Actuaries have always prided themselves on being honest, respectful, and speaking out when they see unethical or inappropriate behaviour. But nobody ever said it was easy.
In a world where complexity in systems and institutions increases almost on a daily basis, the challenge of doing the right thing is now more important than ever. With the dust settling on the banking royal commission, there’s an even greater emphasis on behaviour among Australia’s financial institutions.
At this year’s All-Actuaries Summit, some of the best thinkers gathered to discuss the importance of the topic of ethical behaviour and the broader discussion around conduct.
In his keynote speech, Dr Ken Henry AC spoke on the modern challenges of doing the right thing, particularly when events go awry.
He was joined by a panel including Danny Gilbert (Managing Partner, Gilbert + Tobin), Dr Simon Longstaff (Executive Director, The Ethics Centre), Margaret Cole (Board Member, Australian Prudential Regulation Authority) and Chair for the session Ian Laughlin.
The accountabilities of business leaders
Ken began his address by stressing the importance of business leaders meeting community expectations.
When a business fails to meet expectations, Ken said an analyst might come up with a range of root causes including bad apples among the organisation, poor business culture, failed governance, risk compliance and audit systems, poor regulatory effort, or their policy is deficient.
“In some important respect those who adopt a narrow legalistic perspective might readily conclude that many problems are the consequence of people in positions of trust behaving dishonestly,” he said.
“And these people may well be probably motivated by greed, they will assume that business culture is bad, and they will assume that internal governance systems have failed. And they will certainly conclude that the regulatory agencies have not been performing as they should.”
Ken believes the importance of good economic policy and regulatory oversight are core functions of government.
“How well these functions are delivered has important implications for those charged with corporate governance. So, what happens at the board table when something goes wrong?”
Ken touched on his time as a board member at NAB as an example of issues faced in dealing with complex issues around compliance.
“We did have some bad apples. We did have a cultural problem. Internal compliance systems and the second line risk function certainly were stretched,” he said. “There was evidence of people cutting corners because of internally generated system complexity some of which we had not paid nearly enough attention to.
“Our relationship with ASIC was not healthy and we had not had a practice of putting the customer at the centre of product design.”
Ken said the conversation around corporate governance and regulators today is largely around boards accepting accountability.
“Whilst boards are obliged to act in the interests of the company in the normal course they face accountability only to the company’s shareholders,” he said.
“I’ve argued elsewhere in other places that notwithstanding that fact, we are in a world in which corporate leaders should accept accountability to the community for all of the consequences of their commercial operations.”
Ken said the cause and worsening of issues of the world such as greenhouse gas emissions, environmental degradation, shop front closures, low wages growth, gender inequity, offshoring of jobs, and countless health crisis’ have been levelled at business leaders in recent years.
But Ken said according to the tenants of capitalism, businesses should not have a responsibility to do anything other than maximise profit.
“It’s up to the rest of us, as citizens, to elect governments to establish the rules of the game that make this singular business focus on profit maximisation work for society,” he said.
“It’s also our responsibility to elect governments to attend to negative externalities.
“Today, many governments appear wholly disinterested in policy at times. Some of Australia’s elected officials have preferred the role of a business bashing…Behaving in this way put the functioning of democracy at risk.”
Ken goes on to say that due to government failure, capitalism has been replaced by ‘stakeholder capitalism’.
“Stakeholder capitalism is actually an oxymoron. In the capitalist system, business has no stakeholder other than profit. A profit maximising business cannot have regard to the social consequences of low-income customers being priced out of access to its products.”
“Yet stakeholder capitalism, whilst an oxymoron, is a good description of where we are. The reason we are where we are is this when government can’t be bothered with the policy effort required to ensure that capitalism works for its citizens.”
Ken said boards that accept an accountability to the community will want to have directors who understand the business and it’s social and environmental impact across multiple dimensions.
He said accountability to the community means businesses have multiple stakeholders including their own customers and suppliers.
“Accountability to the community means standing up in public and explaining, even justifying, the economic social and environmental consequences of all of the activities of the business,” Ken said.
While business leaders need to stand up and face these accountabilities, some business leaders can see a case for taking this accountability to an even higher level.
Ken said these leaders are starting to think more about how commercial activities might impact human progress.
“And even for wondering how, through their constructive engagement on challenging policy issues, they might help to rebuild trust in our democratic institutions, rather than undermine good policy by exploiting the manifest weaknesses in those institutions,” he said
“At this time, when so much is going wrong, there’s no more important role for our business leaders to be playing.”
Why corporations should make up the failings of governments
After Ken’s keynote, he joined the panel where Executive Director for the Ethics Centre Dr Simon Longstaff shared his views.
Simon spoke on taking for granted the “essential fragility” of our institutions where a government can alter the foundations of a corporation with the “stroke of the pen”.
He then touched on the corporate history of Australia and the birth of the modern corporation as we know it today, including the right to form a corporation as a separate legal person and the “right to establish the extraordinary privilege of limited liability”.
Simon said today, boards and directors need to have a stronger and consistent message about what counts as “doing the right and good thing” to help define for their stakeholders.
