In a recent speech entitled: Companies behaving badly? Australian Competition and Consumer Commission (ACCC) Chair Rod Sims said that currently the incentives to behave badly — including bonus structures and business models that reward delivery of short term profit — 'often outweigh the incentive to put the customer first' and that 'increasing the private cost of bad behaviour is the key to reducing its incidence'. Mr Sims went on to comment that new legislation (which he said is expected to pass when parliament resumes sitting in August), mandating higher penalties for breach of the Australian Consumer Law may cause companies amend their behaviour, 'Our market economy needs some intervention and it needs the higher penalties just mentioned. And it certainly needs a strong ACCC' Mr Sims said.
[Note: The legislation referred to appears to be: Treasury Laws Amendment (2018 Measures No. 3) Bill 2018 which passed the House without amendment and is currently at second reading before the Senate. Mr Sims said that he expected that the Bill will pass in when parliament resumes sitting in August.]
- Numerous examples of observed poor company behaviour: Though not all companies behave poorly, Mr Sims said, in the ACCC's experience many businesses do. He added that 'poor behaviour usually occurs on a spectrum, with few companies behaving badly often, but rather many engaging in occasional significant instances of bad behaviour, which remains unacceptable'.
- Overly focused on delivery of short term profits at the expense of customers: Mr Sims said that despite statements to the contrary, many businesses 'appear to put immediate profit ahead of their customers either by engaging in misleading or unfair conduct, or even unconscionable conduct towards their customers, or they engage in cartel or other anti-competitive activity that raises prices for their customers'. Mr Sims outlined a number of recent examples of this behaviour noting that the 'list' of examples included a number of 'major Australian companies'.
- Reasons for the misconduct? Poor behaviour is attributable to a number of causes, Mr Sims said, including (among others): market pressure, and incentives (bonuses) for executives to deliver short term profits; lack of safeguards in the design of financial incentives; lack of punishment for poor behaviour (due to lack of visibility to consumers, lack of alternatives and difficulties/costs of switching); and a 'race to the bottom' mentality (eg banks and electricity retailers). In addition, Mr said that executives could be too loyal to the company ie company executives appeared to 'behave differently when they are at work, than the way they would privately' feeling their obligations to the company compel them to 'pursue profit to the maximum, even if their behaviour pushes too close to the boundaries of the law'. Mr Sims said 'It also sometimes appears as if there is no other ethical standard being applied than adherence to some technical interpretation of the law' and that in many of the examples outlined, the cases were heavily contested, 'clearly the companies had legal advice that they had prospects of success in court given their particular behaviour and the letter of the law'.
- Profits can be achieved without 'pushing hard against the boundaries of the law': Mr Sims said that how directors and senior managers 'maximise shareholder value, and how they treat their customers, is their call, not mine or the ACCCs', but observed that despite hard decisions needing to be made, it was nevertheless possible to do so/achieve profits without 'pushing hard against the boundaries of the law'. He added that stronger penalties likely to be enacted in August, may also be effective in changing behaviour.
Suggested actions to address these issues — directors and senior management
'I believe that the first step is for directors and senior management to give more consideration to balancing short and longer term profit considerations, to the interests of their customers and suppliers, and to the reputation of their company. I will leave them to reflect on this. They may well resent being lectured on this by the regulator' Mr Sims said.
Suggested actions to address these issues — governments and regulators
- 'Identify and shine a light on bad behaviour': 'The greater the likelihood that bad behaviour will be exposed and made public, the more companies will do to guard against such behaviours' Mr Sims said. He added that 'Regulators need to be proactive in identifying bad behaviour and be transparent about what they see; it is not enough to simply take enforcement action after breaches occur'.
- Increase penalties to deter bad behaviour: 'When the incentives for misconduct are strong, and the penalties for misconduct, given the likelihood of detection, are comparatively weak, it is easy to understand that company boards and senior management do not act strongly enough to ensure such behaviour does not occur'. Mr Sims went on to say that the ACCC views 'stronger penalties [as] a key part of the answer' and 'strongly encourages' parliament to approve the necessary changes to the Australian Consumer Law to strengthen penalties.
- Case for intervention in the market? Mr Sims noted that the ACCC has limited resources (60 people) to investigate potential breaches of the ACL in all sectors and in all states and territories and that consequently it was not possible to investigate or deal with 'all breaches of the law'. He added that there are some areas where existing laws are 'weak' eg in relation to product safety and unfair contract terms. 'Under current laws there is little incentive to change such contracts because if the ACCC finds out about them you need only then change them as this is not a breach of the law, and no penalties apply' he said. Later in his speech, Mr Sims questioned whether 'more regulation' is the answer stating that 'more regulation can often be harmful to consumers, especially in sectors of the economy that are already heavily regulated' because it can lead to 'perverse' policy outcomes.
- Ensure markets are competitive as possible: 'Bad behaviour by firms is more likely to be ‘punished’ in competitive markets. The more alternatives consumers have, the greater their ability to avoid bad behaviour' Mr Sims said. 'The more firms in the market and the lower the barriers to entry, the greater the imperative for companies to look after their customers. A key objective of competition law is to prohibit conduct that substantially lessens competition, whether it be mergers or acquisitions, unilateral conduct by firms with substantial market power or agreements among competitors or other parties. Strong competition laws and rigorous enforcement of those laws is a key part of preserving and promoting competition'.
- Improved price transparency: 'More price transparency will usually help markets, as the ACCC has or will argue in dairy, beef, electricity, and banking. We have proposed, or will propose, measures to achieve this' Mr Sims said. Mr Sims added that he views the Consumer Data Right (CDR) as 'a game changer here'.