Attempts to improve corporate culture and governance tend to intensify after each major corporate upheaval. In this regard, Sarbanes Oxley Act following the Enron incident and the proposed Dodd-Frank Wall clawback requirements (which are not yet finalised) post the Global Financial Crises (GFC) represent significant U.S.-specific legislation designed to encourage Boards and senior management to take on more accountability and increase transparency over the past two decades.
Australia does not bear any exemptions to these developments. In the aftermath of the GFC, compliance, risk and audit functions have also gained further emphasis in relation to other corporate functions. Ongoing guidance from proxy advisors in relation to executive remuneration and reporting guidelines, as well as increasing regulation from APRA on executive accountability, especially via the relatively new BEAR regime, are expected to foster the desired corporate shift in oversight.
The Accountability Statement templates which were introduced by the BEAR regime are designed to enforce an environment of increased transparency and corporate accountability for senior management and Boards. In the heat of the recent corporate developments in the financial services sector, mapping of executive accountabilities to corporate functions aims to strengthen the accountability culture from the top down.
Needless to say, APRA’s CBA Prudential Inquiry Final Report provides a very detailed analysis of governance, culture and accountability and constitutes a “must-read” in this regard. The findings and recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) present another relevant source in this context.
Although the BEAR regime is currently applicable to authorised deposit taking institutions (ADIs) only, there is no doubt that other players within the broader financial services sector, large listed companies outside financial services which are also under constant shareholder and community scrutiny, as well as companies from other regulated sectors, will gradually adapt their remuneration practices in line with relevant aspects of BEAR if they have not already done so. These include developing a stronger risk culture, deferring short term incentives, apportioning variable pay, and further emphasising accountability mapping of senior management and Boards.
One would expect a flow on effect of these changes from financial services to the broader market, in order to foster the desired paradigm shift for increased corporate accountability. Eventually, the accountability framework targeted by these regulations could establish industry best practice.
It is expected that APRA’s draft prudential standard CPS 511, which is currently being revised by APRA following the consultation process which ended in October 2019, will add further restrictions to executive remuneration practices with a view to strengthening corporate accountability. Although this standard will be only applicable to APRA regulated entities, it is also likely to set a remuneration governance benchmark for large listed companies from the broader market.
These regulatory practices inevitably will enforce further uptake of ESG (Environment, Social, Governance) risk and reporting especially as a result of further scrutiny from investors for stronger corporate accountability and governance frameworks. While environmental issues may not constitute relevant KPIs or major areas of risk for all companies, the social aspects of ESG (i.e. customer satisfaction, gender pay gap, inclusion and diversity, OH&S, employee engagement and industrial relations) represent major risk factors which are frequently reported on and measured as a KPI for short term incentives by many listed companies.
While listed companies already report on their executive remuneration policy and practices and Board governance frameworks, company culture and corporate accountability continue to present significant areas of governance risk for listed (and unlisted) companies for the foreseeable future.