The Crown affair

Friday, 01 April 2022

Damon Kitney

    The Crown Resorts saga shows what can go wrong in an organisation where a dominant shareholder holds sway and basic governance practices fail, exposing an institution where long tenures and cycles of complacency diluted the effectiveness of its board, advisers and the regulator.

    In November 2017, two high-powered new additions to the board of Crown Resorts were announced. Jane Halton AO PSM FAICD, former Department of Finance head, and Toni Korsanos GAICD, former CFO of global poker machine manufacturer Aristocrat Leisure, would join the board of the James Packer-backed Crown. Seven months later, Halton and Korsanos attended their first board meeting after passing probity approvals. It was Korsanos’ first non-executive director role.

    Nothing could have prepared them for the series of events that would transpire at the casino giant over the following three and a half years. Revelations of a string of governance, risk- management and cultural failings would prompt three public inquiries; investigations by the corporate and financial crimes regulators, two class actions, a clean-out of the board and senior management ranks, and the end of the Packer family’s influence.

    The initial NSW inquiry, under former NSW Supreme Court judge Patricia Bergin, delivered a forensic and excoriating report on Crown’s suitability to hold a casino licence at Barangaroo in Sydney. The report highlighted Crown’s “corporate arrogance”, an “unjustified belief in itself”, and its repeated dismissal of concerns raised around its high-roller operations and alleged links to organised crime.

    Those findings were echoed in a subsequent inquiry by the Victorian gaming regulator, led by former Federal Court judge Ray Finkelstein AO QC, which prompted the Victorian government to take the unprecedented decision to appoint Stephen O’Bryan QC as special manager overseeing Crown’s flagship Melbourne casino.

    In WA, the Royal Commission into the affairs of Crown Casino Perth — led by Truth Justice and Healing Council chair and former HIH Royal Commissioner Neville Owen AO, Lindy Jenkins and Colin Murphy PSM GAICD — looked into the suitability of Crown Perth to hold a casino gaming licence, the regulatory framework and potential conflicts of interest by officers involved in casino regulation. It reported on 4 March. All of this culminated in Crown’s decision in mid February 2022 to accept an $8.9 billion takeover bid by US private equity giant Blackstone.

    But that's by no means the end of matters. On 1 March, financial crime watchdog AUSTRAC started proceedings against Crown Melbourne and Crown Perth in the Federal Court, alleging serious and systemic non-compliance with Australia’s anti-money laundering and counter-terrorism financing (AML/CTF) laws over a number of years.

    “AUSTRAC’s investigation identified poor governance, risk management and failures to have and maintain a compliant AML/CTF program detailing how Crown would identify, mitigate and manage the risk of their products and services being misused for money laundering or terrorism financing,” said AUSTRAC CEO Nicole Rose PSM. “They also failed to carry out appropriate ongoing customer due diligence, including on some very high-risk customers. This led to widespread and serious non-compliance over a number of years.”

    Growing pains

    Crown has become emblematic of what can go wrong when companies influenced by powerful personalities focus on growth at all costs. The reputational, social and economic harm has cut deep. While some specifics of the Crown affair may be unique to the gaming sector, there are lessons from the casino operator’s failings for all boards.

    Mention was made at the NSW inquiry of the long tenure of several Crown directors, with the inference that there was a group of directors unreceptive to new ideas.

    “Independent directors must always seek to maintain their independence, particularly where there is a controlling shareholder,” says Louise Davidson AM GAICD, CEO of the Australian Council of Superannuation Investors, which represents institutional investors, some of which are Crown shareholders. “Directors need to remind themselves of their obligation to act in good faith and in the best interests of the corporation, rather than that of any single shareholder. The role of directors is central to achieving high standards of corporate governance and delivering improved shareholder returns. Directors are elected by shareholders to act in the best interests of the company and should be responsive to the interests of diverse stakeholders.”

    Law firm MinterEllison had also been involved with Crown for a long period. During 2020, the board started taking separate advice from Arnold Bloch Leibler, and also brought in Allens to assist with the Bergin inquiry. The Victorian Royal Commission made no findings in elation to MinterEllison. In a further responsive written submission in August 2021, MinterEllison argued that there was no basis on which it could be found to have acted improperly.

    Captive to history

    Issues of ethical conduct, risk management and oversight, board composition, board independence and tenure, the remuneration and incentivisation of directors and senior executives, and Crown’s relationships with regulators have all come to the fore in the inquiries.

    “The Crown inquiries demonstrated the importance of a board’s responsibility to set, monitor and communicate its risk appetite, given boards have ultimate responsibility for the oversight of risk,” says Davidson. “As the Royal Commissions into Crown showed, the company did not have appropriate risk management processes in place leading to breaches of anti- money laundering regulations, the facilitation of unchecked problem gambling at its venues, and a poor workplace culture.”

