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In the latest installment of the Salzburg Questions for Corporate Governance, the Honorable Margaret Beazley AC QC reflects on corporate behavior in Australia and the impact of COVID-19
This article is part of the series, the Salzburg Questions for Corporate Governance by the Salzburg Global Corporate Governance Forum
Australia entered into the period of COVID-19 restrictions, with its significant impact on business’ viability, just over 12 months after a damning report on corporate practices in the financial sector was published. That report, delivered in February 2019, emanating from a Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (RC) made recommendations in respect of corporate practice and culture, widely accepted as setting the governance and regulatory landscape for all Australian corporations for the foreseeable future. The Commissioner, the Honourable Kenneth Hayne AC QC, squarely placed responsibility for governance with the board.
The story that gave rise to the RC was of corporate greed: taking commissions on services never provided, making client recommendations deleterious to the client but beneficial to the adviser, and a failure by senior management and boards to impose governance structures to guard against such practices.
The message was corporate behavior had fallen short of what the community expected and was entitled to expect, regardless of whether it was in breach of the law. The inadequacy of both board challenge to management and the flow of information to boards, the cornerstones of corporate governance in Australia, was highlighted as a significant deficit in corporate governance in the sector.
The report specifically criticized a corporate culture, generally labeled “short-termism,” of prioritizing shareholder return over other non-financial risks. The warning for corporations was that non-financial risks were core governance issues just as much as compliance and financial risks. It is likely that Milton Friedman’s theory of the sole social responsibility of the corporation being increased profits, already under scrutiny, may no longer be valid. (1) Modern corporations will have to consider their operations in a broader context where compliance with legal duties and regulations is required but also where social responsibility is expected. (2)
The immediate fallout from the RC was significant with a number of high profile resignations from boards and, in one case, a searing impact on the share price of a corporation under scrutiny. The profound impact on corporate Australia is ongoing, giving rise to shareholder agitation, particularly around director and executive remuneration. (3)
More recently, both shareholder and staff agitation has seen the resignation of directors who failed to understand the importance of good corporate culture – particularly in relation to sexual harassment of staff by senior management. This failure and the consequential board fallout was described as a “line in the sand for issues not related to making profits for shareholders,” all boards now on notice that “ESG issues could possibly be the trigger for them losing their jobs.” (4)
The impact of COVID-19 on corporations is still being worked through. There is no clarity around when restrictions will ease, nor indeed, little “feel” as to what the “new normal” will be like once the pandemic has passed. The challenge at the moment, for large and smaller to medium size corporations is on whether they will survive. The immediate risk for these businesses is that they will “take their eye off the governance ball” in the daily challenge to stay afloat.
The uncertainty of business survival due to COVID-19 is undoubtedly why expert financial and corporate commentary has been significantly focussed on the need for good governance structures with sufficient adaptability that will afford companies a better chance of survival, now and into the future. In this regard, while the emphasis on the “right” culture coming out of the RC related to greedy corporate practices, the current emphasis is more focussed on that essential corporate ingredient: human capital.
In the short term, Australian Government measures including a staff payment subsidy, (5) ameliorated conditions relating to demands for the payment of a debt (6), and a qualified moratorium on commercial evictions have aided many businesses to survive to date. (7) However, in neither of the latter two instances is the debt waived (other than by agreement). Unless businesses remain acutely vigilant as to their solvency position, these measures will only delay what some see as evitable for what has been described as “zombie companies.” The continuous disclosure obligations on listed corporations are also throwing up its challenges, and for now, quarterly board meetings are a thing of the past.
Risk assessment has emerged as a prime governance issue. As one commentator observed, businesses have been content to “bank” the benefits of globalization without a keen enough eye to potential disruption in the supply chain or markets for their goods. This approach is a particular vulnerability for Australia as other regional factors are also at play. Another governance issue, already in the frame following the RC, is managing the interrelationship between those aspects of business vital for its survival, its obligations to shareholders, and compliance requirements.
The RC placed responsibility for good governance on the Board. COVID-19, more than ever, is requiring a firm board hand on the corporate rudder with the ability to navigate short term solutions with solid ongoing purpose and direction. The challenge will be to take shareholders and other stakeholders – including clients and staff – with them. Shareholders will only accept a no-dividend world for so long, especially if it is not matched by modest executive remuneration.
The “wisdom” emerging in Australia is that a prudent but adaptive approach to corporate activity, supported by good governance, will be a major determinant in corporate survival post-COVID-19. On that accepted wisdom, there will need to be greater flexibility in business practices, as I have discussed. The real question is whether corporations in a crisis and often close to in extremis fully understand this or have left it too late.
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The Honorable Margaret Beazley AC QC is the 39th Governor of New South Wales, commencing her tenure on 2 May 2019. Prior to her appointment as Governor, Her Excellency enjoyed a distinguished career in the law. Appointed Queen's Counsel in 1989, in 1990-1991 she served as an Acting Judge of the District Court of New South Wales and in 1991, Assistant Commissioner of the Independent Commission Against Corruption. In 1993 she was made a Judge of the Federal Court of Australia, the first woman to sit exclusively in that Court, and in 1994 a Judge of the Industrial Relations Court of Australia. In 1996, she was appointed to the New South Wales Court of Appeal and, subsequently, the first woman to be appointed as its President, also serving as Acting Chief Justice of the Supreme Court of New South Wales and Administrator of the Government of the State of New South Wales on a number of occasions. Her Excellency graduated a Bachelor of Laws with Honours from the University of Sydney in 1974 and has since been awarded a Doctor of Laws (Honoris Causa) by the University of Sydney (2008), Australian Catholic University (2019), and The University of Notre Dame Australia (2019). She has further been appointed Deputy Prior and Dame of Grace in the Order of St John of Jerusalem in New South Wales (2019), Honorary Commodore, Royal Australian Navy (2019), Honorary Colonel, Royal New South Wales Regiment (2019), and Honorary Air Commodore No 22 (City of Sydney) Squadron, Royal Australian Air Force (2019). On 26 January 2020, Her Excellency was made a Companion of the Order of Australia in the Australia Day Honours List for "eminent service to the people of New South Wales, particularly through leadership roles in the judiciary, and as a mentor of young women lawyers." Her Excellency has published and frequently spoken on legal and leadership issues, both in Australia and internationally, and currently serves as Patron of over 200 organizations. She is a Salzburg Global Fellow.
The Salzburg Questions for Corporate Governance is an online discussion series introduced and led by Fellows of the Salzburg Global Corporate Governance Forum. The articles and comments represent opinions of the authors and commenters, and do not necessarily represent the views of their corporations or institutions, nor of Salzburg Global Seminar. Readers are welcome to address any questions about this series to Forum Director, Charles E. Ehrlich: cehrlich@salzburgglobal.org To receive a notification of when the next article is published, follow Salzburg Global Seminar on LinkedIn or sign up for email notifications here: www.salzburgglobal.org/go/corpgov/newsletter