The broken bits of Australian business life have been sticking out jaggedly from the otherwise silky-smooth performances at the Hayne royal commission. And not just at the commission: a new report from Australia’s prudential regulator adds more evidence of bad behaviour among bankers and advisers. There are signs the problems extend more widely.
Australia’s business culture, like its political culture, has acquired something of a production-line character. People who fit in easily and say the right things to the right people tend to get jobs they might not be well equipped to perform. Boards of directors and chief executives often appear more concerned to showcase the process of leadership than to practise it firmly and effectively. Processes are unguided by clear purposes, or are shaped by wilful ignorance. And the regulators have been slow to act.
Take the commission testimony of Louise Macaulay, a senior manager at the Australian Securities and Investments Commission. Ms Macaulay, who heads ASIC’s supervision of financial advisers, revealed that the subjects of the agency’s enforcement obligations — the financial services licensees themselves — decide which transgressions are important enough to investigate. Here’s her exchange with counsel assisting the royal commission, Rowena Orr, on 27 April:
Orr: Is there any obligation on financial services licensees to report misconduct by their employees or authorised representatives to ASIC?
Macaulay: Well, it depends on whether it fits within the provisions of the legislation. So it needs to be a significant breach, and whether or not a breach is significant will depend on the nature of the breach and also on the — the nature of the licensee. So if it’s one adviser within a small licensee and there has been a breach that’s affected a number of clients, the licensee may say that that is a significant breach. If it’s a large licensee and there is one adviser with a limited number of clients, the licensee may form a view that that is not significant, because a significant breach aspect relates to the conduct of the licensee’s business, not to the conduct of the individual adviser.
Once it does track down a miscreant and he or she is banned from practising, Ms Orr asked, does ASIC consider the benefits of a public denunciation, as occurs in criminal cases?
Macaulay: I think you can probably say that it doesn’t at the moment. There are constraints on what we can publicly say about bannings. It’s a — our investigations and surveillances, of course, are private, and then the banning process also takes place privately. And the only — the decision is also private, and so we can make a — and we do always put out media releases which record the order, and we do have some brief explanation of the misconduct. So those constraints apply as a result of procedural fairness.
No names are revealed in the ASIC media releases.
Later, Ms Macaulay was asked very directly whether the current regulatory structure meant that misconduct by a financial adviser is predominantly dealt with by the licensee. “Yes,” she answered, without qualification.
In her summing up, Rowena Orr offered a striking counterpoint, drawing on one of the case studies considered by the commission. “Despite attempts from more junior staff to convince senior management of AMP advice licensees to cease charging fees for no service, they continued to do so,” she said. “Mr Regan [Jack Regan, an AMP executive] admitted that this conduct showed that the culture at AMP was not as robust as it should be. He agreed that it showed a culture in which conscious decisions were made to protect the profitability of AMP and put the interests of shareholders first at the expense both of the interests of clients and of complying with the law.”
For Ms Orr, AMP’s approach raised an important question:
Why has it placed so much emphasis on the question of whether an employee or executive received legal advice explaining that it was unlawful to charge fees for no service? While the receipt of such advice might be an aggravating factor in the culpability of an individual, it is difficult to understand why so many employees and executives at AMP were unable to recognise something that was plain to Mr Regan, namely, that to charge fees for services that will not and cannot be provided is unlawful and ethically and morally wrong.
A few days later, the Australian Prudential Regulation Authority, or APRA, released a lengthy report on the culture within Australia’s largest financial institution, the Commonwealth Bank. APRA’s review panel — made up of former APRA head John Laker, former banker Jillian Broadbent and former competition commissioner Graeme Samuel — found that “CBA’s continued financial success dulled the institution’s senses to signals that might have otherwise alerted the board and senior executives to a deterioration in CBA’s risk profile. This dulling was particularly apparent in CBA’s management of non-financial risks, i.e. its operational, compliance and conduct risks.”
According to the report, “These risks were neither clearly understood nor owned, the frameworks for managing them were cumbersome and incomplete, and senior leadership was slow to recognise, and address, emerging threats to CBA’s reputation. The consequences of this slowness were not grasped.” The trio catalogued a series of extremely damaging shortcomings, including inadequate probing of emerging non-financial risks by the board and its committees, unclear accountabilities at senior levels, risk-management processes that didn’t work, and distorted incentives.
Aside from CBA’s extensive reach into the day-to-day activity of households and businesses, its sheer size means that it has a very large influence on the value of savings held by Australian superannuation funds such as AMP. CBA has also appeared at the Hayne royal commission, as have AMP and others. The evidence there so far suggests that the problems in the cultures of CBA and AMP are not confined to our largest and oldest institutions.
