Licence to Lead

With more than four decades in business and governance, the chair of HSBC Bank Australia and GrainCorp, Graham Bradley AM FAICD reflects on the substantial shift in the director landscape in this edited extract from the December issue of Company Director.

Social licence is a white-hot issue in corporate governance. The recent rollcall of company misbehaviour has challenged the reputation of boards and management and underscored the diminished trust and confidence in business leadership.

In the Australian Institute of Company Director’s 2017 Essential Director Update series, presenter Graham Bradley AM FAICD warned of a growing debate about whether corporations deserve the social licence essential to maintaining community support for their operations.

Culture

Culture is the collection of standards a company sets for its internal and external behaviour towards employees, customers and the general community.

It’s also about setting the tone at the top. “At board level, culture relates to how a company will operate within its ethical standards and the way it wants to relate with its regulators and shareholders,” says Bradley

The AICD’s latest Director Sentiment Index reinforces the need to focus on culture. More than 90 per cent of directors surveyed reported that they were making efforts to improve the corporate culture of their organisation.

Australian Council of Superannuation Investors CEO Louise Davidson, says culture is a key determinant of the ability of a business to maintain its social licence to operate and that “ultimately, the responsibility for good culture rests with the board. Investors want to see boards demonstrate accountability for the culture of their organisations.”

Good corporate citizens

Bradley says directors must come to grips with a significant change in how they and the community see their roles. It requires a big mental shift (from the traditional view that directors need to protect themselves and their companies from liability) to a much wider set of responsibilities that includes the question of what businesses owe the community. “There’s been a mindset change that says our big companies are not just owned by shareholders, they’re also important community institutions. The community now feels a greater sense of ownership of companies and directors now feel a greater responsibility to the wider communities they serve.”

Social media has only escalated corporate culture in the minds of the community, adds Bradley.

This “rapid evolution” in attitudes is accompanied by mounting legislation. The Federal Government’s Banking Executive Accountability Regime (BEAR) aims to impose a heightened responsibility and accountability framework on senior directors and executives within the financial services sector. There are draft laws for greater whistleblower protection and increased corporate penalties. Coming soon are laws (including director identification numbers) to prevent misuse of phoenix companies, plus tougher regulations requiring the disclosure of data breaches (Notifiable Data Breaches scheme) and exploitative labour practices in company supply chains (Modern Slavery Act).

Foundation of trust

The social licence to operate — proposed in the late 1990s by Canadian executive Jim Cooney as vital to the survival of the mining industry — has been a live issue in the finance sector since the GFC. The Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) have been strong advocates of the concept for regulated entities.

In his 2016 landmark speech, “The view from the other side of the table: Regulation, trust and social licence”, APRA member Geoff Summerhayes noted that “institutions, despite having stronger financial settings since the GFC, are now arguably less ‘trusted’”. And the overarching mandate to maintain financial stability can be threatened when the community doesn’t trust the financial institutions they rely on. “[Social licence] is granted by the community, is intangible, informal, non-permanent and dynamic. It has to be earned and maintained,” said Summerhayes.

Red flags

These days, public interest in an organisation goes beyond individual risks and liabilities to those of the community, says Bradley, citing the Commonwealth Bank as an example.

In August, CBA chair Catherine Livingstone AO FAICD announced that management and CEO Ian Narev would lose short-term bonuses and directors’ pay would be docked 20 per cent in recognition of collective accountability for the “significant damage caused to the group’s trust and reputation” arising from legal action brought by anti-money laundering watchdog AUSTRAC. This announcement was followed by an unprecedented single-company inquiry into CBA’s culture, governance and accountability by financial regulator APRA.

The lesson is that the organisational culture must exist for executives to report bad news quickly and it must travel straight to the board; delays are unacceptable. If bad news moves slowly, why? Is there a layer of executive more concerned about its own position than its responsibilities to the board?

Also up for debate is whether directors of companies beyond government-regulated entities, and even of NFPs, should be licensed. Bradley sees directors’ character and conduct being held to higher standards. The BEAR legislation is just the start.