Company directors: We need to talk about the royal commission

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The scandals being revealed in the financial services royal commission have sent Australia’s company directors back to the think tank to look at the way boardrooms set the moral compasses of organisations.

“We need to have another conversation about trust and integrity,” says Australian Institute of Company Directors (AICD) CEO Angus Armour. “And then a conversation about accountability and learning.”

Armour, writing in the magazine Company Director, says misleading regulators, charging people for products and services they did not receive, and failing to compensate people in a timely manner, are all unacceptable.

He says integrity, while banks are under focus at the royal commission, is a governance challenge across every sector of the community.

“The culture of an organisation must focus on calling out and remedying individual an systemic bad behaviours,” he says.

Royal commissioner Kenneth Hayne said: “In understanding the culture of an organisation it is relevant to know whether it positively shows its employees how commonly accepted moral standards apply and are to be given effect in commonly encountered circumstances.”

The AICD, the peak director body with 40,000 members, says the important lessons from the final report from the royal commission will be incorporated into AICD policies and education programs.

The Australian Prudential Regulation Authority (APRA) inquiry into the Commonwealth Bank also has important lessons for directors.

The inquiry found that the Commonwealth tended toward group think. Everyone at the Commonwealth believed the bank was well run and no-one, including at board of directors and senior executives, learned from mistakes.

The voice of the customer was lost and the bank adopted a slow, legalistic, reactive, and at times dismissive, culture when dealing with regulators.

The APRA report identified a series of markers organisations should look at.

The AICD says these range from rigorous board and executive committee governance of non-financial risks to embedding a “should we?” question in relation to decisions on customers and cultural change that moves the dial.

The AICD recommends directors reflect on three areas:

Risk governance

  • Are you regularly updating agendas to capture risk issues?
  • Do you rely on management summaries on risk issues?
  • Do you regularly review customer complaints, not just satisfaction?
  • Does your board actively discuss these and seek to identify systemic issues?
  • Are committee mandates clear?
  • Do incentive structures incentivise unethical decision making in your organisation?
  • How do you manage bad news?
  • Are you considering your reputational risk?

Holding management to account

  • Is your board embracing the “show, don’t tell” approach with management?
  • Is there clear executive accountability for risk issues, with visibility to the board?
  • Does executive remuneration include collective accountability for adverse risk and compliance outcomes?

Culture

  • Is your board promoting a culture where ethics are applied to decisions about customers — not just “can we” as a compliance issue, but “should we”?
  • Is a reliance on good intent creating potential blind spots?
  • Is your board visible to the organisation’s employees, with a clear tone from the top?
  • Is your board bringing a sense of “chronic unease” to its oversight of risk?
  • Do you regularly review customer complaints, not just satisfaction?
  • Does the board actively discuss these and seek to identify systemic issues?
  • Are committee mandates clear?

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