In a recent speech entitled Reinforcing Culture in a Climate of Low Trust, Australian Securities and Investments Commission (ASIC) Commissioner John Price has outlined ASIC’s views on corporate culture and touched on the themes of corporate social licence to operate, and the importance of good governance. Citing the recent Australian Prudential Regulation Authority (APRA) report into the culture and governance of the Commonwealth Bank of Australia (CBA), Mr Price said that the report recommendations are of relevance to all organisations and called on every board to take note.
A high level overview of the key points of his speech is below.
Social Licence to operate — good culture and conduct is the best interests of companies (as well as regulators, investors and the broader community): Mr Price said that there has been a shift in the expectations of companies, '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'. He added that that good culture has been demonstrated to be in the best interests of companies and for generating long term shareholder value. Mr Price went on to highlight the potential costs of failure to ensure strong culture: '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' he said. Mr Price also flagged that cultural failure could have regulatory consequences and outlined ASIC's recent enforcement outcomes.
ASIC's areas of focus: Mr Price said that ASIC's role is 'not to dictate a company’s culture nor how a business is run' but that ASIC did expect companies to 'shine a light on their own culture and see if it is sufficiently fit for purpose'. He added that where ASIC identifies elements of poor culture it will 'make this clear to the firms in which we [ASIC] see it'. He then outlined issues ASIC takes into consideration in this regard. These include: how standards of behaviour are set within firms; and 'whether values are being translated into business practices, especially when these may affect customer outcomes'. He added that 'When we [ASIC] 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'.
Boards are expected to be active, vigilant and effective in their oversight of culture: Mr Price noted that in some cases, boards are 'surprised' by issues raised in ASIC reviews, despite the fact that the issues identified are based on the firm's own data. This suggests, Mr Price said, 'a deficiency in the risk governance, oversight and, sometimes, the accountability frameworks within the firm'. Mr Price emphasised that the regulator expects boards to actively monitor and oversee culture. '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' he said. He added that 'boards need to ask themselves whether their company has a "good news" culture, where problems are buried rather than dealt with appropriately' and that functions supporting the risk governance framework are adequately resourced. Mr Price acknowledged that for directors not involved in the daily operations of a company, monitoring culture could pose challenges but said 'there are a range of matters a board can consider' to assist in this respect (eg those outlined in the guide, Managing culture: A good practice guide (see: Governance News 15/12/2018.))
Australian Prudential Regulation Authority's (APRA) report into the Commonwealth Bank of Australia: Commenting on the recent APRA report (see: Governance News 04/05/2018) Mr Price stated that it 'neatly encapsulates some areas of good governance worthy of consideration' and that the recommendations should be considered by all organisations. In particular, he highlighted the following issues (identified in the APRA report): 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.