Governance Institute responds to Hayne interim report
Governance Institute has provided a submission on the issues raised by the Interim Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
The Interim Report along with our most recent Ethics Index and today’s release of the 2018 Deloitte Trust Index demonstrate that the banking, finance and insurance sectors have lost the trust of the community.
‘The loss of trust in the banking sector is illustrated by the 2018 Governance Institute Ethics Index — it was the lowest scoring sector and dropped from -3 to -15 — and is reinforced by the 2018 Deloitte Trust Index, which shows that only 20 per cent of people believe that banks are generally ethical,’ said Acting Chief Executive, Meegan George.
‘An ethical framework should sit at the heart of a company’s governance structure to serve as a common and authoritative point of reference for all decision-makers and give shape to culture,’ she continued.
‘Conduct is the manifestation of culture. Boards must consider how to avoid setting policies, building systems or establishing practices that might drive conduct that is at odds with the declared ethical framework, particularly in the area of remuneration and incentives,’ Meegan George continued.
‘As referenced in our submission, in a complex multi-level cultural system, middle managers play an essential role in generating unethical and ethical behaviour. If middle managers’ remuneration is tied to the performance of their subordinates, they are being incentivised to ‘do what it takes’ to get employees to perform,’ said Meegan George.
‘Governance Institute members advocate for better enforcement of the existing laws and that no new regulation is proposed before the impact of the reforms currently in progress is assessed,’ Meegan George said.
‘ASIC can play a key role in restoring and maintaining trust and confidence in the market, which funds the broader Australian economy. If ASIC is to better enforce the existing laws, it is vital that it is well funded and appropriately resourced,’ Meegan George concluded.
- The Report and the results of the most recent Governance Institute annual Ethics Index demonstrate that the banking, finance and insurance sectors have lost the trust of the community and that the community expects that financial services companies should behave ethically. Our members consider that it is critical for companies in these sectors to look closely at the ethical frameworks underpinning their future governance models.
- An ethical framework should sit at the heart of a company’s governance to enable delegation of authority to responsible decision-makers while maintaining organisational integrity. The framework should serve as a common and authoritative point of reference and give shape to culture. Once established and adopted by the board, all aspects of the company (current and prospective) should be assessed and, if required, aligned with the framework, purpose or values.
- Companies and their officers must, must at a minimum, comply with the law — it is not optional. Legal compliance must be taken as a given rather than a choice made on the basis of ‘cultural’, business or financial factors. More than this, there is a need for companies operating in the banking, finance and insurance sectors to give greater focus to their ethical foundations and their culture. This would help employees at all levels to make fair and honest decisions. Boards play a critical role in setting the ‘tone from the top’ and modelling that tone as well as monitoring culture.
- Given that conduct is the manifestation of culture, a prudent board must consider how to avoid setting policies, building systems or establishing practices that might drive conduct that is at odds with the declared ethical framework, particularly in the area of remuneration and incentives.
- Our members endorse the view in the Report that more disclosure around remuneration is unlikely to assist in addressing poor conduct. Governance Institute has advocated for some time that there is a pressing need for an approach to legislative reporting requirements that simplifies reporting, rather than adding further layers of complexity.
- Our members consider that now is the time for a wide-ranging conversation on the clarity of the role of the board versus management. Addressing the matters raised by the Report will require boards and management to work together differently in the future. Our members are already actively considering the implications of these matters.
- Governance Institute advocates for better enforcement of the existing laws and that no new legislation is proposed before the impact of some of the reforms currently in progress is assessed. Any new individual element of the regulatory landscape needs to be evaluated for its impact on the regulatory ‘whole’ or ‘sum of the parts’. The greatly increased amount of corporate law and governance legislation introduced in recent years has led to significant complexity as well as unintended consequences.
- Our members believe the Australian Securities and Investments Commission (ASIC) can play a key role in restoring and maintaining trust and confidence in the market, which funds the broader Australian economy. If ASIC is to better enforce the existing laws, it must be well-funded and appropriately resourced. There must also be proper accountability and transparency in relation to any funding it receives and in relation to any enforcement action it takes.
 Also referred to by some companies as their purpose or values.
 See Managing Culture: A good practice guide, 1st edition 2017, Institute of Internal Auditors Australia, The Ethics Centre, Governance Institute of Australia and Chartered Accountants Australia and New Zealand at page 11.
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