ASIC's focus on governance, culture and accountability continues

AICD's general manager of Advocacy Louise Petschler recaps ASIC's emphasis on fairness and professionalism. Plus, APRA's proposed changes to executive remuneration.

Focus on fairness

The Australian Securities and Investments Commission (ASIC) has emphasised its focus on “fairness” and “professionalism” in the financial services sector. The regulator sees this focus as key to its ambitions to positively influence culture and behaviour in financial services as well as more broadly.

“Financial institutions must embrace and embed in everything they do the fairness imperative for there to be meaningful cultural change in the industry,” says ASIC chair James Shipton.

Fairness is already embedded in ASIC’s mandate of “a fair, strong and efficient financial system for all” — and in the law (s 912A of the Corporations Act 2001 (Cth) sets out the obligation on financial services entities to act “efficiently, honestly and fairly” — recent changes have added civil penalties to breaches for the first time; with civil penalties up to $525m for corporations). And new product intervention powers and related regulatory tools are strengthening ASIC’s capacity to intervene on the grounds of fairness alone.

ASIC links the focus on fairness to its push for greater professionalism. Commissioner Cathie Armour recently called out the hallmarks of professionalism as “competence — that is, having the right skills; and conscientiousness — that is, caring about other people and acting ethically”.

ASIC has stressed that it cannot regulate culture — this responsibility lies with management and boards — but is providing clear pointers on its expectations of boards.

ASIC Commissioner John Price set out the regulator’s views at a recent AICD panel in Perth where he laid down a challenge to directors. “That is why ASIC has been emphasising the importance of fairness in a firm’s culture,” he said. “That is, does the culture of your firm promote fair treatment of consumers and investors? Boards that have this factor at the forefront of their decisions will be well placed to both prosper over the long term and avoid regulatory and community scrutiny in the future.”

Directors can expect the regulatory and community focus on fairness to grow. Applying a “fairness lens” to board decisions should be on the agenda for directors in all sectors.

Executive remuneration shake-up

In another Hayne-related development, the Australian Prudential Regulation Authority (APRA) recently issued its much-anticipated draft standard on executive remuneration. The proposals for consultation have certainly made an impact. Responding to specific recommendations from the banking Royal Commission, APRA is proposing a far greater level of prescriptive regulation — a meaningful intervention with far-reaching implications for the design, limits and governance oversight of executive remuneration.

While the AICD supports many of the underlying principles in APRA’s paper — alignment of variable remuneration with non-financial risk outcomes, significant deferral periods and regular testing of outcomes across the organisation — we have concerns with the detail and reach of proposals. The AICD considers it is the board’s job to set remuneration policies that align with a company’s needs and strategy, and to be accountable for these settings and outcomes.

APRA’s proposals are highly prescriptive. It is not clear that the expectations on directors are realistic in the breadth and detail of oversight now proposed. For listed companies, the intersection with investors and proxy advisors on the two-strikes rule also needs more thought — otherwise boards will be in an impossible position. Investors have already baulked at APRA’s proposed 50 per cent cap on financial metrics on long-term incentives, as one example.

These are issues we need to test in consultation, which runs to late October. APRA is asking for detailed feedback and directors must engage in good faith in this process. Remuneration is already a huge focus for boards. While reform is clearly required — Justice Hayne made this clear — it is important that reforms are balanced and pragmatic.

ASIC Corporate Governance Taskforce

Remuneration has also been a focus of the work of ASIC’s Corporate Governance Taskforce, which has been looking in detail at governance practices in a selection of large financial and non-financial entities over recent months. The taskforce is reviewing governance processes around the oversight of non-financial risk and the governance practices regarding payment of variable remuneration to key management personnel.

While much of the media focus has concentrated on ASIC’s use of organisational psychologists as a small part of this project, the taskforce has reviewed more than 43,000 documents and completed 97 interviews with directors and officers as part of its work. ASIC will release a series of public reports on its observations later this year which will set new expectations and benchmarks on governance practice in these areas for directors to debate.

Future of the Corporation: join the conversation

Many of the governance debates that underpin these regulatory responses link to a more substantial question: the role of the corporation in contemporary society. On 29 October, the annual Supreme Court of NSW Corporate and Commercial Law Conference will bring Professor Colin Mayer CBE FBA, head of the British Academy research program The Future of the Corporation, to Sydney.

AICD Law Committee member Dr Robert Austin will chair a panel discussion on the concepts in the Australian environment. The panel will include the High Court of Australia’s Hon Justice James Edelman, CBA chair Catherine Livingstone AO FAICD, and ASIC deputy chair Daniel Crennan SC.

Further information about the conference available here.