Following the banking Royal Commission revelations and APRA's CBA inquiry, leading directors discuss whether it's time to take another look at directors' duties.
Q: Has the time come to take another look at directors’ duties?
Charles Macek FAICD
Chair Vivid Technology, member International Governance Network
“The short answer is no. What we are seeing come out of the Royal Commission from a board perspective is that boards have not been as effective as they need to be. They have failed to execute their duties appropriately rather than not knowing what their duties are. Boards need to add value, and the way to do that is by supporting management to be the best they can be in executing the agreed corporate strategy whilst appropriately overseeing the associated risks.
Board effectiveness is the issue rather than the need to clarify or change director duties. Board effectiveness depends on the effectiveness of the chair, the board chemistry and culture, the relationship with the chair and CEO — and the diversity of backgrounds and perspectives of directors. We have a long way to go in terms of board composition in this country.”
Alan Kirkland MAICD
“The Corporations Act 2001 (Cth) says that one of the primary responsibilities of directors is to act in the best interests of the company. That’s commonly understood as maximising shareholder value. This in itself isn’t surprising. People buy shares as an investment, so they expect a return in the form of dividends or an increased share price. We’re almost all share investors, either directly or via our superannuation, so we all depend on the system delivering returns over time.
The banking Royal Commission — and the community reaction to it — has laid out the huge mismatch between community expectations of how banks treat their customers and the narrow definition of directors’ duties in the Act. People expect businesses to act in their customers’ interests, not to pursue shareholder value at any cost. That’s even more important when the business is a major institution that portrays itself as a pillar of the economy. But we should not assume this expectation is limited to banking. We see a similar theme in community reactions to poor treatment of customers in other industries such as energy and health insurance.
Unless we set about redefining directors’ duties, we’ll continue to see breakouts of community anger and political intervention on an industry-by-industry basis. That will ultimately be much worse for shareholders and the economy. If you think about the damage to community interests wreaked by the likes of Volkswagen and AMP, you have to wonder whether they would’ve made the same decisions if their directors were required to focus on more than shareholder value.
Over a decade ago, the UK changed the law to make company directors think about ‘enlightened shareholder value’. While they’re still required to act for the benefit of shareholders, directors must now have regard for a range of other interests — including those of employees, customers and suppliers. They’re also required to think about the long-term consequences of decisions, and the company’s impact on the community and environment.”
Judith Fox MAICD
CEO Australian Shareholders’ Association
“The Corporations Act 2001 (Cth) does not state that directors and other officers must exercise their powers and discharge their duties in the best interests of shareholders, although case law has tended to grant primacy to shareholders’ interests. The legislation states that directors have a duty to act in the best interests of the company. As it stands, the law generally links the corporate interests to those of the shareholders, and only derivatively with those of the community, consumers, employees and other stakeholders.
The Royal Commission has shown how the idea of corporate management seeking profit maximisation at any cost — under the guise of preferring shareholders’ interests — can be at a cost to customers, which in turn has had a negative impact on the reputation of companies and directors, and the share price. Ultimately, shareholder interests were affected by the lack of consideration of the interests of stakeholders.
Given that many question whether the law and community expectations sufficiently coincide, there is strength to the argument that only a change to directors’ duties will ensure that alignment. An amendment could be introduced to section 181 of the Act, which would permit directors to have regard to the interests of stakeholders other than shareholders. Providing a permissive clause in the Act to consider these interests would assist directors to consider other stakeholders in decision-making, as directors may take the view that they could be breaching their duties to the company if they do this. These questions were examined in two inquiries more than a decade ago. Yet the debate as to whether the corporations law should change to have directors take account of stakeholders other than shareholders continues.”
Kevin McCann AM FAICDLife
Former chair of Macquarie Group
“When I initially considered the Royal Commission interim report, I was concerned that non-executive directors of financial institutions were challenged because they had not managed financial risk effectively, particularly conduct risk. However, since reflecting on the APRA report into the CBA, I have become more optimistic. With proper management of these risks, boards can fulfil their role of management oversight to ensure this will not occur on the scale revealed in the Royal Commission. It has been common for chairs and CEOs of financial institutions to claim misconduct was due to a few bad apples. It wasn’t — the issues have been revealed as systemic.
High level ‘sorry’ statements are no longer sufficient. Chairs and CEOs need to make a full and frank admission of systemic misconduct, the reasons for this and the actions they propose to take to fix their problems.
The APRA report into CBA is a roadmap for better oversight and interaction between the board and executives. In future, boards will need to be proactive rather than reactive in the way they deal with legislative change.
Another issue is the workload of directors of financial institutions. In present circumstances, directors face a much broader range of responsibilities while banks work to implement programs to deal with issues the Royal Commissioner has identified. Cutting fees is not the way to go. Directors need to be paid to reflect the workload they have undertaken. If the directors of financial institutions are required to sit on fewer boards they need to be compensated for the additional workload they have taken on their bank boards.”
Royal Commission State of Play
The seventh and final round of hearings was held in Sydney and Melbourne from 19–30 November. It gave the Royal Commission the opportunity to explore policy issues identified at all hearings to date. The focus was on causes of misconduct and conduct falling below community standards and expectations by financial services entities (including culture, governance, remuneration and risk management) and possible responses, including regulatory reform.
ANZ Bank, AMP, CBA, Bendigo and Adelaide Bank, National Australia Bank, Westpac and Macquarie Group, ASIC and APRA were listed to give evidence.
The hearings also considered the role of ASIC and APRA in supervising the actions of financial services entities, deterring misconduct by those entities, and taking action when misconduct may have occurred.
In November, the Royal Commission released 215 documents submitted in response to its initial request for information on instances of misconduct or conduct falling below community standards and expectations, identified over the past decade.
As of 28 September, the Royal Commission had received 10,140 submissions.
Where to next?
Commissioner Kenneth Hayne AC QC is due to lodge his final report by 1 February 2019.
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