Regaining trust

Sunday, 01 December 2019


    Society’s mistrust in our key institutions has been a consistent theme in my conversations with members over the past year.

    The introduction to Dickens’ A Tale of Two Cities would have been a conventional start to this column. With its memorable “it was the best of times, it was the worst of times”, an apt introduction in a month when the ABS reports Australians born today will live longer than at any time in history — driven by improvements in nutrition, health, education — and the Attorney-General chastises another large corporation for systematically underpaying employees more than $300 million.

    Society’s mistrust in our key institutions has been a consistent theme in my conversations with members over the past year. That mistrust stems in part from the sense that critical issues are not being addressed, including energy policy and climate change, and the concern in society that the institutions we rely on are no longer “fit for purpose”. It is amplified with every governance failure or revelation at odds with our conception of “fairness” or “equity”. Consequently, Royal Commissions have become an escape hatch for driving public policy and legislative reform, and people are challenging established governance frameworks.

    More than 13,000 members registered for the AICD’s Essential Director Update (EDU) in October and November, attending events in capital and regional cities across Australia or participating through a webinar. Sydney’s EDU featured Australian Securities and Investments Commission chair James Shipton launching ASIC’s Corporate Governance Taskforce report. The EDU is truly an essential element of our annual program to engage members, from the perspective of informing members of the events and direction of governance practice and debate, and to hear your questions and concerns about this challenging environment.

    The questions raised at EDUs across Australia and across our diverse membership have focused on the role of the board versus management given increasing demands, the practical limits for directors in what they can achieve in areas such as culture and how many commitments they should accept, and the focus of directors’ duties. Members would like to better understand what “accountability” means in this new environment: to whom are they accountable, and how do they demonstrate their accountability?

    In this debate, the British Academy has published a paper on the future of the corporation that “sets out a radical reinterpretation of the nature of the corporation that focuses on corporate purpose, its alignment with social purpose, the trustworthiness of companies and the role of corporate culture in promoting purpose and trust.” The paper draws from academics across the humanities and social sciences through 13 research projects examining different aspects of the future of the corporation.

    Regaining trust

    Recovering a sense of trust in business and other institutions, and promoting positive, purposeful cultures in all our institutions is essential to strengthening our society and ensuring our future prosperity. This is a challenge we must overcome. It is as much a matter of strategy as it is responsibility. Commonwealth Bank of Australia chair Catherine Livingstone AO FAICD recently made this point at a conference on the future of the corporation. “From an internal perspective, [a purpose statement] guides the evolution of strategy, priorities and decision making,” she said.

    The question is whether a “radical” structural approach to our understanding of the corporation will answer the challenge, and if a corporation with an enshrined social purpose, externally set and legislated and regulated, will achieve these aims.

    The first hurdle is whether we would have avoided successive Royal Commissions with this approach. Clearly, there are examples of institutions of every character — including public institutions, charitable and faith-based institutions — that have been undermined by the actions of individuals and shortfalls in governance. And the British Academy does not argue that a clearly articulated social purpose is enough — it points to the influence and direction that purpose provides, and the application of sanctions and penalties when institutions fail to achieve their enshrined social purpose.

    Is the answer legislating purpose with the objective of enforcement? In the case of Australia, Commissioner Hayne AC concluded that no additional regulation was needed to address the failings identified in the banking Royal Commission. The indefensible conduct that has been revealed in serial Royal Commissions — including the recent Royal Commission into Aged Care Quality and Safety and the Royal Commission into Violence, Abuse and Neglect of People with Disability — is essentially captured under our current laws. The challenge is compliance and enforcement of existing laws.

    We have this pressing issue: How do we restore trust in the accountability of our institutions? How do we hold ourselves accountable for the ethical consequences? What can be done practically and appropriately?

    The second hurdle is whether this is the “first, best response” to our challenge of mistrust and aligning expectations. The British Academy suggests that “external factors, in particular technological advances, are intensifying the need for this reinterpretation” and further, “the increasing inadequacy of conventional policy responses in the form of regulation and competition policy, and the steady erosion of the traditional source of social capital from corporate taxation.”