The most striking feature of ASIC’s evidence to the commission was the revelation of its distorted priorities. ASIC revealed that cases of serious misconduct are reported to it quite frequently by financial institutions. Yet it then pursues its inquiries in private and obtains private undertakings and relatively modest remediation — always relying on the institutions themselves to admit misconduct and never considering the social benefits of the publicity that would accompany criminal charges.
ASIC was created out of the National Companies and Securities Commission, which was a creature of the pioneering national corporations regulation developed by the states and the Commonwealth in the early 1980s. The NCSC had a rough introduction, running up against some remarkably aggressive corporate pirates in the 1980s. Perhaps bruised by the knuckling, the NCSC’s first chair, Henry Bosch, later confessed that he pined for the days when a miscreant might be guided back on track with a few words from the chaps at his club. The reality, at least in one case related to me, is that legal advisers were told, “Don’t tell me what’s illegal. Tell me what gets me into jail!”
The pirates have mainly gone now, and today’s corporate environment is different in important ways. Critical to this shift has been the influence of compulsory superannuation. In fact, a case could be made that superannuation policy has had a powerful negative impact on corporate culture. Citizens are compelled to put almost 10 per cent of their earnings into investments they often don’t understand. Despite this compulsion, governments have made no real effort to provide a simple, low-cost default fund for those who don’t feel confident to choose. Employers and unions offer a narrow choice of funds differentiated, at best, by banal tags.
Generally, the super funds don’t comply with the disclosure rules imposed (by them) on listed companies, so we don’t know much about the salaries and benefits they pay, or about the related-party transactions they may make, or about how their bonus schemes work. Many super fund board members have been there for a very long time, a practice they discourage when it comes to listed companies. And it’s not at all clear how they are chosen.
As big investors, super funds should be closely monitoring the performance of the companies they have stakes in. Generally, they focus almost exclusively on smooth (ideally smoothly rising) share prices and profits. Unless there has been an egregious and widely publicised event, it is extremely rare for a chief executive or board to be tipped out. Even when they sometimes are — as was the case with former AMP chair Simon McKeon — we now know that broader questions should have been asked about governance.
Superannuation has pumped a huge flow of cash into the Australian stock market. This has at least two serious effects, both of which reflect Warren Buffet’s aphorism: in the short term, the share market is a voting machine; in the long term, it is a weighing machine. In the short term, corporations are under enormous pressure to sell a story and to maintain a narrative, even if the real world is unpredictable, in order to keep their share prices high. Longer term, their aim is to market concentration, which is why we have ended up with a very large proportion of companies’ growth being driven by takeovers.
In a market heavily influenced by very large superannuation flows, conformity and predictability are extremely highly regarded corporate attributes, and strong-growth companies are not always favoured. CSL, for example, has an impeccable governance record and a remarkable growth history, but is not in the portfolio of some large funds. Its growth — frequently uprated — has attracted international interest to the point where super funds have turned down the chance of substantial gains because of what they think are exaggerated prices. Yet the same funds do nothing when BHP blows a few billion — for the umpteenth time — at the peak of a commodity cycle. In this cautious world, financiers and advisers become unnaturally influential and companies pursue a strategy of least risk and most certainty — not always succeeding even in those terms — rather than one that elevates value creation and community benefit.
It’s clear that the primacy of institutional interest is unquestioned at ASIC. Combine that with the apparent need for explicit legal advice about right and wrong — at AMP, anyway — and, like a small island lacking genetic diversity, we are breeding a dangerous culture.
Overlaying all this is a dubious leadership culture. Ever since Bill Clinton’s administration opened the way for equity-based incentive schemes, corporate salaries have inflated beyond imagining across the English-speaking world. Executives are very often rewarded for capital appreciation rather than operational performance, which effectively treats them like owners and elevates their interests above those of shareholders. The glamour of enormous salaries and status has seeped into the boardroom, which appears to be much more intrusive, politically charged and fickle than in the past.
The curative required is tension. Roles need to be clear and enforced. Purpose needs to be at the top of board members’ and executives’ minds. Outcomes must be the test of performance. ASIC ought to introduce serious tension into its relationship with companies. Superannuation funds ought to be clear that their job is husbanding savings and demonstrating they can increase their value. Corporate leaders ought to be absolutely clear about the need to create value.
Right now, a lot of emperors are poncing around naked. They need new clothes. •