The Financial Services Royal Commission was a big deal. We don’t need to tell you that, but we would like to tell you about some of the flow-on effects that many may not have considered. The expectations of boards and senior executives have shifted. This is particularly pertinent when looking at how organisations are governed or their cultures are formed and overseen.
Let’s take APRA’s prudential review of the Commonwealth Bank of Australia as an example. Certain things that were previously acceptable are now unacceptable. Character, integrity and ethics are viewed through a much stricter lens, and rightly so. But what does this mean moving forward? How do you future proof your organisation when something that is allowed now may be completely disavowed in ten years?
Across the pond, an issue arose for the directors of Boeing with both current and former company directors required to pay a US$237.5 million settlement to settle a lawsuit over the board’s oversight of the 737 MAX aircraft’s safety. Two fatal 737 MAX crashes in 2018-19 killed 346 people, grounding Boeing’s best selling plane for 20 months.
Part of the answer is to be prepared for new waves of regulation that continually strive to raise the bar for boards and executives. The failures brought to light by the Royal Commission and APRA’s cultural review of the CBA hint at the types of things that will come under consideration. According to APRA, organisations should be adopting a stance of chronic unease regarding governance and how their company culture is formed and overseen. How lovely.
The Royal Commission Terms of Reference
The Royal Commission Terms of Reference exist to explain which conduct, practices, behaviour or business activities are deemed unacceptable and below community standards and expectations. Even events that occurred years ago are judged on current community standards and expectations.
The Terms of Reference require the Royal Commissioner to determine if inappropriate conduct can be attributed to culture and governance failures within an organization. APRA’s prudential review of the CBA identified a range of shortcomings in its governance culture and accountability, nothing that community trust had been damaged as a result.
From the consumer to the company
Another way regulation has forced a raised bar for boards and executives is with buyer protection. Sellers of goods or services were previously better protected (for lack of a better description), with many buyers often being cheated with nowhere to turn.
Many modern factors, mainly social media, make organisations far more publicly accountable for their wrongdoings, causing more shifts in the organizational landscape. As a result, companies must be extra sure that their products and services are fit for purpose least they feel the wrath of a very public (and possibly viral) shaming.
The risks are just as significant internally. A scorned or mistreated staff member has the same social tools at their disposal as a dissatisfied customer. As a result, boards and executive teams must adjust how they govern their organisations and oversee organisational culture.
Uh-oh, climate change
One area that is sure to be next on the regulatory chopping block is the way in which organisations will prepare for climate change. There is significant confusion and uncertainty in Australia, with roughly half the country’s directors claiming they are unclear on how to tackle the issue.
A study by the Australian Institute of Company Directors found that 77 per cent of directors are worried about how climate change will affect their company but have failed to act on any changes as yet. The overwhelming response from directors was an agreement that they should pay more attention to climate but are unclear on how to do so.
Six tips to improve corporate governance
Despite the specifics of the many changes that have taken place, or may in the future, here are some tips to make sure you keep your corporate governance in check from a board level:
1. Understand good governance is more than compliance
Your boards should balance compliance with regulation and organisational performance aspects. Your company must clearly define the difference in the functions of the board and management.
2. Define the board’s role in strategy
The board has a substantial role in the organisation’s strategic direction. From approval to development, the board must determine where and how it will have an effect.
3. Overseeing organisational performance
Ensuring organisational performance and legal compliance falls under the board’s monitoring role. Corporate decision making should be consistent with the organisational strategy. Key performance drivers should be clear, as should measures for determining success.
4. Remember; the board employs the CEO
This is not a threat! However, it is essential to remember the board’s role in appointing, reviewing and replacing (if necessary) the CEO. The board/CEO relationship is vital for effective corporate governance, ensuring strategic direction and corporate objectives.
5. Governance of risk is a board responsibility
Risk oversight falls under the roles of the board. Always remember that effective risk management and quality decision making go hand-in-hand.
6. All directors should be well informed
Regular board papers keep directors informed, but sometimes, additional information may be required. Always ensure directors can easily find the answers they may be looking for.
How a board evaluation can help
Board appraisals can help an organisation improve the performance and effectiveness of their board. Benchmarked board and director surveys coupled with professional advice to interpret survey results can enhance and grow a business thanks to evidence-based insights and practical advice.
The regulatory effects of events like the Royal Commission and outcomes discussed above can be accounted for along with an overall improvement in the performance and effectiveness of constituents and stakeholders. Consider a board performance evaluation via an in-depth board survey today.