    In the lead-up to the NSW Inquiry hearings in 2020, long-serving Crown director and former federal Liberal minister Helen Coonan stepped up to take the chair’s role to guide the company through a regulatory and financial storm. Following an exodus of incumbent directors in the aftermath of the release of the inquiry’s findings in February 2021, Coonan, Korsanos and Halton banded together to pursue reform and set the Crown ship on a new course.

    Coonan, who declined to comment for this article, put a string of processes in place inside Crown well before the release of the NSW report because she had a strong sense of the damning findings that would emerge. She also helped to transform Crown’s relationship with its regulators. She accepted at both the NSW and Victorian inquiries that she bore some personal and shared responsibility with the board for the failures of Crown Resorts during 2011–21.

    Halton, criticised in Bergin’s report as giving evidence that was “a touch argumentative”, with a “somewhat unfortunate penchant for anticipating questions” and “speaking too much and thus irritating people” — but who Bergin said left the witness box with “her integrity intact” — replaced Coonan as Crown interim chair in August 2021.

    Halton now says she has no regrets taking the role, which saw her oversee a stormy annual general meeting in October. Korsanos did not seek re-election at the AGM, citing workload issues.

    “Once a number of directors left the board after the release of the Bergin inquiry findings, I felt I didn’t have any choice but to stay,” says Halton. “Toni Korsanos and I talked about it and we knew we had to do the right thing by the shareholders and staff. Do I regret it? I don’t. I have learned a lot. I would never have learned some important things if I didn’t go through something like this.”

    Halton declined further comment given the Blackstone takeover bid, but her experiences at Crown highlight the red flags directors must look for before they agree to join any public company board, especially in a highly regulated sector.

    Undue influence

    Halton and Korsanos conducted extensive due diligence — even talking to the financial crimes regulator AUSTRAC — before they took up their roles. They saw no blazing red lights even though Crown staff had been detained in China in October 2016 for alleged gambling crimes.

    “Due diligence won’t tell you everything because there are limits to what you can find,” says Professor Ian Ramsay, director of the Centre for Corporate Law at Melbourne University.”

    Aside from the long tenure of some fellow Crown directors, one of the most immediate challenges facing Halton and Korsanos was that key members of management were close to James Packer, the company’s 37 per cent shareholder.

    Bergin found former Crown chair John Alexander’s loyalty to the Packer family left him “either blind to the reality or lacking in candour” in confronting serious problems including the “infiltration of criminal elements” in the company.

    Alexander had been on the Crown board since 2007, and before that ran the Nine Network and Australian Consolidated Press Magazines business for James Packer and his father, Kerry. Another Packer board nominee, Michael Johnston was a long-serving employee of his private company, Consolidated Press Holdings.

    Bergin found that “Mr Johnston failed his colleagues on the board and the staff in China rather dismally. A compounding feature of this dismal failure was Mr Johnston’s pugnacious attitude in the witness box in maintaining the unsustainable suggestion that this was not a serious issue".

    Bergin also found evidence presented by Crown director Andrew Demetriou, a former AFL chief executive — who admitted he would discuss issues that arose in board meetings directly with Packer — was “quite bizarre” and “[reflected] very badly on his judgement”.

    In a sense, Crown was a legacy Packer family company that had failed to embrace the evolution of corporate governance over two decades, as the historical power of a dominant shareholder weakened the influence of the independent directors. Over the years, the inquiries found, deals were done at Crown between the principals and state governments, while regulators were either whitewashed or sidelined.

    A distinct feature of Crown, until recently, was an executive chair at the helm of the board table, a practice frowned upon in modern corporate governance. Initially, it was Kerry Packer, followed by his son, James, investment banker Robert Rankin, and then Alexander. “Combining the roles of chair with CEO or executive director positions can work to diminish the degree of accountability that would usually result from a separation of the two roles,’’ says Davidson.

    When James Packer left the board in March 2018, the Crown directors also agreed to sign an extraordinary secret protocol to pass on information to Packer’s private investment vehicle CPH, which was not shared with other directors.

    The protocol was pilloried at all three inquiries. Notably, Bergin concluded that “the corporate needs of Crown were not given precedence over the corporate needs or desires of CPH” and that the “remote manoeuvring” by Packer of Crown’s operations “was enabled by arrangements” such as the protocol.

    “Where you have a major influential shareholder, directors need to be assured there are proper policies and practices around disclosure of information to that shareholder,” says Ramsay. “They must be robust and protect the interests of other shareholders, the company and the board. It is absolutely logical to expect that shareholder will want some special treatment. After all, they can say ‘I have invested more than others’. In some circumstances, it may be possible for that shareholder to receive some information... But if there are agreements in place to provide information — that needs to be totally robust and transparent. Directors have a duty to prevent themselves and senior executives — including nominee directors — using information to gain an advantage for themselves or someone else.”

