Category Archives: Corporate Governance

Integrity and the Acid Test: How Would it Look as Front Page News?

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We have been hearing a great deal recently about allegations of political corruption in Australia, culminating in the resignation of a State Premier. This has raised questions about integrity in public office, given the steady stream of stories concerning dubious donations to election campaigns, murky business deals involving politicians and party power-brokers, misuse of trade union members’ assets by officials who were also prominent party figures, opaque political lobbying by industry, tawdry backroom deals to preference election candidates… oh, and the gift of a $3,000 bottle of wine.

Premier Cru-elled de Chateau ICAC?

I won’t dwell on the whys and wherefores of Mr O’Farrell’s resignation, except to say this: If the Premier genuinely believed he did not receive the bottle of wine in question, and his assertion was subsequently shown to be wrong, does this amount to giving false witness? Surely, the act of giving false evidence involves the commission of a deliberate lie, either with the intention of causing a deception or creating an erroneous version of events. It seems that had Mr O’Farrell, as a Member of the New South Wales Parliament, remembered to declare the gift on his register of pecuniary interests, but later forgot about it or failed to recall it when giving evidence, he might have been made to look merely foolish. However, failing to register the gift was either a costly mistake or a grave error of judgement, and by forgetting it altogether (including his handwritten letter of thanks) it reveals a certain level of incompetence. Yet, how many foolish and incompetent politicians manage to keep their jobs, and even get re-elected?

Some commentators have suggested that the nature of the Premier’s resignation showed real integrity – but the truth is, once the facts contradicted his evidence, his position became untenable, and he realised he had no choice in the matter. (The relevant inquiry had in fact already cleared Mr O’Farrell of any suggestion of wrongdoing in the matter under investigation, but now his reputation is probably tarnished by the implication or perception of corrupt behaviour.)

The big lesson from these latest events is that when we get wrapped up in process or get sidetracked by personal, political or financial outcomes, we can easily lose sight of the need to act with integrity and to exercise our authority and powers of influence with transparency. Otherwise, we end up colluding which allows the smell of corruption to permeate. Politics is not alone in these matters – religious institutions, professional sport and corporate boardrooms have more than contributed to the current malaise.

I experienced a small but significant test of personal integrity early on in my career, when I was working as a paralegal in local government. Part of my role was to provide impartial legal advice to local residents facing housing problems. At the time, the area was undergoing intensive gentrification, and many private tenants were being “persuaded” to move out by landlords and property developers. In many cases, all I could do was advise parties of their respective rights, particularly the tenants who had protection from harassment and unlawful eviction under the relevant housing laws. In some cases, the council could mount criminal prosecutions for more serious offences, but this was rare.

So, one day, one of my “clients” (the advice service was free to the public) brought me a personal gift: a bottle of vodka and a bottle of champagne (probably no more than $50 in total value). I initially refused because I did not feel it was necessary or appropriate that he reward me in this way for simply doing my job. However, because my legal advice had enabled him to negotiate a lucrative payout from his landlord to vacate his home, and because he had been brought up to value displays of gratitude, he insisted I keep the gift and refused to take it back.

I could have just taken the bottles and not said anything to anyone, as there were no witnesses. But whether it was my conscience, or the thought that the client might have said something to a third party that may have compromised me, I immediately raised the matter with my manager. He acknowledged my honesty in reporting it (even though I wasn’t really sure what the council policy was on gifts), but said I could keep the present as it was of nominal value, and because I hadn’t sought or solicited a personal benefit. (He also said that if it was a bottle of gin, he might have taken it for himself… but I think he was joking?)

Nowadays, I’m not so sure that I would have got the same response, and over the years, having worked in some high-profile and highly regulated industries, I am aware that there is far more scrutiny around formal compliance, self-regulation, voluntary codes of conduct and business ethics. Of course, individuals need to feel comfortable about the organization they work for and the role they are expected to perform, to ensure there is alignment with their personal values. In addition, I’m often reminded of three questions you should ask yourself in corporate life whenever you have any doubts about the integrity of your actions:

  • Would you still do it if the CEO or Chairman was watching?
  • What might your clients or your shareholders think?
  • How would it look if it made front page news in the morning?

I think the problem for many modern politicians is that they hardly ever say exactly what they are thinking, for fear of letting slip a personal opinion that may differ from their public persona or their party’s stated policy position. (How often nowadays do Ministers resign on a point of personal principle?) Worse, it has been suggested that “loyalty to party” has been displaced by “loyalty to faction”. As a consequence, they are compromised because they forget about individual accountability; and they collude because they either prefer to toe the party line or hide behind the collective shield of cabinet, ministry or faction. In doing so they demonstrate a lack of personal integrity. Unfortunately, when even “benign” or “innocent” collusion emerges, corruption is never very far away.

