Post Hayne – which way from here?
‘Would you tell me, please, which way I ought to go from here?’ Alice said to the Cheshire Cat. ‘That depends a good deal on where you want to get to, said the Cat. We are all familiar with this sage advice from a fictitious cat and now we are left in no doubt which road Justice Hayne wants Australian corporations to travel – he makes it all very clear in his final Banking Royal Commission Report and there are very strong messages around board oversight.
Justice Hayne says in his opening remarks, “…There can be no doubt that the primary responsibility for misconduct in the financial services industry lies with the entities concerned and those who managed and controlled those entities: their boards and senior management…”. He further reminds us that, “…Because it is the entities, their boards and senior executives who bear primary responsibility for what has happened, close attention must be given to their culture, their governance and their remuneration practices…”.
I agree and have argued regularly that the time has come for the directors and boards who are accountable for ensuring the proper and ethical function of our corporations to take back control. The time has come for those directors and boards to enforce ethical behaviour and reignite robust customer service cultures – not just in financial services industry organisations, but throughout corporate Australia. And, corporate Australia needs to clearly understand we are entering unprecedented times and the extent of the scrutiny from regulators will be palpable.
Justice Hayne makes it clear that corporations must obey the law, not mislead or deceive consumers or regulators, be fair in conducting business, provide services that are fit for purpose, deliver services with reasonable care and skill and always abide by the concept of undivided loyalty when acting for a client. Making this happen clearly involves robust scrutiny and oversight by boards.
Understanding public expectation is often seen as key to driving conduct and organisational culture, but also can be difficult and perhaps unwise to prescribe when it comes to the behaviour of Australian corporations and how consumers and customers should be treated. However, in Justice Hayne’s opening remarks referring to conduct examined he said, “…Very often, the conduct has broken the law. And if it has not broken the law, the conduct has fallen short of the kind of behaviour the community not only expects of financial services entities but is also entitled to expect of them…”.
Commentators will continue to debate community expectations and how expectations depend on circumstances and the motivations of consumers. However, boards can take immediate and decisive action, and again not just boards of those entities in the financial services industry, by setting expectations of how corporations should operate, including ethical behaviour, a focus on providing high quality services and embedding a culture consistent with the organisation’s values.
Graeme Samuel AC who will be conducting a capability review of APRA has drafted his proposed code of conduct for the financial services industry. This code of conduct, “We the undersigned, hereby undertake that as from today we will conduct our operations in accordance with the recommendations of the Hayne report” is blunt, easy to understand and can just as easily be utilised by all Australian corporations, particularly relating to conducting business ethically, in line with the board’s expectations and a culture of compliance with the law. Mr Samuel further, very rightly, points out “Corporate Australia has got a relatively short memory and tends to fall asleep again, become complacent and lapse into old behaviour”. I agree totally with Mr Samuel – this complacency runs in cycles back over decades, whenever major corporate collapses or significant lapses in governance has been identified. This is a particularly important risk highlighted by Mr Samuel.
Justice Hayne’s recommendations are now being debated at length. I do not propose to go into detail about the findings. Simply, I propose there is a need to get on board with the recommendations and findings and the best way for Australian corporations to do that is to ensure boards and directors take back control and remember they are the governors with the statutory and fiduciary duties.
Dishonesty and greed were the consistent themes identified by Justice Hayne during his inquiries. How did this happen when boards are supposed to be watching? Clearly boards are accountable for setting the strategic direction of the organisation, delegating authority to the CEO to manage the business, providing robust oversight of risk, compliance and financial sustainability and for embedding the desired culture into the organisation – just to name but a few of the many key accountabilities of boards.
To do all this boards need to have information to make decisions, but it is imperative they have the right information to make the right decisions or what I call defensible decisions.
Justice Hayne highlights in his report that boards must have the right information in order to discharge their functions. In particular, boards must have the right information in order to challenge management on important issues including issues about breaches of law and standards of conduct, and issues that may give rise to poor outcomes for customers. Without the right information a board cannot discharge its functions effectively. He further points out that when referring to the right information, he is not referring to boards having more information but that it is the quality not the quantity that must increase.
Justice Hayne very rightly says that improving the quality of information given to boards will require giving directors less material and more information. Justice Hayne also says that he does not pretend to offer any single answer to how boards can ensure that they receive the right information, but boards and management must keep considering how to present information about the right issues in the right way. Many recent and significant Australian corporate judgements have asked the same question – Justice Middleton in the now famous Centro case said a board can control the information it receives.
However, Australian boards seem to be slow learners when it comes to clearly articulating expectations to management about board papers and information requirements.
It is not Justice Hayne’s job to answer the question of how to provide boards with the right information, in the right form, having the right level of analysis through a robust process, procedure and control system in order to make defensible decisions. That is the job of the board assisted by governance experts, particularly those governance experts with demonstrated expertise in making this happen.
Effective Governance (eG), part of the HopgoodGanim Advisory Group, the pre-eminent provider of governance services in Australia, has demonstrated this expertise over the last 21 years working with listed entities, public and private companies, family owned businesses, not-for-profits and charities, government entities and APRA-regulated entities to develop high performance boards.
So, how do boards ensure they are receiving the quality information required to make the defensible decisions consumers, stakeholders, shareholders, governments and regulators expect? Robust processes, procedures and controls developed and implemented by skilled executives and overseen by high performing and skilled directors are fundamental to capturing the information. However, without the right information provided in board papers, presented in a clear and understandable way, aligned with organisational strategy and complying with board expectations and policy the information does not reach the quality and standard required to make defensible decisions.
Effective Governance has the solution. We are the experts at providing practical guidance to those executives and managers responsible for preparing board papers. We can help boards to clearly articulate their expectations to management. The development and implementation of a board paper writing manual and a board policy on expectations and reporting underpinned by the Effective Governance Writing Better Board Papers course is the answer to enhancing leading practice governance. Contact our team to find out more.