Dr Deen Sanders, a Partner at advisory firm Deloitte, believes Australia’s Royal Commission will force corporates to put more emphasis on conduct and culture.
Greed. Short-termism. Dishonesty. Not three qualities any CEO would want to be associated with. Yet those words were carefully chosen by Australia’s banking Royal Commissioner Kenneth Haynes in a damning recent review of the country’s financial services sector. The shockwaves from the ongoing banking review will spread far beyond the financial services industry and could reshape corporate Australia for years to come. Conduct risk and culture are likely to be a hot topic in every Australian boardroom.
The Royal Commission is expected to change the way Australian companies look at non-financial risk. Dr Deen Sanders, a Sydney-based Partner at Deloitte, believes the review will create opportunities for risk managers to excel. He believes the damning indictment of Australian corporate culture will force companies to reconsider non-financial risk, individual accountability, and culture. He believes these factors will lead to more demand for risk professionals.
Sanders says: “Conversations about non-financial risk have increased rapidly. Organisations are asking themselves, ‘what risks haven’t we thought of?’ In the past, non-financial risk didn’t have the same credence or volume at the board table. Organisations are beginning to value that stuff and ask us questions.”
Haynes’ interim report outlined six key tenets for Australian corporates to follow: “Obey the law, do not deceive or mislead, provide services that are fit for purpose; deliver services with reasonable care and skill; and when acting for others, act in their best interest of the other.”
The six tenets should be front of mind for Australian companies re-assessing their risk profile, Sanders says. “Hayne said organisations need to ask themselves ‘should we?’, rather than ‘can we?’, in the context of how they make profits. This question opens up an enormous opportunity for the risk management profession. The calibration of risk and compliance at the moment is ‘what is allowable under the law?’ Haynes exploded that concept.”
Sanders believes the Haynes report delivers a clear message about corporate behaviour: “When you are acting for another, act in the best interests of that other. That principle extends way beyond financial services. There is a lot in the Royal Commission for the wider community. Risk professionals should see the interim report as an extraordinary document of guidance.”
Sanders expects the Royal Commission to change how Australian executives view their fiduciary duty: “The concept of shareholder primacy, that a company’s duty is exclusively to shareholders, has also exploded. The idea that an organisation operates with a social license is increasingly prominent. When a company operates at the benefit or authorisation of the government, they have a duty to the wider public, not just their shareholders and customers.”
Conduct and culture have been a key focus of the Royal Commission. While it is difficult to legislate changes in culture, Sanders believes risk managers will play a key role guiding Australian companies in the new environment: “Culture cannot be wholly be regulated for because it is a matter of practice. You need policies and structures to improve transparency, and a more expansive view of what culture is.”
The corporate crackdown will also impact individuals. In Australia, there is a growing focus on individual accountability and holding executives responsible for regulatory failings. In July, Australia introduced a Banking Executive Accountability Regime (BEAR). Sanders expects the concept to extend beyond banking. “The thing we will see is an absolute increase in the concept. Up and down businesses, individuals need to be accountable for their functions and will not be able to hide behind the corporate veil,” Sanders adds.
In a tighter regulatory environment, Sanders believes demand for risk professionals will soar in the coming years: “Matt Comyn [Commonwealth Bank of Australia CEO] said there was not enough attention on non-financial risk. That is an open invitation to risk managers to better understand and diagnose risk. There’s definitely a bright future for risk management professionals.”
“Risk [management] has evolved substantially over the years from managing risk matrices and being the doomsday-ers in the room. It will move towards a central role of being able to identify and diagnose risks.”
The fallout from the banking commission is expected to lead to changes in Australian corporate law. Sanders believes changes will have ramifications for “the entire marketplace”. He calls on risk managers to study the Royal Commission and actively improve their business: “If I was a risk manager, I would be brushing up on the issues of non-financial risk highlighted in the Royal Commission. The stories from banking executives show there are significant development opportunities for risk managers. It was an extraordinary report. I wouldn’t be waiting until February. Give it a read for your professional future.”
Sanders believes risk managers need to rise to the challenge of the post-Royal Commission environment: “It’s not about shouting louder in a boardroom and being more high profile. It is about bringing knowledge and intelligence. There is an invitation to accelerate the risk management profession. But it has to be done intelligently, that’s where the real value is.
“As the world becomes more focused on a broader area of risks, the real opportunity is to interpret material and give reasoned information to the board about risks that matter. If the playing field has just widened, the best risk professionals will be able to interpret data and meaningful risks,” Sanders adds.