Reinforcing culture in a climate of low trust
A speech by John Price, Commissioner, Australian Securities and Investments Commission at the Governance Institute of Australia – Governance and Risk Management Forum, (Sydney, Australia), 7 June 2018
Good afternoon everyone and thank you to the Governance Institute for inviting me here today.
Before the panel discussion, I would like to briefly share some of ASIC’s views on corporate culture. I’ll also mention the idea of corporate social licence to operate, and the importance of good governance.
ASIC’s view on corporate culture
I would argue that now more than ever companies need to have a culture that focuses on more than just the short-term financial interests of shareholders.
For example, at ASIC, we are particularly interested in whether the culture of a firm (or an industry sector) promotes fair treatment of consumers and investors. In our view, this is also the sort of culture that should help companies survive and thrive in the longer term.
Of course, ASIC’s role is not to dictate a company’s culture nor how a business is run, but we do want companies to shine a light on their own culture and see if it is sufficiently fit for purpose. Culture is at the heart of how an organisation and its staff think and behave. It is an issue companies must address themselves. Where we identify elements of poor culture, we will make this clear to the firms in which we see it. Specifically, some issues we consider in doing our work are:
- how standards of behaviour are set within firms
- whether values are being translated into business practices, especially when these may affect customer outcomes.
When we identify poor conduct in a firm, ASIC will not only look for any breaches of the law, we may also examine how culture is contributing to that poor conduct as part of our ongoing supervision work.
More broadly, I would argue that our society has come to expect much more from companies than short-term shareholder returns. The concept of corporate social licence to operate now extends a company’s legitimacy in our society.
For example, it can include:
- community relationships with both internal and external stakeholders
- ethical business conduct and transparency
- workers’ rights and safety
- environmental performance.
Today, I see investors place more emphasis on these considerations and other sustainability issues. So, companies need to think longer term and consider whether their culture supports more than simply a short-term financial focus.
In fact, many studies have found that good culture is good for business and for generating long-term shareholder value. Good culture enhances brand loyalty and bolsters reputation, which has a very real financial impact.
And, as we all know, there have been some very recent examples where the market value of a company has been significantly eroded as a result of poor culture and conduct.
Above all, I think it is important to remember that things like poor culture or ill-considered remuneration structures can drive poor conduct, undermine good governance practices and weaken risk management systems. It is important to highlight that boards and the management of companies themselves need to be the frontline in dealing with such issues. I’ll return to this point shortly.
ASIC’s enforcement outcomes
Of course, ASIC also plays a role in holding companies responsible for any poor corporate outcomes, this can include holding directors and officers responsible in the discharge of their duties.
As a reminder of the consequences of poor corporate outcomes, I’d like to take a moment to mention some of our enforcement outcomes over recent years. Since July 2011 these have included:
- over 1,260 investigations
- more than 800 people banned from providing financial services or credit – and more than 390 people banned from being directors
- 19 criminal convictions obtained so far this financial year, and over 160 in the period since 2011
- over 140 enforceable undertakings, with in excess of $63 million in civil penalties
- over $1.6 billion in compensation and remediation for investors and consumers.
Let me move quickly to considerations of governance and, in particular, what governance structures and practices should be in place to support good culture and conduct within firms.
We think that a company’s board, senior executive and management play a critical role in relation to culture and conduct. The board plays a role in setting the tone, influencing and overseeing culture, and ensuring the right governance framework is in place – one that functions in a manner which elevates material risks to the board for attention and action.
This requires non-executive directors to be active in their oversight – to constructively challenge and question management. Boards need to ask themselves whether their company has a ‘good news’ culture, where problems are buried rather than dealt with appropriately. Boards should be vigilant in their oversight of budgets to ensure that functions supporting the risk governance framework are adequately resourced.
It is also important that the board and leadership team promote, monitor and assess the impact of the firm’s culture and approach on conduct issues, and make changes when necessary.
In our regulatory work, we often see instances where leaders are surprised by the issues we raise in our reviews (e.g. poor customer outcomes as a result of a product the firm has sold), despite the fact that we have used the firm’s own data to identify the issues. This suggests a deficiency in the risk governance, oversight and, sometimes, the accountability frameworks within the firm.
For directors who are not involved in the daily operations of a company, we recognise that monitoring culture can be challenging, but I do think there are a range of matters a board can consider.
In this regard, I should commend to you all the book Managing culture: A good practice guide, which is a joint publication between the Governance Institute and various other bodies.
Let me conclude today by very briefly referring to a recent report commissioned by the Australian Prudential Regulation Authority (APRA) into the Commonwealth Bank of Australia (CBA) that neatly encapsulates some areas of good governance worthy of consideration. That report mentioned the need for:
- more rigorous board and executive governance of non-financial risks
- exacting accountability standards reinforced by remuneration practices
- substantial operational risk management and compliance functions
- asking the question ‘Should we?’ in relation to all decisions and dealings with customers
- cultural change to support enhanced risk identification and remediation.
I think these are in fact recommendations that all companies should be considering. On that note, I’ll wrap things up. I’m looking forward to getting into the discussion.