Future Stewardship – post Royal Commission for Directors

Boards of Directors looking to apply the corporate governance lessons from the Royal Commission and ‘do the right thing’ by the community over the long-term, must find a way to rise above the complex amalgam of law and self-regulation that has comprised accountability until now. They would do well to focus on stewardship as their new bedrock.

Commissioner Hayne’s Interim Report noted that much, if not all, of the misconduct exposed as falling below community standards and expectations could be traced to entities ‘preferring pursuit of profit to pursuit of any other purpose[1]’.

And while Hayne recognised that a director’s duty to shareholders to pursue profit does exist, he went on to offer a more expansive interpretation of that duty. Importantly, he pointed to its ‘significant temporal dimension’ being to pursue ‘the long-term advantage of the enterprise’ which he said entails both ‘preserving and enhancing the reputation of the enterprise’ and ‘engaging in the activities it pursues efficiently, honestly and fairly’. The enterprise ‘must do more than not break the law. It must seek to do ‘the right thing’.

In a climate of strongly divergent views (debate over the inclusion of broader social accountability in the next draft of the ASX Corporate Governance Principles and Recommendations), Hayne was making the point that the proper discharge of a director’s  duty to the company demands a wide lens.

NAB Chair Ken Henry picked up on this point in the final round of hearings when he said: “NAB’s view clearly today is that … instead of positioning the business in this way… the purpose of the business should be to maximise shareholder returns, subject to customer tolerance and subject to regulatory tolerance; rather, the purpose of the business should be about maximising the outcomes for customers subject to financial viability. And it is a rather profound distinction”.

Asked directly by Hayne: “So you believe boards should be accountable to our community now and our future community?” Henry responded: “I do, indeed[2]. On the following day, Dr Henry commented further: “But the board does have to be accountable…for the impact of the business, and including impact with regulators and with the community generally. And the board has to take responsibility for the reputation of the business[3].”

Boards should drive accountability to ‘do the right thing’ in the future in the context of their roles.

Already, the wider director community is asking new questions about business purpose, strategy, and models to achieve it. Why does the company exist? Who does it serve? How should it be nurtured and grown? And why will it flourish? How will it make profit and manage risk? Where must it head if it is to sustain a competitive presence and achieve its broader purpose in the community?

This is where stewardship comes in. Stewardship involves boards holding themselves accountable for these matters – for the reach, contribution and endurance of the entity.

Stewardship

The concept of stewardship is not new. It first appeared in the Middle Ages to denote the office of manager of a large household. The concept builds on the development of Corporate Social Responsibility and sustainability. Today stewardship is generally defined as an ethic embodying responsible planning and management of resources. In both respects, stewardship encompasses the idea of ‘taking care’ of an organisation and those affected by it for the long term.

Stewardship suits Hayne’s expansive view of director accountability in relation to community standards and expectations, in that it requires a broad range of interests to be accounted for over the long term.

For Boards looking to stewardship, here are just three  attributes likely to take them a long way in the post Royal Commission world:

  1. Understanding and clearly articulating the vision and purpose of the entity in the community and modelling values to guide behaviour (forming a clear ‘house view’).
  1. Developing strategy and risk settings that ‘characterise’ the entity in alignment with its purpose, and holding management accountable for operating the entity within these settings.
  1. Leading the entity by engaging collectively with management on the most critical decisions ensuring they are ‘in character’.

 

Author: Deborah Latimer FGIA, GAICD– Partner Deloitte Governance, Regulatory, and Conduct. Deborah is the joint leader of Deloitte Australia’s Corporate Governance practice, and leads its compliance practice.

For more commentary from Deloitte on the Royal Commission, please click here.

[1] Hayne Royal Commission Interim Report, pages 54-55.

[2] Royal Commission Transcript 26 November 2018, evidence of Ken Henry AC, page 7101.

[3] Royal Commission Transcript 27 November 2018, evidence of Ken Henry AC, page 7133


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