Good governance – what is all the fuss about?

By Jody Wright*

Society’s expectations of firms and how they act continues to rise. The most recent statement from the regulators is Crown Inquiry Report Volume 2 Chapter 4.1. Following revelations made during the Financial Services Royal Commission, ASIC set up the Corporate Governance Taskforce to review the corporate governance practices in large listed entities:

“In recent years, the level of scrutiny into matters of corporate governance across corporate Australia has intensified consequent upon events such as the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Financial Services Royal Commission) and investigations into the conduct of specific entities, such as into the CBA by the Australian Prudential Regulation Authority (APRA).”

These types of Inquiries have resulted in an inordinate amount of focus by ASIC and other regulators on the conduct of management and senior executives in the financial services industry, particularly banks and insurance companies.

How did we get here and what does good governance look like?

So why is this happening and is this trend about to expand to other industries and what does this mean for boards and management level employees across Australia? To answer these questions, it is necessary to first look at the definition of “corporate governance’ and what “good governance” actually means.

Corporate governance has included many definitions over the years and from the early day definition espoused by Justice Owen in the HIH Royal Commission Report, has developed into a detailed allencompassing definition involving the elements of control and accountability.

The Governance Institute of Australia defines governance as “the system by which an organisation is controlled and operates and the mechanisms by which it, and its people are held to account. Ethics, risk management, compliance and administration are all elements of governance”.

The question then becomes, what is good governance and it is this rapidly changing concept which is resulting in Inquiry after Inquiry, a shift in the focus of investigations and prosecutions by ASIC and other regulators and an increase in regulatory powers.

Change in expectations

Companies need to be aware that a significant contributor to the ever changing concept of “good governance” is consumers. Public

expectations of how corporations should act significantly determines what rules should apply. Society exerts pressure on legislators and regulators to ensure that corporations are meeting the expectations of the public generally and this in turn leads to Inquiries, prosecutions, legislative changes and heavier regulation.

Society also puts pressure on media to investigate the conduct of companies and their executives. It was information and documents leaked to media that lead to the allegations made against Crown Resorts Limited and the resultant Inquiry under Section 143 of the Casino Control Act 1992 (NSW). This Inquiry is another example of the expansion of regulators delving into the conduct of corporations and in turn their boards of directors and management teams and resulting in further regulatory intervention. Specifically, the report recommended the establishment of an Independent Casino Commission as an independent, dedicated, stand alone, specialist casino regulator to meet the extant and emerging risks for gaming and casinos.

What do the regulators think?

Aside from the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations, what amounts to good governance in the eyes of the regulators and society?

The corporate regulators have over time made suggestions to assist corporations with some practical steps towards establishing good corporate governance. They have included: “effective communication; encouragement of debate and challenge; learning from past experiences; awareness and active stewardship of risk; clear escalation processes; and clear consequences for breaches of risk.” (ASIC).

The elements of corporate governance include transparency, accountability, integrity and stewardship. Integrity involves maintaining a culture committed to ethical behaviour and compliance with the law. Commissioner Hayne during the Royal Banking Commission Enquiry also asked organisations to improve management of compliance risk, conduct risk, regulatory risk and operational risk. Conduct risk is the risk of inappropriate, unethical or unlawful behaviour on the part of an organisation’s management or employees.

What does this mean?

In practical terms for banks, insurance companies, financial service providers and all other corporate entities moving forwards it is important for companies to take a proactive approach when it comes to governance and risk management and to create a culture of ethics and corporate responsibility in all industry sectors.

Really when it comes down to it all directors, executives and employees are responsible for their conduct and actions and in turn the way that consumers perceive the organisation’s brand.

*Jody Wright Head of Risk & Governance and Company Secretary Risk & Security Management

This article has been produced by the writer and represents the views of the writer and Risk & Security Management. It is current at the time of publication but does not constitute legal advice and should not be relied upon as such. You should seek independent advice where necessary.

Practical tips to ensure your firm has good governance

z Implement and maintain a robust compliance regime; z Implement and maintain a rigorous risk management framework which assesses, measures and treats all type of risks including financial, operational, regulatory, reputational and conduct risk;

z Training, open communication with all employees and continual improvement are essential. There is no point having policies and procedures without all representatives of the organisation living and breathing those policies and procedures and having open communication about risks, issues and areas for improvement; z Always consider the possibility that a consumer may be a “vulnerable customer” and as such take appropriate steps to determine whether the consumer may match the criteria; z Ensure that any third party suppliers, particularly those who are representing your brand have similar frameworks and regimes in place and promote a culture of good governance and ethics.

The last thing that you want is for your brand to end up on the front page of the Australian

Financial Review in a bad news story because of the conduct of a third party supplier; and. z Foster relationships of trust with all relevant stakeholders.