I’ve had time to digest the report of ASIC’s Governance Taskforce (this is a very “ad-hoc” blog remember) and come to 2 conclusions:
- As a tool for board self-reflection it’s extremely useful. Just as with APRA’s report into CBA, there’s a lot in it for directors on Boards of all shapes and sizes. There are helpful ideas throughout around shaping information flows, spotting early warning signs and other practical tips to make Boards function better. It is compulsory reading.
- But….as an indicator of how regulators see the duties of boards, and as a taste of a heavier and more individualised regulatory future, it’s troubling.
Directors’ duties under the actual law in Australia are essentially to exercise care and diligence and to act in good faith, for a proper purpose and in the best interests of the company. It is often complicated in practice, but it’s simple in concept and reflects the non-operational, stewardship role of a director.
On the first page of its report though, ASIC says that “Boards must recognise that they are accountable for mitigating all risks – financial and non-financial – facing a company”.
That is just such a big leap from the starting point. The very purpose of the corporation, being to facilitate entrepreneurial risk taking through a stand-alone legal structure, is now almost completely lost in the rear-view mirror.
ASIC, in reviewing the governance practices of seven of the most heavily regulated and best resourced companies in the country, says that “oversight was less mature than needed” and the companies need to “significantly improve their practices”. How to take these statements depends on how you see the document. For normative or “learning and development” purposes – it’s great – all organisations big or small should try to improve, particularly following a period of such radical upheaval. On the other hand, for forming a view on how to actually comply with corporate governance standards, or as a window into the thinking behind future stepping stone litigation against directors – those statements are concerning.
To take an example, ASIC suggests members of board risk committees are not spending enough time on their task. The reporting companies said the chairs of these committees were spending up to 3 full days a week on that work and their NED role. Directors aren’t meant to be management and risk committees aren’t compulsory, they are additional governance structures these companies have implemented. ASIC says it’s not enough. It just isn’t a realistic view on what directors can and should be doing.
The governance eco-system is complicated, and the left hand isn’t necessarily speaking to the right (or maybe more accurately the right hand happily takes what the left is giving it). Strict laws designed to protect investors are well and good until they start being gamed by external actors and until regulators hold individuals personally accountable for honest failings of very large corporations. It’s entirely possible for example that the strictness of Australia’s continuous disclosure is an accident (if you’re interested, read this section “The continuous disclosure regime” from the recent law reform commission inquiry into class actions and litigation funders). Directors are increasingly being blamed for “failures to prevent” at the same time as companies are grappling with “stakeholders” such as unlicensed offshore litigation funds and activist short sellers with completely opposite interests to those of regular shareholders or employees.
It’s all a bit of a mess. I was thinking about this when I heard a talk last week from Dr David Putrino who had just won “Global Australian of the Year” at the Advance Australia awards.
Putrino is a neuroscientist and physical therapist and the director of rehabilitation innovation at the famous Mount Sinai Hospital in New York. To grossly simplify his achievements, he runs a lab that speeds up the approval and adoption of futuristic stuff that can help people with catastrophic injuries where conventional treatments have failed.
For all his talents, what brought Putrino’s brilliance to the attention of Advance was his success in creating testing and implementation structures designed to short-cut the byzantine health approval and adoption requirements that usually kill medical innovation. In his talk Putrino cited an astonishing statistic that 98% of med-tech start-ups in the US fail without ever touching a patient, sending $90bn in venture capital investment up in smoke every year as well as countless therapies that may have had a real impact on suffering people.
It made me think that in a funny way, the challenge of running a hospital is a metaphor for everything going on in corporate governance in Australia. There is that same tension in striking the right balance between innovation, risk and compliance.
It’s hard to imagine where safety could be more important than in the testing and rolling out of new health products. But why then is the International Australian of the year lauded for finding quicker ways through these safety checks, while so many recent corporate scandals have been caused by a failure of a compliance culture? Why is one acceptable and not the other?
The answer is a singular focus on the customer (in Putrino’s case, real people with catastrophic injuries). When processes around compliance start to harm customers in order to protect the service provider, they need to be challenged.
The other thing that struck me about medicine and corporate governance was the inter-connectedness of systems. Putrino said a common failing in medical research was that a treatment could be great in theory, but it could have side effects in the real world of rehab or just not be taken up by doctors who are too busy to retrain. In corporate governance this might be the doom-loop of ever-stricter compliance obligations, astronomical new penalties and class actions, or maybe it's remuneration. One of the major focuses of the Royal Commission was how incentives drive behaviour. APRA took up the baton and introduced new requirements for executive bonuses (financial measures can’t account for more than 50%). When this eventually plays out at AGMs fund manager shareholders and proxy advisors are going to smash Boards for doing what Hayne and APRA told them to.
So what does this leave you with on where we’re at with all the upheaval in governance in Australia? My 2 cents – the refocus over the last 24 months on governance and risk prevention is a good thing. But, just as businesses need to focus on customers, so do regulators. This involves reflecting on the entire eco-system, not just layering more personal accountability on directors.
I think there are the first signs that the tide might be turning. Last week, in an opinion piece in the AFR Jason Falinski (government member for Mackellar and the Chair of Standing Committee on Tax and Revenue) said “When business leaders spend more resources designing products that meet regulatory whims rather than the needs of the people, we have a problem. When regulators feel as if they need to issue guidance on how boardroom notes are taken, then we have gone past any reasonable understanding of consumer protection.”
Commerce is multi-faceted (just like human patients) and regulation overlaid on more regulation on only one participant in the eco-system can, over time and with the best will in the world, actually harm the people businesses serve. Regulation taken too far stifles entrepreneurialism, which will have significant costs for Australia, many unseen. Boards should set the tone on compliance but also on growth, creativity and strategic vision. There needs to be balance. We don’t want directors manically scrubbing their fingernails and taking clinical notes while the patient slips into a coma.
As cool as they are, we shouldn’t need to celebrate renegades that break down unnecessary red tape, we should have rules that are simple and clear and that drive the right outcomes in the first place.