ASIC Targets Corporate Governance and Culture

As part of its Corporate Governance Taskforce, ASIC has recently appointed organisational psychologist Elizabeth Arzadon from Kiel Advisory Group to assist with targeted reviews of corporate governance practices in large listed entities. Ms Arzadon has previously held roles with APRA, Macquarie, McKinsey and Deloitte.

Her role involves sitting in on board meetings with up to 21 of Australia’s leading companies, including Qantas, IOOF, AMP and Lendlease, to closely examine how directors interact with management and help them understand their role in tackling deeply engrained conduct and cultural issues. Key areas of focus include looking at governance processes and practices around the oversight of non-financial risk and practices regarding the payment of variable remuneration to key personnel.

This appointment closely followed the release by APRA in May 2019 of its Information Paper entitled ‘Self- assessments of governance, accountability and culture’. Following the Prudential Inquiry into the Commonwealth Bank of Australia and the Royal Commission into the Banking, Superannuation and Financial Services Industry, APRA called on all APRA-regulated institutions to review their own management of non-financial risks, in particular operational, conduct and compliance risks. This paper analysed the self-assessments of 36 of Australia’s largest banks, insurers and superannuation licensees and found a number of common themes in terms of governance, accountability and culture, including:

  • A need to improve non-financial risk management;
  • Lack of clarity, cascading and enforcement of key accountabilities within the organisations;
  • An acknowledgement that shortcomings are both well-known and in some instances, have been long standing; and
  • A widespread lack of understanding of risk culture, which therefore does not adequately reinforce desired behaviours.

Most of the institutions participating in the self-assessment critically evaluated their organisations and committed to extensive lists of actionable improvements. Prominent cultural issues identified as having significant scope for improvement included a widespread sense of complacency, insularity and not learning from experiences and mistakes, an overly collegial and collaborative working environment that lessened constructive criticism, timely decision-making and a focus on outcomes, and a reactive rather than proactive stance in dealing with risks.

APRA itself was also subject to a capability review by the Australian Treasury of its own internal culture, regulatory approach and ability to meet its mandate into the future. The Chairman, Graeme Samuel, together with Diane Smith-Gander and Grant Spencer, undertook a four-month review, finding inter alia that the culture was lacking in and discouraging of internal challenge, robust debate and professional collaboration. Findings also included a low tolerance for operating beyond quantifiable risks and robust strategies with poor execution. 24 recommendations were made, aiming to improve leadership and culture, maintain financial stability, improve focus on assessment of governance, culture and accountability, regulating superannuation for members and becoming a more open, forceful regulator. Furthermore, it was recommended that APRA replicate the banks’ self-assessments on its own processes every two years.

The increasing focus on self-assessment and the appointment of an organisational psychologist to monitor board management of non-financial risks and culture demonstrate a shift towards greater accountability and transparency within Australian corporates.