The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and the Australian Prudential Regulation Authority (APRA) Report of the Prudential Inquiry into the Commonwealth Bank of Australia have both shined a spotlight on systemic corporate governance failures in Australian financial institutions. But these failures in governance are not just limited to the financial services industry.
There are a number of important takeaways from the recent investigations and reports into large financial institutions which are also relevant for SMEs and their directors regardless of the industry or the size of the business. Here are 5 key lessons:
- Culture: Whilst it can take years to build a culture of good corporate governance practices, as we have seen in the banking sector a rotten culture can spread like wildfire through an organisation. As the leaders and drivers of a business, it is crucial that company directors foster a culture of honesty and transparency throughout their organisation. Staff should feel empowered to bring risks in the business's processes to the attention of management. The culture should encourage people to be proactive rather than reactive.
- Skills: It is important to regularly identify any gaps in the collective skills of the directors which the Board can address either by up-skilling the existing directors through professional development, or by recruiting new members to the Board with additional skills and qualifications.
- Questions: In companies where the directors are separate from the managers, the directors should be encouraged to question the managers and to test the operational risk management and compliance functions of the business. And even the most qualified Boards can benefit from the expertise and experience of outside help. Sometimes the simple act of running an idea past an independent corporate adviser, lawyer or accountant is all that is needed to help a director feel confident that he or she is making the right decision. Seeking professional advice can also help a director demonstrate that he or she has complied with his or her directors' duties and been diligent in the performance of his or her role.
- Board Charter: An effective Board is one where each director has a clearly defined role and understands what is required of them. Companies of all sizes should consider adopting a Board Charter that sets out the responsibilities of the Board. A well-written charter will help keep directors accountable for their own individual performance and help focus the activities of the Board in general. In companies where there are non-executive directors, these standards can be incentivised through appropriate remuneration practices.
- Regular oversight: All too often directors will wait until there is an urgent need to review their company's corporate governance practices. Good corporate governance should not just be considered an item at the bottom of the agenda to be discussed only when there is a scandal to manage or an impending corporate exit event (such as a sale or IPO). Not only can effective corporate governance reduce risk in the business, but it can also increase the long-term value for a company's shareholders and can give its stakeholders (shareholders, investors, creditors, suppliers and customers) confidence that the company is a "good corporate citizen". Good corporate governance should not be an afterthought for directors, but the foundation for solid management and oversight.
Implementing good corporate governance requires a company's board to be continually vigilant and to think broadly about their responsibilities in a changing corporate environment. For more information on building a strong corporate governance framework in your business, you can download the Swaab Practical Guide to Corporate Governance in Australia.
For further information please contact:
Amy Pun, Solicitor
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.