“I’ve always argued that the overarching duty of directors is to ensure that people within an organisation and the organisation as a whole, consistently do that which is right and good,” he said.
“But no one can know that unless someone defines those terms and that’s what effectively boards do.”
Simon said it was a reasonable expectation for organisations to make up for the failure of government.
“I think it’s clear that directors do have a right, and I would even say an obligation, to step in if the system itself that threatens the viability of that corporation is at risk,” he said
Simon finished up by commenting on organisations dealing with tensions with stakeholders.
“The reason why shareholders enjoy limited liability is because they do not direct the affairs of the corporation,” he said.
While Simon said he loved a lot by what’s driven by shareholder activism, they risk pushing too hard and can potentially interfere with the organisation.
“(They’re) not just now exercising your transferable rights to say to elect a board or not elect them, you’re actually starting to interfere in the direction of the corporation and therefore perhaps the grounds on which you enjoy limited liability are at loss,” he said.
“That’s why I think directors, even in shareholders’ interests, have a duty not just to increase dividends or capital gains, but also to ensure that they do nothing, and in fact positively do something, to ensure that privilege of limited liability is not disturbed by a community that feels that it has been failed in that basic promise.”
ESG and the evolving relationship with stakeholders
Danny Gilbert, Managing Partner at Gilbert + Tobin continued the conversation saying concepts such as ESG and stakeholder capitalism are “coming at corporate Australia with a rush.”
Danny said for years organisations have been providing to philanthropic causes including charitable donations and involvement in various sporting, cultural, and environmental concerns.
But he said today those activities are no longer enough.
“It can be just papering over things and embellishing corporates with good reputations,” he said. “That’s not to say that these things are not valuable or good things to support, but they don’t come to the heart of ESG.”
Danny said many corporates are now adopting ESG practices such as producing sustainability reports, looking at supply chains conditions and encouraging Indigenous employment and support.
“While these types of initiatives are necessary, they are not really sufficient,” he said.
“Because no corporation on its own is going to shift the dial in relation to some of the major problems of inequity, poverty and disadvantage in our country, let alone the more vexed issue of human rights.”
Danny said many corporations are now thinking about the nature of their relationship with stakeholders and communities and asking, “are we looking at all of these people and their best interests?”
He said the problem lies with corporations not having made sufficient investment into the impact of their activities in the community, which is where ESG should be anchored.
“It always gets anchored back to what is in the interests of shareholders and, once you stray outside that paradigm, there are challenges,” he said.
“But I think boards can answer that question. They can have a go at this.”
Danny used a recent example where Woolworths was looking to build a large Dan Murphy’s store in Darwin, a community that has been beset with problems relating to alcoholism for Indigenous people for years.
“(Woolworths) failed to adequately engage with the Indigenous community, with the health providers in the Northern Territory,” he said.
Danny said while Woolworths could at that time legitimately and legally supply alcohol, the problem was that they were providing a product causing damage to the health and wellbeing of Indigenous people. So, the question was, what should they do?
“Boards need to think beyond what it is that they, as individual corporations, should do and take a broader approach” he said.
“In this case, a legitimate question for suppliers of alcohol is to engage with other providers to deal with what is a major community problem. A problem that government has consistently failed to deal with. Governments seem unable to solve these problems of this nature on their own. The question is, what should corporations do to attend to the problems caused by the products they supply?”
The importance of regulators engaging with stakeholders
Board Member for the Australian Prudential Regulation Authority (APRA), Margaret Cole continued the session opening with her experience in the UK financial regulatory sector.
Margaret shared some of her learnings in her 20 years in private practice law and as the General Counsel at PWC in the UK.
“It’s often said of the general counsel as a conscience of an organisation, and I was always having to be the one that spoke truth to power. Never a comfortable place to be,” she said.
“We need to ask ourselves a question not just can we do this legally, but should we do this?”
Margaret spoke about her experience working with the UK’s Financial Conduct Authority (FSA) as the director for enforcement during the collapse of Northern Rock in 2007 and the Global Financial Crisis in 2008.
After a number of reviews, numerous failings were noted in the UK’s financial system leading to calls for new regulation to make sure that nothing like that could ever happen again.
Responsible for enforcement of these industries, Margaret said many were also calling for heads on spikes.
“It was very difficult to pin blame on individuals for the things that had happened in the sense of accountability for regulatory rule breaches,” she said.
“We would have to have rules, we’d have to analyse behaviour against those rules, we’d have to see whether the behaviour caused the breaches.”
“I had to stand up to parliament and say that and that did not make me hugely popular at the time.”
Margaret said today as an APRA board member, her role involves numerous stakeholders who ultimately play an important role in society.
“As a prudential regulator I’d say much of our work, in fact, our best work, goes unseen,” she said. “We can’t shout about it, we can’t show off about it, even in a world in which people are saying regulators must do more.”
Margaret said while much of this great work is in the background, we still need to be prepared to speak up when the time is right.
“We have to be prepared to do that when the evidence justifies it and we have to be prepared to take action even with the possibility, if it’s legal process, that we might lose,” she said.
Watch below for a creative summary of the plenary session!
CPD: Actuaries Institute Members can claim two CPD points for every hour of reading articles on Actuaries Digital.