    Risk awareness

    According to the Bergin inquiry, the Crown case highlighted the dangers of directors failing to understand their business and its risk profile. Specifically, none had in-depth knowledge of the money-laundering risks associated with running a casino. During the NSW inquiry, Crown’s risk committee chair, former Qantas boss Geoff Dixon, said during his 12 years with Crown there had been no formal anti-money-laundering training. Former Crown chair John Alexander also acknowledged he had no training in anti-money laundering before or during his tenure.

    Bergin noted that it was not until the announcement of the NSW inquiry that Crown “apparently formulated an idea that it would be a good idea to give some instruction to the Crown directors on the AML/CTF legislation and landscape”. This was training that one director boasted of having finished in half an hour.

    “Boards need highly-qualified people capable of dealing with the unique issues within their industry and require regular and adequate training to make sure they remain on top of the operating environment,’’ says Davidson. “Boards must monitor the changing regulatory landscape and ensure their organisations go beyond minimum regulatory standards. The costs of not doing so are great — whether it be civil penalties, compensation or criminal sanctions for workforce exploitation and human rights violations.”

    Notably, the Bergin Inquiry recommended that all casino directors should complete courses run by the AICD to demonstrate their knowledge of corporate governance. Bergin found that many of the problems at Crown stemmed from what she labelled “poor corporate governance, deficient risk management structures and processes, and a poor corporate culture”.

    Ramsay stresses that directors do not necessarily need to be subject matter experts, but rather must have a firm grasp of key risks commensurate with their role of being a director within a specific operating environment. “Generally, it is not a requirement that every member of the board should come out of the same industry,” he says. “You need a diversity of skills. The development of skills matrixes for directors in recent years has been a welcome development to assess gaps which can be filled. It is important the chair, in combination with senior management, ensures there is proper learning, education and skills attained by directors.”

    Cultural dysfunction

    The Bergin inquiry also found that the remuneration and incentive structures at Crown helped drive a culture that prioritised commercial considerations over compliance.

    One observer with knowledge of Crown’s internal affairs says across the organisation, it was made clear that financial returns were of primary importance. If there were issues, they were all subordinate to the economics. The culture was defined by hitting the numbers, getting returns and making sure that all the high-roller customers who produced big revenues were happy.

    While boards do not set individual remuneration for all staff, Ramsay believes they should have oversight of remuneration structures to ensure they are adequately addressing risk, including non-financial risk. Especially in relation to bonuses and incentive payments.

    “Incorrect incentives can cause enormous damage to a company,” he says. “The senior executives of Crown were rewarded incentives based on VIP turnover and market share, which just got entirely out of control. There is a responsibility on not only the remuneration committee, but the entire board, to be monitoring that and, where appropriate, to get independent advice. The red flag should go up when the incentives are so high and potentially create heightened risk for the company.”

    The WA and Victorian inquiries revealed a lack of clarity at Crown around the roles of the subsidiary boards overseeing the Melbourne and Perth casino operations, which compromised risk management. For instance, the directors and management of Crown Resorts believed the subsidiary companies were looking after their own audits, a direct contradiction of ASX principles.

    The NSW inquiry heard that on the issue of the China arrests, the board had multiple red flags from different quarters that China was cracking down on gambling and junkets, yet took no action. This also went to the structuring and resourcing of the risk management function.

    The Victorian inquiry found Crown restricted a 2019 Deloitte review of its risk management framework to a “desktop” assessment that didn't examine whether it was effective or suitable for a casino.

    In his Expert Report on the Risk Management Frameworks and Systems of Crown Resorts for the Finkelstein Inquiry, former chief risk officer at the Bank of Queensland Peter Deans GAICD identified many areas where Crown should “enhance” its risk management, including making the audit committee do its job. Specifically, he recommended making amendments to the Audit and Corporate Governance Committee Charter to improving the oversight, governance, and management of risk at the group. He also recommended that the risk management committee implement a regular agenda of items for meetings. He noted such rolling agendas play an important role in identifying, assessing, and managing risk, warning a too rigid or structured approach to discussing risk management could result in some material business risks not being discussed at all by the board.

    ASX corporate governance

    The Crown affair highlights that modern directors need to ensure they are capable of fulfilling the challenges and responsibilities of being on a public company board.

    The first edition of the ASX Corporate Governance Principles and Recommendations, was published in 2002. The fourth iteration (2019) lists 15 distinct responsibilities for boards — including the following.

