ASIC takes stand on director responsibilities relating to non-financial risk

ASIC Commissioner John Price discusses the importance of maintaining corporate governance standards through non-financial risks following the banking Royal Commission.

The banking Royal Commission highlighted the harm poor conduct can inflict on consumers. We have seen a breakdown in trust in the financial sector, which has had a flow-on effect to the rest of corporate Australia. The duty to address the harm caused by poor conduct lies with the institutions we regulate. Our supervisory efforts are aimed at improving organisations’ ability to fulfil that responsibility. To rebuild trust, the people who work for those companies need to improve their conduct. To support better conduct, cultural change and better governance is vital.

Non-financial risk review

We have seen stark examples of non-financial risks, such as conduct and compliance risks, having material financial and reputational consequences for many companies. The Australian Securities and Investments Commission (ASIC) established the Corporate Governance Taskforce in August 2018 to conduct a targeted and thematic review of corporate governance practices across large listed entities in Australia. It reviewed how directors and officers are discharging their duties to oversee and monitor non-financial risk. The review focused on governance practices at the highest levels of the company.

The results of the taskforce’s non-financial risk review will be published later this year. This report, and others to follow, align with ASIC’s regulatory mission to change behaviours to drive good consumer and investor outcomes, and to promote strong and innovative development of the Australian financial system.

Enhanced supervision

The Corporate Governance Taskforce forms part of ASIC’s enhanced supervisory approach, along with its Close and Continuous Monitoring program. They are part of the ASIC response to widespread conduct failures in the Australian financial services industry.

These supervisory activities focus on the early identification of deficient practices in specific areas inside entities. They also aim to promote improved corporate governance and corporate culture over the long term — including calling out better practice when we see it. This will help detect cultural, organisational and management failings that can lead to conduct problems, breaches of the law and unfair outcomes. Supervision, as a regulatory tool, adds a focus beyond known non-compliance, assessing the significant risk of future breaches.

As part of this supervisory work, we have been providing important detailed and targeted feedback to CEOs, chairs and other business leaders on our concerns and observations. For example, as part of our corporate governance review, the taskforce reviewed 21 ASX 100 entities, receiving and reviewing more than 43,000 documents. ASIC staff members have completed 97 interviews with CEOs, chairs, board risk committee chairs, chief risk officers, internal auditors and company secretaries.

To improve governance at board level, the taskforce is also reviewing executive remuneration — a clear driver of conduct. Specifically, it is observing and reporting on directors’ discretionary decision-making relating to variable executive remuneration. The results of the taskforce review will be published soon.

What is non-financial risk?

Different entities adopt different definitions of non-financial risk. However, the term commonly refers to a combination of compliance risk, conduct risk and operational risk. Although they are called non-financial risks, history shows they may lead to very significant financial loss if not managed well.

Find more information on the Corporate Governance Taskforce at here.