an opportunity to show that lessons have been learnt and behaviors genuinely changed. But changes like that are not seen in just a few months. It is only by being tested over time – perhaps a very long time – that deep changes are proven. Until they are, it can’t be right to think that the loss of a bonus, or even a substantial monetary fine, is enough to remedy the past and ensure that it won’t repeat.
Well, culture is what the culture is. So the question is, is the culture appropriate to the risk appetite that the board is setting, given the purpose of the company? If it is that the culture is out of alignment, then it's a very tricky task to work out how the board will act to move the culture. Organisations still have a lack of understanding of how that can be done.
As the APRA inquiry into the CBA noted, ‘Accountability means being answerable for actions, decisions and outcomes within one’s area of control and influence. Accountability can be delivered through formal frameworks and culture… However, the cornerstone of culture is the actions and behaviours of the CEO and the Group Executives, and the standard to which they are held by the Board.
How does this reflect on the significance of a charter of social licence to operate for business?
I am skeptical of the nebulous concept of social licence. We have the rule of law in Australia which governs how a company operates. Also, in this context, I agree with Commissioner Hayne who said we need to ask the question "This may be legal, but should we do it?" This is a good touchstone for directors. Directors have to be very thoughtful about the likely reaction of sections of the community to actions which they regard as inappropriate. If they are regarded as controversial and sections of the community and media combine to challenge them, it may seriously impact on operations and company reputation.
Some prominent directors have argued against the concept of a social licence, and I understand why. There’s a tyranny in the concept of operating to a licence granted by no-one, but able to be withdrawn - or re-written - by everyone. If there was agreement on what a single ‘social licence to operate’ was, it would be fine. But there isn’t, because everyone has his or her own idea of what the social licence is. At the detail level, the social licence concept fails to recognise that doing anything worthwhile inevitably requires balancing different, and often competing, interests. So the social licence is generally very parochial and narrow, elevating one interest above all others.
But it is foolish to ignore that this is a feature of society, and of businesses that operate in the society. It means that managers, and boards, need to labour to understand the views of the stakeholders, be prepared to engage transparently with them, and in cases where their views cannot be met in the way they want, to explain and appeal to the wider court of public opinion.
Boards would be wise to create, publish and demonstrably live by a social licence to operate. Millennial workers and ethical consumers are being attracted to hybrid social impact businesses, such as B Corps. Just as these entities can threaten the monopoly of charities on good works, so can they also threaten the amoral consumerism. As we move into a post-pandemic world, we are likely to see changes such as greater numbers of home-based workers, a move to the regions, and increased commitment to buying local and supporting local communities. Those entities that demonstrate they understand their social and environmental credentials are likely to receive greater local and shareholder approval.
I think the companies’ social licence to operate has taken a real body blow here. With Rio, the reaction of the WA state government is to make legislative changes around Aboriginal rights to impact the decisions that mining companies are making. So the WA government is effectively saying we're going to change the rules. They are saying that really mining companies have not got enough of a social licence to operate in the current regulatory framework, so they are changing it for everyone.
These are incredibly big consequences for any company – that their social licence has been damaged so much that the government or the regulator is changing the rules. The social licence damage at AMP extends to the contract the company has with their investors, and particularly the largest investors.
Do you think the reputational damage and consequences here in both cases is a lesson to be learned for all boards?
Every damaging incident has lessons for other boards. I’m sure many directors and boards will be reflecting on these incidents over coming months. The challenge is to see the principles, and not either get bogged down in the detail or imagine that ‘our circumstances are so different that it could never happen here’.
There are definitely lessons for other boards in the Rio and AMP case studies. Here are a few:
- Boards should insist that management have an articulated culture, that is modelled and measured.
- Management and boards need to take staff (and customer) complaints seriously and there should be real consequences for weak responses.
- It is unacceptable to destroy a country’s cultural heritage. (This should not need to be said…)
- Boards will be held accountable to the poor decisions of management, if their response is seen to be inadequate.
How does a board recover from this kind of reputational damage?
A new Chair will need to communicate with all stakeholders, in particular employees and shareholders and the social commentators who have taken an interest in the controversy and issues raised. The Chairman will also need to be transparent about the reason why a former Chairman and another director retired and why the Board reversed its original decision on the promotion of the executive. If, as a consequence, of the controversy there will be reputational damage which takes time to be recovered. However, if the board and management are resolute one would hope that they can put the controversy behind them and proceed with the turnaround strategy they are undertaking at AMP.