    Should deficiencies in the development and coordination of public policy be resolved by the legislation of a public interest test in the objectives of corporations? It is not clear how that would work. How would a winemaker weigh its social purpose with the public policy choices in the production and sale of alcohol? How could any company define the “national interest” in its social purpose? In the Commonwealth government, the “national interest” takes account of the perspectives of departments and agencies across the government and policy is ultimately decided by our elected representatives. It can be a complex, contested and intensive process; practically, it requires time, resources and consultation that would challenge our most sophisticated companies.

    Our elected representatives are responsible for that complex process. They are tasked to establish the legislative and regulatory environment that provides clarity and certainty for our institutions to function, to allow for the planning that supports investment and employment. They provide the guardrails for the community to function, and for corporations and institutions to focus their compliance. “Obey the law” is one of Commissioner Hayne’s principles. And in the absence of legislative clarity and certainty, business either adapts, moves ahead or pulls back.

    Business dynamic

    There are reasons that business runs ahead of — or around — existing public policy and regulation, but the consequences can include damage to public trust. Innovation creates avenues to satisfy unmet needs and makes better use of skills and assets. It makes the community as a whole more prosperous by creating new markets and introduces competition where legislative and political barriers are high. But there are no excuses for clear breaches of existing laws.

    Innovation can be organic, disruptive, chaotic and swift, and it can be perceived as “unfair” when existing structures are dismantled. In the process of absorbing new technologies and innovations, society may set new norms and expectations and then revisit them with the benefit of experience and hindsight.

    This is the constructive tension in a market-based economy: between the short-term and long-term objectives of the different stakeholders in our society; between the interests and existing structures that seek stability and certainty and can be constrained in their responsiveness, and the outsiders seeking to compete, disrupt and challenge the status quo. It is a dynamic process that constantly resets the equilibrium point.

    If it were possible to introduce a social purpose test for a corporation into this dynamic environment, and to provide the resources necessary to support compliance without dramatically shifting our corporate focus to enforcement of social obligations, would the cost of additional regulation and enforcement outweigh the benefits? Even today, 71 per cent of our members consistently say that boards are “risk averse”, and this has clear and significant implications for our capacity to respond to changing technologies and a dynamic global political economy.

    Catherine Livingstone also provided a neat summary of this challenge. “It is certainly essential to take individual corporations to task, but the key is having government, regulators and corporations aligned, to ensure that the primary source of our prosperity, capitalism, can continue to solve problems, create that prosperity and operate within an ethical framework that delivers for all stakeholders.”

    Moving forward

    We have this pressing issue: How do we restore trust in the accountability of our institutions? How do we hold ourselves accountable for the ethical consequences? What can be done practically and appropriately?

    Let’s return to the questions posed by members at EDUs across the country. What I take away from these sessions is the sense of members asking: “How can I do better? How can I fulfil my role and demonstrate my accountability to the community, to the broad set of stakeholders essential to the long-term interests of my institution?” There was no question that sought to deflect this responsibility or channel the challenge elsewhere. Given the current tone and polarisation of public discussion and public policy debate, that itself is remarkable.

    Our members are focused as individuals on their roles as stewards of their institutions. The debate around a statement of purpose for corporations will be far removed for many of our diverse membership. Regardless, they are acutely aware of the expectations of society and that at this point, these expectations are unfulfilled. Members are seeking to learn from best practice and each other, knowing that no one individual has the answer, but any individual might ask the question that unlocks the challenge. Unlike the UK, our duties in Australia are focused on the best interests of the corporation, and directors are conscious this means addressing the needs of a broad set of stakeholders over the long term.

    For the AICD, this means pressing ahead with our Forward Governance Agenda: providing the education, tools and resources for our members to explore as individuals their duties and responsibilities, how to be confident as individuals in the ethical frameworks that guide decisions in their institutions, and to determine as individuals how they demonstrate accountability.

    I wish all of our members a happy and safe holiday season, and that you return in the new year refreshed for this challenge.

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