 

POSTSCRIPT:

Since drafting this blog, I have heard several “wise after the event” comments from the chattering classes, which can be summarised as follows:

  • If the original enquiry was not interested in a bottle of wine, was the Premier “mere” collateral damage of the anti-corruption investigation?
  • How could he possibly have forgotten about such a significant gift, and his written note of thanks? What was going on? What was he thinking? What were his staff doing?
  • The 1959 Grange vintage is somewhat overrated (and well past its best drinking) – which might suggest it was worth less than $3,000 (NB: gifts under $500 do not need to be declared on the Parliamentary register of MPs’ pecuniary interests…)
  • On the other hand, bottles of 1959 Grange are being advertised at over $4,000 because the notoriety has boosted its value
  • It again raises questions about whether the electorate can trust any of our politicians – the backdrop being “lies” and “broken promises” over pre-election commitments

Corporate Governance – exercising a “duty of awareness” in the age of social media

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Do we need a new theory of Corporate Governance? Is it time to look at a new model that reflects the current environment in which businesses operate, an era characterised by:

  • social media,
  • corporate and social responsibility,
  • shareholder and consumer activism,
  • increased market connectivity, and
  • rapid generational change?

Has the law fallen behind in being able to regulate and oversee contemporary corporate behaviour – where compliance with and adherence to the letter of the law may no longer be enough to meet community standards or satisfy shareholder expectations?

The question arose during a roundtable discussion I attended recently, comprising non-executive directors, entrepreneurs, corporate advisers and governance experts. Some of the issues we kicked around included:

  • the efficacy of running more frequent board interaction via the use of technology (as opposed to the standard face-to-face monthly board meeting);
  • the ethics of minimising cross-border taxation by multinational companies (even though it may be legal under international tax law);
  • the imperative to develop more inclusive and diversified boards (including networking into broader stakeholder groups);
  • the perils of ill-considered public comments made by CEOs (and the resulting social media backlash); and
  • the risk of harking back to some “golden age” of corporate behaviour (assuming such an era actually existed)

Our current perspectives on Corporate Governance largely derive from the late 1980s and early 1990s when a series of authoritative studies and reports led to new Codes of Practice and updated corporations laws – I’m referring to the work done by and in the name of Tricker, Carver, Monks, Cadbury, Greenbury, Hilmer and Hempel. And while in recent years we have seen increased scrutiny on CSR, directors’ remuneration and financial oversight by boards (plus Sarbanes-Oxley, Dodd-Frank and IFRS), the reality is that most of the earlier Corporate Governance reforms were introduced just as the internet went public and just as financial markets were being deregulated. So it could be argued that the reforms were ill-equipped for, or could not have anticipated, the changes to come – witness for example, the SEC’s recent approval of social media as an appropriate platform for corporate disclosure.

In Australia, Corporate Governance is described simply as “good decisions being made by the right person”, and the obligations of company directors are summarised as follows:

  • your primary duty is to the shareholders;
  • you must act with appropriate due care and diligence;
  • you must not allow the company to trade while insolvent;
  • you must exercise your powers in good faith and in the best interests of the company;
  • you must not improperly use your position of (or information obtained as) a director to benefit yourself or another person, or to cause detriment to the company.

On one level, the test of whether an organization has exercised good judgement in making a decision is, “would you be embarrassed if this was reported on the front page of tomorrow’s newspaper?” At another, Corporate Governance is reduced to a compliance checklist of risk mitigation measures.

The Australian courts (in the OneTel and Centro cases) have expanded and reinforced the duty of care (particularly in relation to the business judgement rule) to place greater accountability on individual directors to consider what a reasonable person would do in exercising their duty of care and diligence:

  • To understand the fundamentals of the business
  • To keep themselves informed of the company’s activities
  • To monitor the company’s activities (e.g., through active questioning)

The question we should be addressing is: “Does imposing a broad duty of care and specific fiduciary obligations ensure an appropriate level of Corporate Governance?” I would argue that in light of a rapidly changing operating environment, we would be well-advised to exercise a “duty of awareness” in respect of our Corporate Governance standards. In my view, directors need to take a wider perspective in understanding and monitoring the business fundamentals and the company’s activities. Some may argue that this is not a new duty, it has simply been forgotten in recent times – and in the era of social media, when it is far easier to “get caught out”, it would be prudent to have more regard for the broader context.

A “duty of awareness” offers an appropriate counter-balance to the numerous areas of self-regulation by industry sectors and by individual companies. It provides an objective test for assessing “if not, why not” explanations required under both voluntary and mandatory Codes of Practice – i.e., did the respondent take into account all relevant factors, and did the respondent adopt a sufficient level of awareness in evaluating its options under a chosen course of action?

The “duty of awareness” means that at an individual level, directors would be obliged to reflect on their contribution to and participation in board decisions; boards would need to consider the likely impact of their decisions on the company’s performance and on wider stakeholders; and companies would be expected to have regard to their standing as a good corporate citizen, not merely a compliant one.

Acknowledgements: I am grateful to Andrew Donovan of Thoughtpost Governance and Dale Simpson of Bravo Consulting Group for their invaluable contributions to this article.