The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) has many months to run, but has already heightened scrutiny of boards and governance practice in financial services.
Along with APRA’s important Prudential Review of the Commonwealth Bank of Australia (read Graham Bradley’s insightful article), the Royal Commission is sparking important discussions.
What governance themes are emerging from the Royal Commission?
While the Royal Commission is only part-way through its work, some of the governance issues from case studies to date are raising important topics for the practice of governance more broadly.
- What more should boards be doing to set a highly visible ‘tone from the top’ on culture?
- How will directors manage the demands for greater oversight of operational detail and non-financial risk while maintaining independence from management?
- How can boards gather the detail necessary to ‘know what they don’t know’ on operational detail and non-financial risk, to meet expectations of enhanced governance oversight?
- How many board seats should non-executive directors hold, particularly if they are on the boards of large, complex financial institutions?
- How will directors meet the community’s expectation that stakeholder interests – in particular, customers – will be fairly and transparently considered, while meeting their fiduciary duties and legal obligation to act in the best interests of the company as a whole?
- Where does accountability rest for instances of corporate misconduct, and what are the reasonable limits and expectations of boards when poor conduct emerges?
- Are boards paying enough attention to remuneration practices beyond the c-suite – in particular, ensuring that incentives promote careful management of non-financial risk?
- Are boards sufficiently across and engaged on dealings with regulators by their organisation?
- Does our model of corporate governance need reform to better meet community expectations – for example, with stakeholder representatives, or tiered board structures?
- What is the composition mix of skills, expertise and diversity of thought for successful boards?
As APRA noted in its review of CBA, there is no ‘silver bullet’ on these issues –they will be the subject of boardroom debate over the months ahead. The AICD will be looking closely at insights from the Royal Commission to guide and improve practice and strategies in these areas.
In considering these issues, we should not lose sight of the fact that Australia’s corporate governance model is, rightly, well-respected. The governance topics emerging from the Royal Commission and APRA’s report into CBA will not be new to most directors – they are part of the complex, ongoing work of governance and effective boards will be regularly debating them.
The call for deeper engagement by boards with the operations and risks of their business should also not require a conflation of the roles of the board and management. This separation is a strength of our system and important to maintain. Of course, non-executive directors must work hard to design the frameworks and controls needed and gain the information and understanding of the business necessary to fulfil the board’s role, and the Royal Commission will likely lead to a recalibration of where the lines should be set or flex.
Most importantly, directors from all sectors will be listening to the clear community expectations for transparency, accountability and timeliness in responding to instances of poor practice or corporate misconduct. It is these factors that will help rebuild community trust and confidence.
In August, the Royal Commission will turn its attention to case studies in superannuation. The recent Productivity Commission report into superannuation, and APRA’s review of superannuation fund governance, have identified opportunities for improvements to governance in this vital sector, including in board composition, related party transactions, competency and evaluations. The Royal Commission case studies may identify further governance issues that warrant review.
Further hearings are planned on insurance and other sectors in financial services.
The Royal Commission is due to report by 1 February 2019, with an interim report (at the Commission’s discretion) by 30 September 2018. The Royal Commission process to date includes submissions from financial services entities, the public (over 7,000 to date), Public Hearings using and background papers prepared by government, regulators and independent experts (21 to date).
Behind the scenes, the Royal Commission has extensive powers to investigate and review as it considers the many issues covered by its broad terms of reference – which range from looking at individual cases of poor practice to systemic to structural issues in our financial system. The Royal Commission has also noted that papers may be issued canvassing law reform, on which comment will be invited.
The second round of Public Hearings in April (financial advice) brought a focus on governance, most notably through the AMP case study. Counsel Assisting Rowena Orr QC proposed that it was open to the Commissioner to find breaches of civil or criminal provisions for alleged misconduct that was ‘attributable to culture and governance practices’ (see AMP’s submission in response here). Other case studies profiled conduct that according to Counsel Assisting was ‘attributable, at least in part, to remuneration practices’, inadequate management and conflicts of interest in other entities.
The Commonwealth Treasury provided a submission on the advice hearings which discussed options to improve culture in financial services, noting that this responsibility sits with boards. Extending the reach of the Banking Executive Accountability Regime (BEAR) across financial services more broadly was canvassed in its paper.
Media and political commentary has also focused on board accountability. The Treasurer for example has said ‘Boards at the end of the day are responsible for these organisations’ and ‘At the end of the day, I find the boards accountable for all of this. They can blame the executives all they like, but they appoint the executives, so they are responsible.’
Shareholder groups (such as the Australian Council of Superannuation Investors and the Australian Shareholders Association) and institutional investors, reacting to the coverage of the AMP case study, also demanded accountability at the board level (see the ASA’s views here).
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