    This has implications regarding how many boards one can join and for the design of selection and induction processes for new directors, which must assess whether they have the capability, the skills and — most importantly — the time to deal with the issues.

    1. Lay solid foundations for management and oversight: A listed entity should clearly delineate the respective roles and responsibilities of its board and management and regularly review their performance.
    2. Structure the board to be effective and add value: The board of a listed entity should be of an appropriate size and collectively have the skills, commitment and knowledge of the entity and the industry in which it operates, to enable it to discharge its duties effectively and to add value.
    3. Instil a culture of acting lawfully, ethically and responsibly: A listed entity should instil and continually reinforce a culture across the organisation of acting lawfully, ethically and responsibly.
    4. Safeguard the integrity of corporate reports: A listed entity should have appropriate processes to verify the integrity of its corporate reports.
    5. Make timely and balanced disclosure: A listed entity should make timely and balanced disclosure of all matters concerning it that a reasonable person would expect to have a material effect on the price or value of its securities.
    6. Respect the rights of security holders: A listed entity should give its security holders appropriate information and facilities to let them exercise their rights effectively.
    7. Recognise and manage risk: A listed entity should establish a sound risk management framework and periodically review its effectiveness.
    8. Remunerate fairly and responsibly: A listed entity should pay sufficient remuneration to attract/ retain high-quality directors, attract/retain and motivate high-quality senior executives, and to align their interests with those of the entity, its risk appetite and value creation for security holders.

    Dealing with the regulators

    According to the Finkelstein report, another failing for Crown directors was understanding how the company was dealing with regulators in a highly regulated industry like gaming.

    “The task for the directors, always, is to be assured that the company is complying with all the regulations that apply to it and that it has proper processes and procedures to deal with them,” says Ramsay. “But a less-discussed point is the relations with regulators. You need to ensure they are positive, constructive and that staff at the company are not doing anything to warrant heightened regulatory scrutiny through inappropriate behaviour.”

    At Crown, the Victorian regulator was seen to essentially be captive of Crown. But it was also kept in the dark and “bullied”, in Finklestein’s words. “Over the years, the regulator conducted several investigations into Crown Melbourne’s affairs,” he said. “Instead of cooperating with those investigations in the manner expected of a regulated entity, Crown Melbourne took the opposite tack. It bullied the regulator. It provided it with false or misleading information. It delayed the investigatory process. It took what steps it could to frustrate the regulator’s investigations.”

    Specifically, Finklestein’s report found Crown was “unnecessarily belligerent” and “failed to have due regard to its position of privilege” as Victoria’s sole casino operator during the investigation into the China arrests, slowing the progress of a vital investigation into the affair by the Victorian regulator.”

    This behaviour underpinned Finkelstein’s recommendation of the appointment of a special manager to oversee all aspects of the casino’s operations, keeping a watchful eye on the progress of reform and ensuring all rules and regulations are complied with.”

    Heeding the lessons

    Ramsay says the Crown affair and the findings of the multiple inquiries into the company have similarities with those of the financial services Royal Commission, offering similar lessons for directors. In recent years, Commonwealth Bank and Westpac have also been subjected to specific investigations by the prudential, corporate and financial crimes regulators.”

    “They are different industries of course,” says Ramsay. “Yet you do see some quite striking similarities. The pursuit of profit at the expense of proper compliance, corporate governance and risk management.”

    Failings in terms of director capability and skills. You see conflicts of interest loom for consideration where conflicts are allowed to run rampant without proper monitoring and prohibitions in place. Also, it would be true to say there are similarities in terms of poorly devised remuneration structures. They incentivised poor decision-making and heightened risk-taking that turned out to be adverse to the interests of the company and shareholders. Crown is not an anomaly.””

    Like the big banks in the aftermath of Hayne, Crown has changed significantly in the wake of the inquiry findings and actions by governments and regulators. New chair Ziggy Switkowski AO FAICD and CEO Steve McCann, both appointed in 2021, have made risk management and liaison with regulators a top priority for management, staff and board, Switkowski stating he planned to “grow value for shareholders by continuing the urgent work to reform the business”.”

    Only one of the 11 board members present a year ago remains — Jane Halton. And of the 12 direct reports in the executive ranks to McCann, all but three are new. But the turnaround of Crown is a work in progress, which will continue until at least 2024.”

    At AICD’s March Australian Governance Summit, ASIC chairman Joe Longo confirmed the watchdog would not continue investigations against 10 directors, saying ASIC had considered the evidence, the age of the matter, the knowledge of the directors at the time — and in all the circumstances, there wasn’t an actionable case against the directors.”

    “That was our call, and it falls to me to talk about it as much as I can ... but there’s definitely a difference between what a royal commission or inquiry comes up with and what is actionable.”

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