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In the Interim Report of the Royal Commission into Misconduct in Banking, Superannuation and Financial Services, Commissioner Hayne said “…every piece of conduct that has been contrary to law is a case where the existing governance structures and practices of the entity and its risk management practices have not prevented that unlawful conduct” . He asked “What are banks doing to meet the danger of conduct risk?”
While ‘prevention’ should be understood in the context of risk mitigation, Hayne’s question pits corporate governance practices against conduct outcomes, in particular ‘misconduct’ (defined as encompassing conduct falling below community standards and expectations). To predict and prevent problems from happening, rather than responding to them when they happen, Hayne’s focused on implementing better corporate governance practices to render conduct blind spots visible.
Useful questions include:
Corporate governance is generally defined as: The framework of rules, relationships, systems and processes within, and by which, authority is exercised and controlled within corporations. It encompasses mechanisms by which companies, and those in control are held to account.
Governance has both structural and behavioural dimensions. Increased insight into weaknesses across both dimensions can help change governance practices to address conduct blind spots and so predict and prevent misconduct.
Much misconduct is caused by how directors and senior leaders behave within the governance structures.
As former US Federal Reserve Chair Alan Greenspan commented post GFC: Rules cannot substitute for character. And the G30 noted: Most studies agree that it is behaviours, much more than frameworks and structures that matter.
Decision-making is essential to governance practice and critical to conduct. What and how you decide, defines how you behave and produce outcomes, and how you are perceived. It is a key driver of reputation and trust.
Through its decisions, an organisation either demonstrates consistency with its strategic objectives balancing the risks and interests of all stakeholders –or it doesn’t. Consistent and balanced decision-making promotes sustainable performance and, done well, can maximise social welfare.
Since 2010 the central bank of the Netherlands (DNB) does supervisory assessments of the behaviours and culture of financial institutions as predicting and driving future performance. Early intervention aims to prevent future problems. Drawing on the DNB supervisory model, the indicators below provide food for thought on what might be changed.
While other corporate governance elements can be examined for conduct blind spots, rather than waiting for the negative outcomes of inconsistent and unbalanced decisions, organisations can and should, get on the front foot with planned decision-making interventions that serve to predict and prevent misconduct. Governance practice designed in this way can provide organisations with the confidence to sustainably deliver to both customer and community standards and expectations.
Author: Deborah Latimer FGIA, GAICD–Partner Deloitte Governance, Regulatory, and Conduct. Deborah is Co-lead of Deloitte Australia’s Corporate Governance practice and lead of its Compliance practice.
For more commentary from Deloitte on the Royal Commission, please click here.
 At page 302
 ASX Corporate Governance Council, Corporate Governance Principles and Recommendations 2014, Third edition, ASX.
 Address to the Wharton School, University of Pennsylvania, 15 May 2015
 Group of Thirty, 2012, p13
 Supervision of Behaviour and Culture: Foundations, practice and future development, 2015, De NederlandscheBank, see Chapter 5 ‘Decision-making’.
Deborah is a Partner in our Governance, Regulation and Conduct Practice. She is a lawyer and has over 25 years’ experience within the financial services sector in Australia including regulatory, industry (in-house) and consulting experience. Deborah is a Fellow of the Governance Institute of Australia (FGIA) and of the GRC Institute (FGRCI), and a Graduate of the Australian Institute of Company Directors (GAICD). From a sector perspective Deb has deep experience and expertise in Wealth Management and her focus areas of practice are superannuation, insurance, and managed funds.